USDA

United States

Department of

Agriculture

Rural BusinessCooperative

Service

Cooperative

Information

Report 59

Antitrust Status of

Farmer Cooperatives:

The Story of the CapperVolstead Act
Abstract

The Capper-Volstead Act provides a limited exemption from

antitrust liability for agricultural producers who market the products they

produce on a cooperative basis. Without Capper-Volstead, farmers who

agree amon g them selves on the pric es they 'll accept for their prod ucts

and other terms of trade would risk being held in violation of antitrust law.

Even with the exemption, agricultural producers are not free to un duly

enhance the prices they charge, consolidate with or collaborate in

anticompetitive conduct with nonproducers, or engage in conduct with no

legitimate business purpose that is intended to reduce competition.

Keywords: cooperative, antitrust, Capper-Volstead Act, law

________________________________________

Antitrust Status of Farmer Cooperatives:

The Story of the Capper-Volstead Act

Donald A. Frederick

Program Leader

Law, Policy & Governance

Rural Business-Cooperative Service

U.S. Departme nt of Agriculture

Cooperative Information Report 59

September 2002

RBS publica tions an d inform ation are availab le on the In ternet.

The R BS w eb site is: http://www.rurdev.usda.gov/rbs
i

Preface

Antitrust law poses a special challenge to agricultural marketing

associations. Certain conduct by independent busines s people--

agreeing on prices, terms of sale, and whom to sell to--violates the

Sherman Act and other an titrust statute s. And these are the very types

of collaborative activities that agricultural producers conduct through

their marketing cooperatives.

Since 1922, the Capper-Volstead Act has provided a limited

antitrust exemption for agricultural marketing associations. Producers,

through qualifying associations, can agree on prices and other terms of

sale, select the extent of their joint marketing activity, agree on common

marketing practices with other cooperatives, and achieve substantial

market share and influence.

But Capper-Volstead is not a total antitrust exemption. So

cooperative managers, directors, and advisers must unders tand courses

of condu ct that ma y expo se their o rganiza tion to antitru st risk. These

include collaborating and/or combining with firms other than C apperVolstead cooperatives and engaging in activity with little or no

discernable purpose other than to limit or eliminate competition.

This report foc uses o n the dev elopm ent and e volution of antitrust

law as it applies to agricultural marketing cooperatives. It places as

much emph asis on how an d why the rules evolved as it does on the

rules thems elves. It attempts to tell a story rather than provide clear and

simple signposts for making business decisions.

While some readers m ay find this frustrating, it is done for a

purpose. There a re no ea sy ans wers to most q uestion s involving

possib le antitrust liability. Antitrust disputes are fact intens ive and their

resolution can be very subjective. Litigation can involve numerous

issues and take many years to resolve. Involvement of a legal counsel

who unders tands b oth cooperatives a nd antitrus t issues is crucia l to

limiting legal exposure in this area.

________________________

This report does not represent official policy of the U.S. Department of

Agriculture, the U.S. Department of Justice, or any other Government

agency. This publication is presented only to provide information to

persons intereste d in the antitrust status of agricultural producers and

their cooperative marketing associations.
ii

Contents

Page

CHAPTER 1. HISTORICAL PERSPECTIVE .................. 2

The Railroads: The E arly Years ........................ . 2

The Farmers Move West ........................ ...... 5

Railroad Growth, Conduct, and Regulation ................ 7

Corpo rations a nd Trus ts ........................ ...... 14

Developm ent of the Corporate Structure .............. 14

Horizontal Coordination ........................ .... 15

Vertical Coordination ........................ ...... 17

Cooperatives Emerge ........................ ........ 19

CHAPTER 2. THE SHERMAN ACT ........................ 22

Legislative History ........................ .......... 23

Provisions ........................ ................. 28

Judicial Interpretation ........................ ........ 30

Literal Meaning Decisions ........................ . . 33

Business Reacts, Roosevelt Responds ............... 34

Rule of Reason ........................ .......... 36

Rule of P er Se Illeg ality ........................ .... 40

Price Fixing ........................ ...... 43

Trade Territory Allocation .................... 48

Group Boycotts, Refusals to Deal ............. 50
iii

Page

CHAPTER 3. SHERMAN TO CAPPER-VOLSTEAD,

1890-1922 ........................ ................ 59

Coop erative G rowth ........................ ......... 59

Cream eries an d Che ese Plants ..................... 60

Fluid M ilk ........................ ............... 61

California Fruit Growers Exchange ................... 62

California Associated Raisin Company ................ 63

Early State Antitrust Laws ........................ .... 67

Early Cooperative Incorporation Laws ................... 71

Congress Responds to Stand ard Oil and American Tobacco . 72

Federal Trade Commission Act ...................... 72

Clayton Act ........................ ............. 73

Section 6 of the Clayton Act ........................ 73

Legislative History ........................ . 75

Judicial Interpretation ....................... 83

CHAPTER 4. THE CAPPER-VOLSTEAD ACT ............... 88

General Overview ........................ ........... 88

Rationale for Capper-Volstead ........................ . 91

Legislative History ........................ .......... 92

Building Momentum ........................ ....... 92

House Consideration, 66th Congress ................. 95

Senate Consideration, 66th Congress ............... 101

Regrouping for a Second Campaign ................. 108

House Consideration, 67th Congress ................ 109

Senate Consideration, 67th Congress, and Enactment . . 113
iv

Page

CHAPTER 5. OTHER ANTITRUST LAWS .................. 131

Nava l Stores Ame ndme nts Fail ....................... 131

Cooperative Marketing Act of 1926 .................... 133

Fisherman's Collective Marketing Act .................. 142

Robinson Patman Act ........................ ....... 145

State Barriers Eliminated ........................ .... 147

CHAPTER 6. APPLICATION OF ANTITRUST LAW

TO FARMER COOPERATIVES ....................... 153

Early Court Interpretation ........................ .... 154

United States v. Borden ........................ . . 155

Mary land & Virgin ia Milk Prod ucers Ass 'n ............ 162

Who Can Participate in a Capper-Volstead Cooperative? ... 167

Person ........................ ................ 167

Member ........................ ............... 170

Membe rs Must be Produ cers ...................... 172

Producer ........................ .............. 176

National Broiler Marketing Association ........ 176

De Minimis R ule for Ancillary Membe rs ........ 185

Is Big Necessarily Bad? ........................ . . 186

Integrated Entities ........................ 187

Processing Subsidiaries .................... 189

Protected Producer Conduct ........................ . 191

Any B usines s Struc ture Pe rmiss ible ................. 191

Joint Marketing ........................ ......... 192

Bargaining and Price Setting ....................... 194

Marketing Service Associations .................... 202
v

Page

Association Collaboration ........................ . 203

Complex Cooperative Structures ............. 203

Cooperation Among Cooperatives ............ 210

Nece ssary C ontract a nd Ag reeme nts ................ 217

Statutory Limitations ........................ ..... 218

Mutual Benefit as Produ cers ................ 218

One Member/One Vote or 8 Percent

 Limit on Dividends ..................... 219

Majority of Product Handled Must Be

 Member Product ....................... 220

Unprotected Conduct ........................ ....... 221

Collaborating with Non-produ cers ................... 222

Consolidating with Non-cooperative Firms ............ 224

Predatory Conduct ........................ ...... 231

Cooperative Monopolization ........................ . . 243

Early Decisions Accept Cooperative Monopolies ....... 244

United S tates v. G rinnell ........................ . . 246

Milk Industry Transformation ....................... 249

Mid-Am Fires the First Shot ....................... 253

Justice Department Action ........................ 254

Related Private Litigation ........................ . 260

Fairda le Farm s v. Yan kee M ilk ............... 260

Kinnett Dairies v. Dairymen, Inc. ............. 264

GVC C annery v. California Toma to Growers .... 269

United States v. Dairymen, Inc., Revisited ............ 270

Midw est Milk Revisited ........................ ... 272

Kinnett Dairies v. DI Revisited ...................... 277

Section 2 of Capper-Volstead ........................ 277

USDA Enforcement ........................ ...... 278

Limits on USDA Jurisdiction ....................... 282
vi

Page

CHAPTER 7. ODDS AND ENDS ........................ . 285

Cooperatives, Em ployees and M embers ................ 285

Cooperatives and C ontractors ........................ 286

Directo r, Emp loyee, a nd Ad viser Lia bility ................ 288

Supply Control ........................ ............ 289

Cooperative or Union? ........................ ...... 292

Capper Volstead and Exporting ....................... 297

Unprotected Cooperatives ........................ ... 299

State Antitrust Enforcement ........................ . . 310

Disruptive State Regulation ........................ . . 311

Marketing Orders and Capper-Volstead ................. 315

Limits on FTC Jurisdiction ........................ ... 316

Mark eting Ag reeme nts ........................ ...... 317

CHAPTER 8. IN CONCLUSION, A LOOK

TO THE FUTURE ........................ .......... 320

Guidelines for Collaborations A mong Com petitors ........ 320

Butter S ettleme nt: The F uture of Antitrust En forcem ent? ... 322

APPENDIX A: COOPERATIVE ANTITRUST CASES ......... 326

APPENDIX B: CASES BY CIRCUITS ..................... 335
vii

Page

APPENDIX C. FEDERAL ANTITRUST STATUTES .......... 344

Sherman Act ........................ .............. 344

Federal Trade Commission Act ....................... 345

Clayton Act ........................ ............... 348

Capper-Volstead Act ........................ ....... 352

Cooperative Marketing Act of 1926 .................... 355

Fisherman's Collective Marketing Act .................. 358

Price Discrimination Act (Robinson-Patman) ............. 361
1

 42 Stat. 388 (1922), 7 U .S. C. §§ 291-292.

2

 Ewell P. Roy, Cooperatives: Today and Tomorrow (Danville, IL:

Interstate Printers & Publishers, 1964) 215-216.

3

 26 Stat. 209 (1890), 15 U .S. C. §§ 1-2.

ANTITRUST STATUS OF

FARMER COOPERATIVES:

The Story of the Capper-Volstead Act

This report is essentially the story of the Capper-Volstead Act. 1

Enacted in 1922, Capper-Volstead authorizes agricultural producers to

act together in associations that process, prepare for market, handle,

and market the agricultural products they produce. Without this

protection, farmers, who agree on the price they will accept for their

production and other terms of trade, would risk challenge and

prosecution for restraining trade and attempted monopolization under

our antitrust laws. Cooperative scholars consider Capper-Volstead so

crucial to the development of effective producer owned and controlled

marketing firms that it "is frequently referred to as the 'Magna Carta'

of farmers' cooperatives."

2

Capper-Volstead is somewhat unique for a major Federal law; it

has remained as written for 80 years. In fact, there has been no

serious attempt to amend it. While Capper-Volstead has been on the

books for many years, it is a living statute subject to continuous

application and interpr etation by cooper ative leaders and advisers,

competitors and their counsel, antitrust enforcement officials, and

judges asked to resolve conflicts about its meaning.

This paper begins with a detailed account of the historical

background that led to enactment of landmark antitrust legislation,

notably sections 1 and 2 of the Sherman Act. 3 Next it focuses on

judicial application the Sherman Act and other factors that led to

enactment of Capper-Volstead. Then, it turns to various decisions

interpreting the scope of the exemption and the extent of joint conduct

by agricultural producers that it sanctions.
4

 This sum mar y is based considerably upon Sidney Ratner et al. , The

Evolution of the American Economy (New Yor k: Basic Books, Inc. ,1979);

Simon N. Whitney, Antitrust Policies, (New York: The Twentieth Century

Fund, 1958); S. C hesterfield Oppenhe im, et al., Federal Antitrust Laws, 4th

Ed. (St. Paul, M N: W est Publishing, 1981); Wayne D. Rasmussen, Farmers,

Cooperatives, and USDA (Washington, DC: U. S. D epartment of Agriculture,

1991).

2

CHAPTER 1

HISTORICAL PERSPECTIVE4

The Civil War is the defining event in our history for many

reasons. It not only determined our political and geographic

composition, but also marked, and in some ways facilitated, the

transformation of the bases of our economy from land and the

individual to industry and the corporation. The story of how people

reacted to this change is, in part, the story of the development of laws

that limit the ability of the few to accumulate and exercise economic

power to the detriment of the many.

This report focuses on the role of farmers and farmer cooperatives

in the evolution of this public policy initiative. It begins with a

historical overview of the part 3 entities -- railroads, farmers, and

corporate trusts -- played in the enactment of the landmark laws in this

area, the Interstate Commerce Act of 1887 and the Sherman Act of

1890.

THE RAILROADS: THE EARLY YEARS

The Conestoga wagon, which carried settlers west from 1750 until

1850, was only a modest mechanical improvement over the carts used

by Hannibal when he crossed the Alps to wage war against the Romans

during the Second Punic War (218-201 B.C.). But then, Conestoga

wagoning ended abruptly around 1850 when the railroads crossed the

Appalachians.

Railroads were the first great American business. They served as

both the model for and facilitator of other industrialization. And they
3

became the subject of the first legislative initiatives to regulate

anticompetitive conduct.

The concept of moving objects in wagons with wheels over rails

is documented as far back as European mines of the 1500s. The

wagons, pulled by men or horses, moved more easily over wooden

rails than over the rutted and muddy mine entrances and floors.

The basic development of modern railroading, with steam engines

and steel rails, is credited, like much of the foundation for the

Industrial Revolution, to English inventor-engineers. In 1804,

Englishman Richard Trevithick attached one of his new engines using

high-pressure steam to a carriage and used it to haul several tons of

cargo along 15 kilometers of tr ack, the first successful operation of a

railroad locomotive. Another Englishman, George Stevenson, opened

the first public railroad in 1825 and in 1830 opened a second line,

between Manchester and Liverpool. It provided the first scheduled

passenger service.

Some Americans quickly recognized the potential of this new

system. In 1815, John Stevens obtained a charter from the State of

New Jersey to build a steam-power ed railroad across the state. When

he couldn' t raise enough money for the project, he built a circular

track near his estate in Hoboken, NJ, and a steam-powered vehicle to

run on it. In 1825, his finished project became the first railroad in the

United States.

In 1827, Baltimore merchants, hoping to increase trade with

western states, received a charter for the Baltimore & Ohio Railroad.

Ground was broken on July 4, 1828, and in 1830 Peter Cooper's

experimental locomotive, Tom Thumb, made its first run over the 13

miles of completed tr ack. On Christmas Day, 1830, the South

Carolina Railroad provided the first scheduled steam rail service in the

nation in and out of Charleston. Although only 23 miles of operating

rail lines existed in 1830, the seeds of the Industrial Revolution were

sown and germinating.

Railroads combined the steampower and low-friction technologies

of the waterways with the flexibility of being able to operate without

benefit of a navigable river or canal. The growth of railroading was

astonishing. By 1835, more than 200 railroad charters had been

granted in 11 states, and more than 1,000 miles of track had been

opened for service.
4

Unlike the waterways, these early rail ventures were owned and

controlled by private, not public, entities. Most were structured under

State charters as corporations. The corporate form was selected

because the cost and complexity of constructing and operating a

railroad were greater than a single owner or partnership could handle.

Railroads were an early model of public-private partnership.

While the railroads were owned by private corporations, they received

substantial assistance from all levels of government. The State charters

often granted them rights of eminent domain, special tax prefer ences,

and credit advantages.

Local governments began a practice still common today--bidding

against each other for new businesses--by offering financial incentives

to be "on the line."

In 1850, in response to western political pressure, the federal

government gave several million acres of land to the states of Illinois,

Alabama, and Mississippi to aid in the construction of a north-south

line from Illinois to the Gulf of Mexico. These lands were turned over

to the Illinois Central Railroad Company, which then sold or

mortgaged the land to pay for building the railroad. It was completed

in 1856. This gift of Federal land became the precedent for a shift in

Federal land policy during and after the Civil War.

During the 1850s, the rail mileage in the country increased from

9,000 to 30,000. What had been little more than a scattering of short

lines became an integrated network serving all of the states east of the

Mississippi River. The City of Chicago, which began the decade with

1 rail line and 29,000 residents, ended it with 11 railroads and 109,000

inhabitants.

Although Government involvement in railroad construction was

significant, three-fourths of the more than $1 billion invested in

American railroads before 1860 was private capital.

The ability of railroads to move people and products was

illustrated throughout the Civil War. For example, in the autumn of

1863, 25,000 Union troops moved from Washington to Tennessee, in

30 trains over 12 days, to lift the Confederate siege of Chattanooga.

The Union drive to Atlanta was aided by the daily arrival of 16 trains

from the North bringing 1,600 tons of supplies to General Sherman's

army.

After the war, the railroads were a primary factor in the

development of the United States. They permitted raw materials in
5

abundance west of the Appalachians to move east and finished

products to move west at much greater speed and at much lower cost

than was possible on roads or canals. Producer prices were able to

increase at the same time consumer prices decreased. Specialized

production in areas with a comparative advantage became prevalent as

competition between producers in previously distantmarkets increased.

The Constitution had created the possibility of a great "common

market" throughout the United States. The railroads made it a reality.

THE FARMERS MOVE WEST

Agriculture was the dominant force in our economy before the

Civil War. Two events in the 1790s began a period of remarkable

growth in agricultural production.

One was Eli Whitney's invention of the cotton gin in 1793. This

permitted rapid growth in the production of short-staple upland cotton

as a high-profit, alternative crop to tobacco in the South.

The second was the migration of people from the coastal

communities in the Middle Atlantic and New England regions to

settlements in western and northern "frontiers" like Ohio, Kentucky,

and Illinois. These people found satisfaction as independent family

farmers working the cheap and fertile land that seemed inexhaustible.

In the early 1840s, settlers began moving west, following the

Oregon Trail to the Pacific Northwest. They found favorable

conditions for growing wheat in eastern Washington and fruit from the

Willamette Valley to Puget Sound. But they remained isolated and

devoid of economic or political support for many years as the country

focused on the gold fever in their burgeoning neighbor to the south,

California.

As part of the Treaty of Guadalupe Hidalgo ending the Mexican

War, Mexico ceded California to the United States on February 2,

1848. Unknown to any of the treaty signers, gold had been discovered

nine days earlier, on January 24, at a sawmill owned by John A.

Sutter, a Swiss immigrant, on the South Fork of the American River.

The ensuing "gold rush" brought people from all over the world

to California to seek instant riches. In the 4 years from 1848 to 1852,

the population of California increased from 15,000 r esidents to
5

 In 1850, Califor nia was gr anted virtu ally instant statehoo d. A t this

time, the only "states" w est of the M ississippi River were Iowa, Missour i,

Arkansas, and Texas. The magnitude of this "leap" over a large por tion of

our land mass is illustrated by the fact that it is 1,600 m iles from Kansas City,

on the western edge of Missouri, to Reno NV, on the eastern edge of

Califor nia and just west of Sutter's M ill. But it is only 1,100 m iles from

Kansas City to Washington, DC.

6

250,000. 5 The rapid influx of people created a great demand for beef,

bread, and other food staples. Many miners discovered that they had

a better opportunity to improve their financial fortunes by becoming

ranchers and grazing cattle on the open range or cultivating wheat,

grapes, or other fruit than by searching for gold. They could sell all

the food and wine they could produce to the miners for just about any

price they chose.

Estimates suggest that between 1800 and 1860 the number of

farms and total farm output in the United States increased sixfold. On

the eve of the Civil War, agriculture accounted for 60 percent of our

production of commodities.

But the economy was already entering a period of transformation.

At the beginning of the 19th century, five out of six Americans worked

in agriculture. By 1860, that ratio had fallen to just over one out of

two. Agriculture's contribution to the gross national product was twice

that of manufacturing in 1860, but it had been three times as great in

1840.

The Civil War facilitated dramatic change in agriculture. The war

created a tremendous demand for farm products while taking the

young men away from the fields. Those remaining, mostly older

people, adapted to new horse-drawn machinery such as grain

harvesters and hay rakes. This allowed them to meet the demand for

increased production and to profit from markedly higher prices. By

the end of the war, previously self-sufficient agriculture in the North

and West had become market-oriented.

During the antebellum years, the Government had gradually

liberalized its policies on making land available in more western areas.

The Homestead Act of 1862 completed this trend. It made 160 acres

of land available for free to anyone who would reside on and cultivate

it for 5 years. In just a few decades, an enormous amount of land,
7

roughly equal to all of western Europe, was made available to ranchers

and farmers.

Opening the West to farming and ranching led to a new set of

problems for producers. For one thing, it was difficult for settlers

used to farming the fertile, rain-blessed land around and east of the

Mississippi River to adapt to the semi-arid high plains lands of the

West.

Also, many farmers had borrowed heavily during the war to

purchase more land and equipment. Paying off these loans became

difficult as general price deflation and reduced demand contributed to

sharp declines in farm prices after the conflict ended. All of this land

coming into production further depressed the prices farmers received.

Finally, while towns and markets were springing up every day as

people came west to seek their fortune in mining or provide goods and

services to others, farm markets were still primarily east of the

Mississippi. This meant shipping east via railroads.

RAILROAD GROWTH, CONDUCT, AND

REGULATION

During the 1860s, businessmen in San Francisco began shipping

wheat to the East Coast and exporting wheat to Great Britain,

Australia, and even China. Wheat farms in California became largescale enterprises, supported by absentee owners, abundant credit, and

mechanization. For example, by the early 1870s the combine was

used throughout the Sacramento and San Joaquin Valleys. Combines

didn' t come into general use in the Great Plains until the 1920s.

After the end of the Civil War, the move to unite the states

included a drive to build a transcontinental railroad linking the states

along the Mississippi to California. Construction was funded by huge

land grants and government loans. For a small investment, four

Sacramento businessmen--Leland Stanford, Mark Hopkins, Collis

Huntington, and Charles Crocker--gained control oftheCentral Pacific

Railway. It was building east from Sacramento to meet with the Union

Pacific, which was building west from Omaha, in the Nebraska

Territory just beyond the Iowa border.

In 1869, the Golden Spike ceremony commemorating the joining

of the Union Pacific and Central Pacific marked the advent of
8

transcontinental service. This new rail line made it possible to

transport California agricultural products to eastern markets in days

rather than the weeks it took using ships. This was certainly a boon to

California agriculture.

It was also a boon for the four investor-owners of the Central

Pacific (later renamed the Southern Pacific). They reaped enormous

profits and used them to buy control of river and port facilities in the

State. With a monopoly over transportation, the Southern Pacific had

the power to manipulate rates and make or break any farmer,

manufacturer, or mining company in the region. It used that power to

suppress any attempt to establish effective government regulation of

rates. For the next 50 years, the Southern Pacific was the dominant

force in both the California economy and California politics.

Over the next several years, four additional lines reached the

Pacific: the Great Northern and the Northern Pacific to the north and

the Southern Pacific and the Atchison, Topeka & Santa Fe to the

south. The western boundary of the American frontier, which barely

2 decades before had been the Mississippi River, was now pushed all

the way to the Pacific Ocean. Rail freight traffic grew from 10 billion

ton-miles in 1865 to 75 billion ton-miles in 1890.

Much of this growth was in the agrarian West. For example,

large ice compartments and insulation were added to traditional box

cars to create iced refrigerator cars. By 1890, carloads of oranges,

apricots, cherries, and strawberries were being shipped from

California to eastern markets in refrigerated cars owned by both the

railroads and private carlines. This greatly facilitated the further

growth of California fruit and vegetable production.

The rapid growth of the railroads presented both the carriers and

their customers with a new challenge, competition. Competition had

been limited before the war. Most railroads were small, providing

service between a couple of population centers. Neither the State

"charter" process nor the level of potential business favored the

construction of competing lines.

After the war, growing competition and technological advances

led to significant reductions in the cost of service to customers. They

also spurred the development of a standard gauge for track, business

agreements to share equipment and revenue of interline service

equitably, and a standard time system so schedules could be easily

understood.
9

Eastern rail owners learned that a high volume of through traffic

was essential to the health of their capital-intensive companies. They

moved swiftly to control midwestern lines and gain direct access to

Chicago, St. Louis, and other emerging business centers. They also

learned that business couldn't be taken for granted and that purchases

and leases of other lines was the most effective way to guarantee the

generation of sufficient revenue.

While the railroads were operating more efficiently and hauling

more traffic at falling rates, large numbers of shippers and, for

different but related reasons, the railroads themselves were unhappy

with the existing situation. Most problems stemmed from variations

in the degree of competition faced by the railroads. Fr equently,

several lines operated over long distances between major cities. And

it was just as common for a single railroad to be the only service

provider between cities and their surrounding countryside. This led

the carriers to charge relatively low rates on long, competitive hauls

and higher rates on noncompetitive short hauls.

The railroads wanted relief from the cutthroat competition

between cities. Competing lines negotiated cartel arr angements with

the objective of sharing traffic and revenue in an orderly manner.

These efforts to reduce competition were only modestly successful.

They lacked a legal foundation and represented little more than

gentlemen's agreements. Both participants and outsiders frequently cut

prices to increase profits by taking business away from carriers who

honored the cartel agreement.

Shippers throughout the Nation began to complain about volatile

and discriminatory freight rates. In the East, "rate wars" were so

common that charges often changed every week. A period of low

rates would be followed by one of excessively high rates. Smaller

shippers protested discriminatory low rates in favor of big shippers,

such as John D. Rockefeller and his Standard Oil Company.

Midwest and Great Plains farmers were particularly impacted by

questionable rail practices. They had to rely on rail transportation and

were often served by a single rail line. They were subjected to shorthaul rates that exceeded those of longer hauls, downgrading of their

grain by rail-owned local elevators, and the general practice of

charging what the traffic will bear.

In 1867, Oliver Hudson Kelley led farmers to organize the

National Grange of the Patrons of Husbandry. By 1875, it had grown
6

 Munn v. Illinois, 94 U.S. 113 (1877).

7

 Chicago, Burlington, and Quincy RR Co. v. Iowa, 94 U. S. 155 (1877).

8

 Peik v. C hicago and North-western Ra ilway Co. , 94 U. S. 164 (1877);

Chicago, M ilwaukee, and St. Paul RR Co. v. Ackley, 94 U. S. 179 (1877).

9

 Winona and St. P eter Railroad Com pany v. Blake, 94 U. S. 180 (1877).

10

to 800,000 members. One of the Grange's accomplishments was the

stimulation of cooperative development. As early as 1868, Kelley

began urging members to develop a network of marketing cooperatives

as a shield against business monopolies and a way for farmers to

establish the price for their products.

Many local farm supply and general stores were started in rural

areas, also following the cooperative principles of user ownership,

democratic control, and returning earnings to members based on

patronage. But many of these stores were under-capitalized and poorly

managed. When the Grange began to decline in the late 1870s, so did

most of the cooperatives it founded.

The Grange also recognized the importance of political

involvement. Western farmers, now organized through the Grange,

elected a number of their members to midwestern State governorships.

Their supporters became forces in several State legislatures. Grange

support helped enact state laws regulating the services and rates of

businesses perceived as abusing farmers, primarily the railroads and

grain elevators. The impacted businesses reacted with a series of legal

challenges questioning the constitutionality of these "Granger " laws.

Several cases were argued before the U.S. Supreme Court in late

1875 and January 1876. After more than a year of deliberation,

separate opinions were issued in each case, as a group, on March 1,

1877. All were written by Chief Justice Morrison Waite and all found

the challenged laws constitutional.

The lead opinion concerned a provision in the Illinois constitution,

adopted in 1870, and an implementing law enacted the next year.

Among other things, the law (1) set maximum rates grain elevators in

a city of more than 100,000 population (Chicago) could charge and (2)

required elevator operators to be licensed.6

 The other cases involved

laws regulating rail rates in Iowa,7 Wisconsin,8 and Minnesota.9
10 Munn v. Illinois, 94 U.S. at 123.

11 94 U.S. at 135. Waite's position in intere sting in view of his extensive

discussion of the movement of grain from the W est, through the Chicago

elevators, an d into barges and railcars for shipment to the Atlantic coast. 94

U.S. at 130-131. The same opinion was expressed concerning railroads in

CB&Q RR Co. v. Iowa, 94 U. S. at 163.

12 94 U. S. at 135.

13 94 U. S. at 126, 130.

14 94 U. S. at 134.

11

The railroads claimed these laws violated three provisions of the

Constitution:

1. That part of Art. I, Sec. 8 that says Congress shall "regulate commerce with foreign nations and among the several States."

2. That part of Art. I, Sec. 9 that says "no preference shall be

given to any regulation of commerce or revenue to the ports of one

State over those of another."

3. That part of the 14th amendment, Sec. 1 that reads no State

shall "deprive any person of life, liberty, or property, without due

process of law; nor deny any person within its jurisdiction the equal

protection of the laws. "

10

Chief Justice Waite, a firm believer in judicial self-restraint, wrote

only a single paragraph in Munn v. Illinois on each of the first two

arguments. As to the commerce clause, he said storing grain may be

incidently connected with interstate commerce, but is primarily a

matter of intra-State concern.11 Art. 1, Sec. 9 was disposed of as a

provision only applying to Federal regulation.12 While the Court' s

reasoning on the latter issue was not challenged, the applicability of the

commerce clause would be raised in subsequent litigation.

Waite focused his opinion on the 14th Amendment. In upholding

the Illinois law, he said that regulating the use or the price of the use

of property does not deprive the owner of that property. This is

especially true when the property is used to provide a public service. 13

He concluded that if people felt they had been treated unfairly by the

legislature, they "must r esort to the polls, not to the courts. "

14

But even as the opinions were being drafted, winds of change

were in the air. Big business was booming and individualism was in

favor. The prevailing economic philosophy of the times was laissez
15 The discussion of the Granger cases and the subsequent c hange in

attitude by the Suprem e Court is based in part on Rocco J. Tresolini,

American Constitutional Law, 2ud Ed. (New York: T he MacM illan Co.,

1959), pp. 264-266, 326-331.

16 Wabash , St. Louis & Pacific Railway C o. v . Illinois, 118 U. S. 557

(1886).

17 118 U. S. at 577.

12

faire. Corporate interests wanted to grow without fear of government

intervention. Their lawyers were more than willing to help. In 1878,

they formed the American Bar Association. It became a sounding

board for protecting property inter ests from government.

The influence of laissez faire in political and legal circles was

soon evident in the U.S. Supreme Court. From 1877 to 1886, five

justices resigned or died. And two of those remaining, Joseph Bradley

and Stephen Field, had not been comfortable with the judicial restraint

shown in Munn. The Court became more inclined to protect the

property interests of the emerging business corporations. 15

In 1886, the Supreme Court again considered the ability of the

States to regulate rail rates on goods going outside the State. Four of

the five new justices sided with the two remaining activist jurists to

repudiate the Granger cases and strike down State regulation of rail

rates on traffic moving among the states. 16

The Wabash case involved an Illinois statute which imposed a

penalty on a railroad that charged lower rates on long hauls that

extended beyond its border than on a shorter, in-State haul on the same

tracks. The Court, in holding the statute unconstitutional, relied

exclusively on the commerce clause language that provides Congress

shall have the power to "regulate commer ce with foreign nations and

among the sever al States."

The Court did little to distinguish the Granger cases, whose facts

included elements of interstate movement. It simply concluded that

this type "of regulation is one which must be, if established at all, of

a general and national character... "

17

The Wabash decision created a political void. The states were

barred from regulating the railroads and Congress had not done so.

As neither shippers nor the railroads were comfortable with the pro-
18 ICC v. Cincinnati, New Orleans & Texas Pacific Railway Co., 167

U. S. 479 (1897).

19 168 U. S. 144 (1897).

20 Chap. 708, 32 Stat. 847 (1903).

21 Chap. 3591, 34 Stat. 584 (1906).

22 Chap. 309, 36 Stat. 539 (1910).

23 All of these laws and other general rail rate regulation were repealed

by the Railroad Revitalization and Regulatory Reform Act of 1976 (P.L . 94-

210, 90 Stat. 31 (1976)) and subsequent rail deregulation legislation.

13

spect of no rules in the rail service game, it took Congress only a few

months to react, passing the Interstate Commerce Act of 1887.

This landmark legislation marked the first time Congress

affirmatively exerted its authority under the Constitution to regulate

commerce among the States. It was also the first time Congress

created an independent administrative body, the Interstate Commerce

Commission (ICC), to regulate trade and commerce. The ICC was

charged with keeping rail rates just and reasonable.

Railroad regulation in the early days of the ICC was not very

effective, at least from the shipper perspective. The railroads used the

ICC to raise rates on their competitive long-haul routes. And they

used the courts to challenge, often successfully, ICC decisions they

didn't like. For example, in the "Maximum Freight Rates" decision18

the Supreme Court ruled the ICC had the authority to declare r ail rates

reasonable or unreasonable, but not the power to prescribe future

rates. ICC v. Alabama Midland Railway Co.19 held the ICC lacked the

power to prevent short-haul rates from exceeding long-haul rates on

the same railroad.

However, the rising influence of the progressive movement at the

turn of the century, brought with it a feeling that the railroads needed

more stringent public oversight. The Elkins Act of 190320 ended the

railroads' practice of giving rebates to large corporations. The

Hepburn Act of 190621 gave the ICC the power to set maximum rates.

The Mann-Elkins Act of 1910

22 granted the ICC clear authority over

long- and short-haul rate differences. 23

In spite of its new authority, the ICC never became a major factor

in curtailing anticompetitive behavior. Changing economic conditions
14

reduced such conduct. Railroad consolidations mitigated long-haul

competition. Later, the evolution of the truck provided tough new

competition in the short-haul market. But in the late 19th century, the

public had a positive impression that the ICC was there and looking

out for the public good. This cr eated a favorable political climate for

the enactment and enforcement of more sweeping laws designed to

limit restraints of trade in gener al.

Corporations and Trusts

For the first three quarters of the 19th century, most American

businesses were small in size, organized as a sole proprietorship or a

partnership of a few men, managed by their owners, required little

capital, produced a single product, and served local markets.

By 1890, a new industrial structure was taking shape. A relative

handful of large corporations were gaining dominance in many key

industries. In these organizations, management was separate from

ownership, large amounts of capital were used to acquire machinery

and other fixed assets, and many products were produced and sold in

a national or international market. Farmers and their cooperatives

were caught up in this change and influenced by public and

Government responses to it.

Development of the Corporate Structure

Joint business companies can be traced back to ancient civilizations in Asia Minor and early Gr eek and Roman societies. But the

modern corporate form developed in England in the 1840s to support

the movement of production from the home to the factory. Until then,

most commercial operations involved an owner, his family, and

perhaps a small number of employees providing a product or service

to the local community. The corporation made it easy to combine the

key components of production--capital and people--to produce a

product and serve a region, an entire country, and even other parts of

the world.

In the United States, the corporate structur e was particularly

attractive to the railroads. The huge amount of money needed to

build, equip, and operate this expanding industry greatly exceeded the
15

available wealth of any one individual, or even the young country.

Initial capital came from port cities along our Atlantic Coast who were

anxious to become links between the vast natural resources of the West

and the growing industries of Europe. Soon, Europeans were funding

much of the rail expansion, sensing this was the window to

participation in great business opportunities that would arise as the

United States grew.

The railroads were also far too complex for a single or even a

small group of people to manage. Railroads were leaders in

developing modern management structures staffed with professional

managers. Functions such as finance, operations, and traffic were

recognized as separate specialties. Accounting, legal, purchasing, and

marketing departments emerged.

Also, the railroads pioneered amalgamation and use of the

securities markets to acquire market power and wealth. For example,

in 1853 the properties of 10 individual rail companies operating

between Albany and Buffalo were combined to form the New York

Central. Securities amounting to $34 million were distributed to 2,445

investors in exchange for the stock they held in the individual rail

companies.

While railroading led the way in corporate development,

manufacturing later overshadowed it in size and complexity. New and

improved machines, the use of power, and factory organization made

it possible to produce standardized goods in an almost never-ending

stream. Where new technology yielded economies of scale--a decrease

in cost per unit as more units are produced--special incentives for

industrialists to expand their production were created.

Horizontal Coordination

The railroads reduced long distance transportation costs and

increased the market area where each manufacturer could sell his

increased production. This threw him into competition with other

producers whose previous markets had been, like his own, local in

nature. In industry after industry, growth in supply exceeded demand.

Since manufacturers had invested heavily in specializedequipment

which could be used only for limited purposes, they couldn't withdraw

from a market and transfer their capital to another use without

incurring heavy losses. Each manufacturer continued producing as
16

long as the price received for each unit of production covered his

direct costs (labor and materials). The best he could hope for, if

selling at a loss, was that his competitors would be forced out of

business before he was.

Even this wasn't a good solution from a businessman's viewpoint.

The exit of one competitor through bankruptcy usually resulted in the

entry of a new competitor who purchased the assets of the bankrupt

firm at a bargain price. Entrepreneurs raised on the virtues of open

competition and survival of the fittest were confronted with situations

they now described as "ruinous" and "destructive" competition.

To meet the threat of falling prices and vanishing profits,

industrialists formed regional and national trade associations, and

through them entered into agreements to set minimum prices, limit

total output, and/or divide markets. In Europe, such cartel agreements

were legally enforceable and helped solve the overproduction

problems. However, in the United States these pooling agreements

had no standing in court. If a participant broke the agreement by

selling at a price below that established by the cartel, he could not be

sued, even if the agreement was part of a written contract. Thus, most

pooling agreements lasted only a short time, followed by a quick

return to price wars.

John D. Rockefeller, head of the Petroleum Refiners Association,

is credited with devising a more permanent form of combination. In

1882, he and his associates at Standard Oil adapted the old legal devise

of a trust to meet the current needs of business.

In a business trust, the corporations in the industry signed

irrevocable deeds of trust, transferring control of their properties to a

separate legal entity, the trust. A board of trustees was empowered to

manage the properties on behalf of the shareholders of the individual

corpor ations, who remained legal owners of the assets. This

arrangement had the advantage of being permanent. The irrevocable

deeds of trust prevented unilateral withdrawal of a participant.

More importantly, it put centralized management of the industry

in the hands of the trustees. They could make all of the business

decisions for the industry, including the elimination of surplus

capacity. For example, the number of plants in the Standard Oil trust

was reduced from 55 in 1882 to only 22 by 1886.

Eight nationwide trusts were attempted in the 1880s. Six successfully controlled their industries--sugar, whiskey, lead, cottonseed oil,
17

linseed oil, and petroleum. These entities were pioneers in creating

large industrial enterprises through horizontal combination--the process

of joining together companies operating at one level or stage of

production. They not only found a legal form for big business, but

they also began to develop centralized managerial techniques.

In the early 1890s, about the time that the trust form came under

legal attack, New Jersey changed its incorporation laws to authorize

one corporation to own the stock of other corporations. In a short

time, the holding company had supplanted the trust as the preferred

vehicle for consolidating control of companies within the same

industry. But the image of the trust as the symbol of the rapid rise of

large enterprises in the 1880s was so strong that the term continued to

be applied to big business long after the legal form had been

abandoned.

Vertical Coordination

While some companies faced pressure on prices from overproduction, others found their ambitions blocked by inadequacies in the

existing system of wholesalers. While these firms could produce a

large output with continuous-process machinery, in some instances

wholesalers couldn't move those goods quickly enough. In other

instances, wholesalers lacked the ability to perform essential functions,

such as demonstration, installation, and repair.

In the 1880s, makers of low-cost packaged consumer products--

cigarettes, flour, breakfast cereals, canned goods--set up their own

sales offices where they employed aggressive marketing techniques.

Advertising became a particularly potent weapon. Most of the

products were new to consumers. A low per-unit price made it

difficult to stimulate demand by price r eductions.

At the same time, producers of a variety of new dur able goods--

sewingmachines, agricultural implements, office machines, elevators--

created national networks of local representatives. They not only sold

products but also provided spare parts, specialized repair service, and

the credit to purchase these big-ticket items.

Innovators in mass marketing and distribution often had to

overcome vested interests at the local and state levels. A good

example is the Singer Sewing Machine Company. Formed in the

1850s, Singer first sold its products through local merchants.
24 Welton v. State of Missouri, 91 U.S. 275 (1876); Webber v. Virginia,

103 U. S. 344 (1880).

25 Minnesota v. Barber , 136 U .S. 313 (1890).

18

However, after the Civil War it found independent distributors were

unable to provide the credit, conduct the demonstrations, and furnish

the repair service the company needed to mass market its product.

Singer decided to create its own distributing organization and

employed its own traveling salesmen.

Local interests, to protect their markets, invoked "peddler

licensing" and tax laws that discriminated against out-of-state products

and sales people. Singer had the resources and determination to

challenge these tactics in court and, relying on the commerce clause of

the Constitution, have them ruled invalid.24

Similar parochialism confronted innovators in agriculture. For

example, refrigerated r ail cars allowed meat packers to achieve

economies of scale in processing meat in central locations, such as

Chicago, and then ship it hundreds of miles for sale to stores at prices

below what local butchers were charging. Local butchers responded

by inducing a number of states to pass meat inspection laws that had

the affect of eliminating competition from the Chicago packers.

When one of it agents was convicted under such a law in

Minnesota, Armour took the case to the U.S. Supreme Court and

prevailed. 25 A Minnesota law made it a crime to sell beef, pork, veal,

lamb or mutton for human consumption unless the animal it came from

was certified healthy by a local inspector within 24 hours before

slaughter. Minnesota argued this was a valid exercise of State policy

power to protect human health. But the Court, noting the law kept out

all meat from other states, both sound and adulterated, held it unconstitutionally abridged Congr essional power to regulate interstate

commerce.

Manufacturing firms integrated not only forward into marketing

but also backward into purchasing to assure adequate supplies for large

volume production. Durable goods firms bought or constructed

factories to provide themselves with parts and materials. Producers of

nondurable goods took similar steps. Meat packers, for example,

bought into stockyards along the cattle frontier. Cigarette makers built
26 Supra, p. 10.

19

their own storing and curing sheds for the tobacco they purchased from

farmers.

Some firms grew both horizontally and vertically. For example,

in 1882, Standard Oil represented a horizontal combination of

kerosene refineries. But the trust expanded vertically--backward into

crude oil production and forward into wholesale and retail marketing--

to use its large-scale operations more effectively. On the other hand,

the formation of the American Tobacco Company in 1890 combined

five firms with their own marketing and purchasing activities into a

single unit that could both reduce costs and exercise tight control of the

industry.

COOPERATIVES EMERGE

During the years leading up to enactment of the Sherman Act,

cooperation sputtered but grew.

The retrenchment of the Granger movement26 coincided roughly

with the emergence of a new agrarian society, the Farmers' Alliance.

As farm prices continued to fall from 1887 to 1890, the Alliance

membership grew. Its leader, Dr. C. W. Macune, promoted cooperatives as an answer to the farmer's worsening economic position.

The Alliance took a somewhat different approach to cooperative

structure than the Grange. The Grange emphasized the role of the

local associations, which could band together to work on problems too

big for a small, local cooperative to handle. This could be

characterized as the forerunner of the federated system.

The Alliance developed statewide associations to unite farmers

into larger, stronger cooperatives. County associations were primarily

governance vehicles, serving to elect delegates to policy positions in

the statewide associations. This approach became the model for

today's large, centralized cooperatives.

But like their Granger forebears, the Alliance cooperatives gave

farmers a quick boost but then passed from the scene. The Alliance

tried to develop financing policies that minimized the amount of money

farmers were requir ed to invest in their cooperatives. Up-front fees

were not sufficient to adequately capitalize the new ventures.
27 Joseph G. Knapp, T he Rise of American C ooperative Enterprise: 1620-

1920 (Danville, IL: Interstate Printers and Publishers, 1969) p. 71. Knapp

credits Professor T. L. H aecker, who joined the staff of the University of

Minne sota in 1891, with bringing some rationality to the dairy cooperative

system. Haecker educated producers on the schemes of the promoters and

started a program on butter making at the university that led to improved

quality of Minnesota butter. By 1896, numerous efficient cooperative

creameries were functioning in Minnesota.

20

Then the Alliance rejected the Rochdale approach of charging

market prices and returning ear nings, if any, to patrons after the end

of the fiscal year. It adopted instead a policy of attempting to operate

at cost on a transaction-by-transaction basis. While this kept the cost

of supplies low and provided the highest possible returns to producers

for products marketed, it also meant that the slightest miscalculation

left the associations without funds. When the cooperatives began to

fail, the Alliance leadership lost interest and turned to political activity

as a way to improve farmer income.

Other, independent cooperatives were also developing. The

largest number were local dairy processing cooperatives. Several

cooperative cheese plants were in operation even before the rise of the

Granger movement. The introduction of the centrifugal cream

separator in 1879 gave a great impetus to commercial production of

creamery butter and the formation of many more dairy processing

cooperatives.

Noted cooperative historian Joseph Knapp points out that many of

these associations, like their Granger and Alliance counterparts, were

destined to fail. They were not formed on the basis of economic

feasibility, and rather "the unscrupulous efforts of promoters who were

primarily interested in selling creamery equipment. "

27

Many early cooperatives failed because they were long on

cooperative spirit and enthusiasm, but short on business acumen.

Another young cooperative movement in the expanding California fruit

industry, added the need to operate on sound business principles to the

general cooperative business plan.

California was a long way from eastern markets, putting 

individual producers at the mercy of dealers and commission agents.

Growers soon learned that group action was needed to sell their

products at a profit. In the 1880s, grower cooperatives became active
21

players in the marketing of numerous specialty crops including

oranges, lemons, raisins, prunes, apricots, and nuts.

Unlike some of their eastern and midwestern contemporaries,

Californians never became enthralled with cooperation as an end in

itself. Rather, they took the pragmatic view that a cooperative was a

means to an end. The Californians needed to find a way to profitably

sell crops grown in specialized producing areas far from their markets.

The cooperative was merely an extension of the farming operation, an

exclusive marketing agency.

Californians also recognized that operating effectively in distant

markets necessitated attracting and retaining competent management.

While other associations were often run by local producers caught up

in the euphoria of the moment but with little business training or

experience, California farmers paid top salaries to develop an efficient

management core. This led to the development of tools such as

marketing agreements, pools, and federations that still serve farmers

well today.

Thus cooperatives were well established at the time Congr ess

began considering the Sherman Act. By 1890, there were about 1,000

active farmer cooperatives in the United States. More than 700 were

handling dairy products, about 100 grain, and about 100 fruits and

vegetables.
28 John Sherman, the younger br other of Union General William

Tecumseh Sherm an, was bor n at Lanc aster, Ohio, in 1823. His fath er, a

member of the state supreme court, died when John was 7 years old, leaving

his widow with 11 childre n to support. John left school at the ag e of 14 to

work but at age 17 he began to study law under the guidance of his uncle and

oldest brother. He was admitted to the bar in 1844 and pra cticed law in

Mansfield for 10 years.

22

CHAPTER 2. THE SHERMAN ACT

As the dominance of large firms grew, so did public resentment.

The developing backlash against the "trusts" was not an attack on

business or capitalism. Many of those calling for Government

intervention were businessmen and their spokesmen, particularly small

entrepreneurs who had been damaged, or who believed that they had

been damaged, by the aggressive behavior of large corporations. They

focused on traditional sentiment against monopoly and the widely held

belief in America about the virtue of freedom of opportunity.

Some people defended business combinations because they

appeared to be highly efficient, a value some believed to be as

important as competition.

Critics gained a key ally in Senator John Sherman (R-OH), 28

widely recognized as the ablest financial expert in public service.

Although the antitrust act that carries his name was actually drafted in

the Senate Judiciary Committee, Sherman' s interest and support were

key to its enactment.

Sherman’s position to influence the enactment of antitrust law was

due to both good luck and good planning. Naturally drawn to politics,

Sherman was first a member of the Whig party. However, he soon

joined the new Republican party. He was elected to the House of

Representatives in 1854 and in 1855 served as president of the first

Republican convention in Ohio. After 6 years in the House, he was

elected to the Senate in 1861 to fill the seat vacated by Solmon P.

Chase.

Sherman spent 32 years in the Senate (1861-1877, 1881-1897).

During his first tenure he rode the crest of the wave sweeping the

Republican Party, and Ohio Republicans in particular, to political
29 19 Cong. Rec. 6041 (July 10, 1888).

30 19 Cong. Rec. 7512-7513 (August 14, 1888).

31 19 Cong. Rec. 8483-8484 (September 11, 1888).

23

dominance during and after the Civil War. Sherman quickly gained

the allegiance of the party’s two main constituent groups--midwestern

farmers and eastern businessmen--when he rose to Chairman of the

Agriculture Committee (38th and 39th Congresses) and the Finance

Committee (38th and 40th-44th Congresses). However, he resigned

his Senate seat in 1877 to serve as Secretary of the Treasury under

President Rutherford B. Hayes, a fellow Republican from Ohio.

In 1881, President Hayes was succeeded by Senator-elect James

Garfield, yet another Ohio Republican. Sherman left the cabinet and

won reelection to the Senate seat vacated by Garfield. During his

second period in the Senate, Sherman again served on the Finance

Committee, but not Agriculture. While he wasn’t chairman of the

Finance Committee, his experience and reputation gave him

considerable influence over legislation impacting the country’s

financial affairs.

LEGISLATIVE HISTORY

In the late 1880s, Sherman became convinced of the need to place

some limits on the growing power of the trusts. He laid the

groundwork for the enactment of an antitrust law near the end of the

50th Congr ess.

First, he led the Senate to approve a resolution, which he

introduced, directing the Finance Committee to study the need to

control or prohibit anticompetitive conduct. 29 Several weeks later, the

first bills were introduced attacking trusts and combinations in restraint

of trade. Sherman used the directive as leverage to have the bills

referred to the Finance Committee rather than either the Judiciary or

Commerce Committee.30 Thus, he was positioned to move quickly to

make sure a bill was reported out of the Finance Committee before

Congress adjourned. 31

While no action was taken befor e the end of the 50th Congress,

Sherman gained the prestigious distinction of sponsoring antitrust
32 21 Cong. Rec. 96 (D ecember 4, 1889).

33 Senator George’s statement, 21 Cong. Rec. 1768 (F ebruary 27, 1890);

Senator Sherman’s quote thereof, 21 Cong. Rec. 2461 (M arch 21, 1890).

24

legislation introduced as the first Senate bill (S. 1) of the 51st

Congress. 32 Little dispute existed among Federal legislators over the

need for action. The first day of Senate debate on S. 1 consisted

almost entirely of a lengthy speech by Senator James George, a

Southern Democrat from Mississippi.

Senator George, a former chief justice of his State’s supreme

court and a member of the Judiciary Committee, would become

Sherman’s personal nemesis during Senate consideration of his bill.

But Senator George included such a strong condemnation of trusts in

this opening statement that Senator Sherman quoted it with approval

during the subsequent debate:

These trusts and combinations are great wrongs to the

people. They have invaded many of the most important

branches of business. They operate with a double-edged

sword. They increase beyond reason the cost of the

necessaries of life and business, and they decrease the cost

of the raw material, the farm products of the country. They

regulate prices at their will, depress the price of what they

buy and increase the price of what they sell. They aggregate

to themselves great, enormous wealth by extortion which

makes the people poor. Then, making this extorted wealth

the means of further extortion from their unfortunate victims,

the people of the United States, they pursue unmolested,

unrestrained by law, their ceaseless round of speculation

under the law, till they are fast producing that condition in

our people in which the great mass of them are servitors of

those who have aggregated wealth at their command.33

During consideration of antitrust legislation, little opposition was

expressed to its overall intent. There was, however, much discussion

over whether the bill should have been referred to the Judiciary or

Commerce Committee and, more important, whether Senator Sher-
34 21 Cong. Rec. 2455-2474 (M arch 21, 1890); 21 Cong. Rec. 2556-2572

(March 24, 1890); 21 Cong. Rec. 2597-261 6 (March 25, 1890); 21 Cong.

Rec. 2639-2662 (March 26, 1890); 21 Cong. Rec. 2723-2731 (March 27,

1890).

35 21 Cong. Rec. 2731 (M arch 27, 1890).

36 Senator S tewart possibly gained a n appre ciation for c oopera tives while

living in California throughout the 1850s and serving for a time as state

attorney g eneral.

37 21 Cong. Rec. 2606 (1890).

25

man’s language was constitutional. Numerous amendments were

introduced to fine-tune the language, some passing and others not. 34

After several days of debate, which probably confused rather than

clarified the issues in the minds of many Senators, Senator George was

able to wrest control of the bill from Senator Sherman and have it

referred to the Judiciary Committee for rewriting. 35

One of the amendments offered during Senate consideration of

Senator Sherman's bill was designed to protect farmer cooperatives.

A number of senators were concerned that Senator Sherman' s bill

would outlaw farmer cooperatives. For example, during floor debate,

Senator William Stewart (R-NV)36 said:

.. .(T)ake, for example, the beef trust in Chicago....There

is a plain remedy for that trust, not in legislation perhaps, but

in the action of the parties interested. Farmers who are

producing beef have to sell it at an enormous sacrifice, at

starvation prices. Cattle are cheap all through the country.

Still beef is high in Chicago. Suppose the farmers in the

West should unite and say, "We will not sell our beef except

at a certain price. " Suppose they should unite to beat this

combination; they would all be criminals under this bill; they

could not combine to beat it at all.37 (Emphasis added).

After stating a similar second example concerning wheat growers,

Senator Stewart continued, "This measure strikes at.. .the very root of

co-operation.. ..When capital is combined and strong, it will for a time
38 Id.

39 21 Cong. Rec. 2611 (1890).

40 21 Cong. Rec. 2611-2612 (1890). This is not the precise language

introduced by Senator Sherman. It includes several nonsubstantive changes

made during the brief floor debate.

41 21 Cong. Rec. 2612 (1890).

42 21 Cong. Rec. 2726 (1980).

43 21 Cong. Rec. 2726-2731 (1980).

44 21 Cong. Rec. 2731 (1890).

26

produce evils, but if you take away the right of co-operation you take

away the power to redress those evils... ." 38

To allay this concern, Senator Sherman proposed an amendment

first suggested by Senator George, saying "I do not think it necessary,

but, at the same time to avoid any confusion, I submit it... ." 39 The

amendment read:

Provided, That this act shall not be construed to apply to

any arrangements, agreements, or combinations between

laborers made with the view of lessening the number of

hours of their labor or of increasing their wages; nor to any

arrangements, agreements, associations, or combinations

among persons engaged in horticulture or agriculture made

with the view of enhancing the price of their own agricultural

or horticultural products.

40 (Emphasis supplied.)

The amendment was agreed to by voice vote.41

Two days later, the Senate again took up Senator Sherman's

amendment. 42 The discussion turned out to be the last gasp for his

entire bill. Sherman, thinking another amendment had been called up,

took the floor and began a sarcastic attack. This mistake was

smoothed over with a colloquy suggesting not all amendments needing

reaffirmation were properly printed in italics on the version given the

Senators, leading to more confusion. After a somewhat meandering

discussion of various issue concerning the bill, 43 a motion was made

and passed to refer the entire bill, including pending amendments, to

the Judiciary Committee.44 The Judiciary Committee rewrite, which
45 See, e. g., the comments of Senator Vance which begin, "I never have

a bill in which I feel any interest referred to this grand mausoleum of Senate

literature, the Judiciary Comm ittee, without feeling that I have attended a

funeral." 21 Cong. Rec. 2610 (M arch 25, 1890).

46 21 Cong. Rec. 2901 (A pril 2, 1890).

47 21 Cong. Rec. 3145-3153 (Apr il 8, 1890).

48 21 Cong. Rec. 3857 (A pril 25, 1890).

49 21 Cong. Rec. 5981-5983 (June 12, 1890). A detailed list of citations

to the entire congressional consideration of S. 1 can be found in the "History

of Bills and Joint Resolutions: Senate Bills" in the Index to Volume 21 of the

Congressional Record, p. 1.

50 21 Cong. Rec. 6208 (June 18, 1890).

51 21 Cong. Rec. 6312-6314 (June 20, 1890).

27

became the law as enacted, omitted any reference to farmer

cooperatives.

The main argument against referral concerned the Judiciary

Committee’s apparent reputation as a graveyard for any legislation

perceived as anti-business. 45 The motion to refer contained a provision

requiring the committee to report it back within 20 days. The

committee beat the target, reporting out the new language in less than

a week.46 The bill was brought up on the Senate floor less than

another week later and passed after a minimum of debate.47

The Senate Judiciary Committee language was enacted into law,

but not before some additional controversy. In the House, S. 1 was

referred to the its Judiciary Committee and promptly reported

favorably for House consideration.48

During House floor debate, an amendment was adopted declaring

two types of contracts illegal: (1) agreements to prevent competition

in the sale of any commodity transported from one State to be sold in

another State, and (2) agreements to prevent competition in the transportation of persons or property from one State to another. But after

some haggling, the House instructed its conferees not to insist on the

amendment. 49

The conference report recommending adoption of the bill as

originally passed by the Senate was approved without debate in the

Senate50 and minimal discussion in the House.51 It was promptly
52 21 Cong. Rec. 6922 (July 2, 1890). A ct of July 2, 1890, c. 647, 26

Stat. 209, 15 U. S.C . §§ 1-8. The law was originally titled "A n act to protect

trade and commerce against unlawful restraints and monopolies." The H artScott-Rodino Antitrust Improvements Act of 1976, 90 Stat. 1383, 1387

(1976), added language to the earlier law providing it may be cited as the

"Sher man A ct."

53 15 U.S.C. § 1. 

54 15 U. S.C . § 2.

28

signed into law by President Benjamin Harrison on July 2, 1890. 52

PROVISIONS

The first two provisions of the Sherman Act remain the core of

our antitrust law. Section 1 begins:

Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or commerce

among the several States, or with foreign nations, is hereby

declared to be illegal...

53

Section 2 reads:

Every person who shall monopolize, or attempt to

monopolize, or combine or conspire with any other person

or persons, to monopolize any part of the trade or commerce

among the several states, or with foreign nations, shall be

deemed guilty of a felony.. .

54

These prohibitions on trade restraints have never been amended.

They reflect, if not necessarily codify word for word, earlier common

law rules. Their interpretation and application to cooperatives is at the

heart of this report.

Other Sherman Act language added two additional essential

ingredients for effective governmental action--meaningfulpenalties and

a means of enforcement.

First, Sections 1 and 2 provide that a violation is a criminal felony

punishable by substantial fines and prison time. Under either
55 15 U. S.C . §§ 1, 2. 

56 15 U. S.C . § 4.

57 Act of Aug. 17, 1937, ch. 690, title VIII, 50 Stat. 693 (1937).

58 Pub. L . 94-145, § 2, 89 Stat. 801 (1975).

59 26 Stat. 209 (1890). 

60 Act of July 5, 1955, ch. 281, 69 Stat. 282 (1955).

61 Pub. L . 93-528, § 3, 88 Stat. 1708 (1974).

62 Pub. L . 101-588, § 4(a), 104 Stat. 2880 (1990).

63 26 Stat. 209, § 3, at 15 U. S.C . § 3.

29

provision, "conviction...shall be punished by fine not exceeding

$10,000, 000 if a corporation, or, if any other person, $350, 000, or by

imprisonment not exceeding three years, or by both said punishments,

in the discretion of the court. "

55

Second, the U.S. Department of Justice was directed to bring

legal action to prevent and restrain violations. 56

The Sherman Act has changed little since it was enacted. Some

modest amendments have been made to Sections 1 and 2. In 1937,

provisions were added to the first sentence of Section 1 shielding State

fair trade laws from antitrust scrutiny.57 They were repealed in 1975. 58

Other amendments through the years have strengthened the

penalties. Originally, a violation was a misdemeanor punishable by a

fine of not more than $5,000 and imprisonment not exceeding 1 year.59

In 1955, the maximum fine was increased to $50,000.60 In 1974,

violation was changed from a misdemeanor to a felony; separate

maximum fines were established of $1 million for a corporation and

$100,000 for any other person; and the possible prison sentence was

increased to 3 years. 61 In 1990, maximum fines were increased to

current levels, $10 million for corporations and $350,000 for other

offenders. 62

Other Sherman Act provisions are procedural in nature and will

be rarely mentioned herein:

 ! Sec. 3 makes the act applicable to territories of the United States

and the District of Columbia.63
64 26 Stat. 209-210, § 4, at 15 U. S.C . § 4.

65 26 Stat. 209-210, § 5, at 15 U. S.C . § 5.

66 26 Stat. 210, § 6, at 15 U. S.C . § 6.

67 26 Stat. 210, § 7, at 15 U. S.C . § 15.

68 26 Stat. 210, § 8, at 15 U. S.C . § 7.

30

 ! Sec. 4 establishes federal court jurisdiction, Department of Justice

authority to enforce the act, and sets out procedural guidelines. 64

 ! Sec. 5 gives courts hearing an antitrust case nationwide power to

summon and subpoena witnesses. 65

 ! Sec. 6 provides for the seizure, condemnation, and forfeiture of

property being transported from one State to another and is

involved in an activity that violates Section 1 of the law.66

 ! Sec. 7 authorizes private parties injured by conduct illegal under

the act to sue and to recover three times the amount of their losses

and the costs of litigation, including a reasonable attorney's fee.67

 ! Sec. 8 defines the term "person" to include corporations and

associations formed under Federal, State, territorial, or foreign

country laws. 68

Big business didn't appear to feel threatened by the Sherman Act.

Apparently it believed the law was so vaguely worded and innocuous

as to be unenforceable. Business also felt that its friends in

Government would protect its interests. The statute passed the Senate

with only one dissenting vote. It cleared the House of Representatives

on an initial vote of 152 to 72 and 240 to 0 in final form.

JUDICIAL INTERPRETATION

At first, business indifference seemed justified. Few suits were

filed. In the first case to r each the U. S. Supreme Court, business

scored an impressive victory.
69 United States v. E. C. Knight Co., 156 U. S. 1 (1895).

70

 State v. Standard Oil Com pany, 30 N .E . 279 (Ohio 1892). In this

case, the Ohio Supreme Cour t held Standard Oil of Ohio violated common

law on two grounds, (1) the shareholde rs acted illegally in turning over

control of the comp any to the tru stees of the N ew Yo rk-base d Standar d Oil

Trust, and (2) the trust's possession of 90 per cent of the country's refining

capacity constituted a monopoly contrary to public policy.

The court issued an order to the compan y to term inate its connec tion to

the trust, which was soon dissolved. The individual com panies continu ed to

collabora te under a looser comm unity-of-interest arrangement. In 1899, the

group created a more formal legal relationship by forming a holding company,

the Standard Oil Company of N ew Jersey, to hold the shares of the various

companies and to ow n outright several r efineries.

71 156 U. S. at 42.

31

In 1892, the American Sugar Refining Company, a New Jersey

corporation which controlled a majority of the sugar refining

companies in the United States, obtained nearly complete control of the

manufacture and distribution of refined sugar by purchasing the stock

of the E. C. Knight Company and three other Philadelphia refineries.

The United States brought an action alleging American Sugar Refining

was a "combination... in restraint of trade and commerce among the

several states" made illegal by Section 1 of the Sherman Act.

The Court, still dominated by the laissez-faire philosophy, held on

an 8-1 vote that the Sherman Act could not be applied to a virtual

monopoly of the sugar industry because the manufacture of sugar was

not an act committed in interstate commerce.69

In his lone dissent, Justice Harlan expressed astonishment that the

majority could so easily distinguish manufacturing from commerce.

He cited several State court decisions that, like State v. Standard Oil

Company,

70 had held monopoly arrangements null and void as contrary

to public policy. He remarked that "while the opinion of the Court

does not declare the act of 1890 to be unconstitutional, it defeats the

main object for which it was passed."71

Whether bowing to popular opinion as reflected in the emerging

influence of the progressive movement, Justice Harlan's dissent, or for

some other reason, the Court quickly abandoned the philosophy of the

E. C. Knight opinion. Future cases acknowledged a broad application

of the concept of commerce. They focused on finding the proper
72 Pollock v. F armers' Loan and Trust Co., 158 U. S. 601 (1895).

73 In re Debs, 158 U. S. 564 (1895).

74 Thorelli, T he Federal Antitrust Policy, pp. 294-303.

75 United States v. Trans-M issouri Freight Ass' n, 166 U .S. 290 (1897);

United States v. Joint Traffic Ass' n, 171 U .S. 505 (1898); Addyston Pipe and

Steel Co. v. United States, 175 U. S. 211 (1899).

32

approach for determining which restraints of trade violated the

Sherman Act.

During the same term, the Court delivered two other conservative

opinions, one striking down a tax on income derived from land or

personal property72 and another upholding a sweeping anti-labor

injunction issued in connection with the Pullman strike in Chicago

during the summer of 1894.73 These three opinions evoked strong

protests from the American working class, which was now convinced

that the judiciary had become the reactionary defender of entrenched

economic interests.

However, the general public was not yet sufficiently mobilized to

challenge business influence over economic or public policy. Fostered

by these judicial victories, the pro-business Republican election victory

of 1896, and r ecovery from the business depression of 1893-1897, a

period of substantial business mergers began. One historian identified

84 important new combinations between 1890 and 1897 with

authorized capital stock of $1 billion. Between 1898 and 1902 he

identified 189 combinations with capital stock of $4 billion.74

This trend was actually facilitated by a series of Government legal

victories. The Supreme Court began reading Section 1 of the Sherman

Act literally. It issued several decisions holding all agreements among

competitors on prices and production are illegal restraints of trade.75

This encouraged entrepreneurs to combine competing businesses into

a single entity. Merger was considered a safer method of eliminating

competition than keeping the businesses separate and engaging in

anticompetitive conduct.
76 United States v. Trans-M issouri Freight Assn, 166 U. S. 290 (1897).

77 166 U.S. at 313. At the time this opinion was drafted, the Court was

reviewing, and upholding, an earlier decision striking down the position of the

I.C.C. that it had the authority to set rail rates. Cincinnati, N ew Orleans and

Texas Pacific Railway Co. v. I.C .C ., 162 U. S. 184 (1896); I. C. C. v.

Cincinnati, New Orleans and Texas Pacific Railway Co., 167 U.S. 479

(1897). To hold that rail rates w ere also e xempt fr om antitr ust law wo uld

have created the same v acuum that led to enactm ent of the Interstate

Commer ce Act in the first place.

33

Literal Meaning Decisions

Several early cases interpreting the Sherman Act involved

anticompetitive conduct of the railroads. The second case to reach the

Supreme Court grew out of a governmental initiative to break up the

Trans-Missouri Freight Association, an agreement among 15 railroads

operating west of the Mississippi River for the primary purpose of

fixing freight rates. 76

The Court had several important issues to consider. First, the

railroads had already dissolved the agreement before the Court heard

the case and argued the litigation was moot. The Court found that the

carriers couldn't avoid liability by simply ceasing their possibly illegal

conduct, especially since the lack of a ruling would leave them free to

reform the association once the case was dismissed.

Next, the railroads asserted that their agreement was authorized

by the Interstate Commerce Act and therefor e insulated from antitrust

liability. Again, the Court rejected the carrier position. It found the

two laws consistent, noting that the Sherman Act applied to "every"

contract, including contracts among railroads. It also noted its opinion

in E. C. Knight and said that "To exclude agreements as to rates by

competing railroads for the transportation of articles of commerce

between the States would leave little for the act to take effect upon." 77

Finally, the Court had to decide whether this was the type of

restraint of trade outlawed by the Sherman Act. It was generally

accepted that, at common law, only unreasonable restraints of trade

were forbidden. In a 5-4 majority opinion, the Court determined to

follow the literal reading of the Act as declaring illegal "every"

contract or combination that retrained trade among the States. Thus,
78 166 U. S. at 342.

79 166 U. S. at 346.

80 Standard Oil Co. v. U nited States, 221 U. S. 1 (1911).

81 United States v. Joint Traffic Ass' n, 171 U .S. 505 (1898).

82 Addyston Pipe and Steel Co. v. United States, 175 U. S. 211 (1899).

83 175 U. S. at 238-242.

84 175 U. S. at 238.

34

it didn't have to examine whether this agreement was reasonable. It

restrained trade in interstate commerce and was ther efore illegal. 78

Justice White, in a vigorous dissent, reviewed the history of the

common law concept of restraint of trade and argued that the concept

of "reasonableness" was an inherent component thereof. 79 While his

view was not to hold sway this day, it would ultimately become the

accepted interpretation of the Sherman Act. 80

The following year the Court, relying on Trans-Missouri Freight

Ass'n, struck down a similar rate agreement between 31 lines operating

between Chicago and the Atlantic Coast. 81

In 1899, the Court, for the first time, applied the Sherman Act to

invalidate a price-setting agreement among manufacturers. 82 Addyston

Pipe was one of six companies which, in 1894, reached an agreement

that they would not compete with each other in the manufacture and

sale of cast-iron pipe. The Court distinguished E. C. Knight on the

basis that the sugar contract only covered manufacturing while, in this

case, the agreement also included sales. 83 The majority possibly

avoided a dissent on the issue of " reasonableness" by stating the price

charged in one market was so obviously unreasonable that the issue

need not be discussed further.84

Business Reacts, Roosevelt Responds

The Supreme Court decisions of the 1890s convinced the business

community that consolidation of competing firms was the only legal

method to achieve stability. In addition, experience gained during the

depression of the 1890s suggested the practical soundness of large

combinations; most of them fared rather well during the hard times.
85 In 1900, Roosevelt was elected vice president on the Republican ticket

headed by William McKinley. Six months into his term, M cKinley was

assassinated at Buffalo, NY. On September 14, 1901, Roosevelt became

President. In 1904, he was elected to a second term in a landslide.

86 Northern Securities Co. v. United States, 193 U. S. 197 (1904).

35

As noted earlier, the turn of the century witnessed a major merger

movement in the United States, highlighted by the decision of the

petroleum industry to reorganize as a holding company. In the space

of a half-dozen years, mor e than 2,800 business firms entered mergers,

including more than 1,200 in 1899.

The turn of the century also marked a change in Government

attitude, personified by the ascension in 1901 of Theodore Roosevelt

to the presidency.85 Roosevelt was not a dogmatic "trust-buster. " But

he felt big business needed to recognize a social responsibility.

When some large corpor ations didn' t respond to his urging to be

less ruthless and self-centered, Roosevelt decided he needed to do

something to get their attention. He instructed the attorney general to

institute antitrust proceedings against the Northern Securities

Company, a holding company organized in New Jersey by

stockholders of the Great Northern Railway Co. and the Northern

Pacific Railway Co. These two companies operated competing and

substantially parallel lines from the Great Lakes to Puget Sound. The

venture was backed by the most powerful capitalists of the era--J.P.

Morgan, John D. Rockefeller, Edward H. Herriman, and James J.

Hill.

The business community was stunned by Roosevelt's bold move.

Big business was even more alarmed when the Supreme Court found

this holding company eliminated competition between the lines and was

therefore an illegal restraint of trade. 86 The decision was close, 5-4,

and four separate opinions covering more than 200 pages in the United

State Reports were issued. But it accomplished Roosevelt' s purpose

of establishing precedent that the mere creation of a holding company

didn' t shield anticompetitive conduct from antitrust enforcement.

Business received another setback the following year when the

Court held that a relatively informal, but successful, coalition of meat

packers that controlled prices they paid for live cattle and charged for
87 Swift and Co. v. United States, 196 U. S. 375 (1905).

88 Roosevelt's view that big business wasn't going away, but needed to

serve the will of the people, not the other way around, was influenced by the

so-called progressive movement. The progressive movement became

particular ly strong in California. Its leaders formed the Lincoln-Roosevelt

League and, in 1910, succeeded in breaking the Southern Pacific str anglehold

on both the governorship and the State legislature. Pr ogressive leaders

enacted State rail and utility regulation and worker com pensation legislation.

Califor nia progressives also believed political power should be taken out of the

hands of party bosses and given directly to the people. They pushed through

the initiative, referendum, and recall laws that are still an important part of

the political process in California.

36

fresh meat also violated the Sherman Act. 87 This unanimous opinion

was written by Justice Holmes, one of the dissenters in Northern

Securities Co.

Roosevelt's antitrust policy sometimes rested on his intuitive

distinction between "good" trusts that focused on increasing efficiency

and acted with moderation and "bad" trusts that relied on abuse of

power.88 At his direction, the Justice Department instituted antitrust

suits against two holding companies which had gained notoriety for

their predatory tactics toward competitors, Standard Oil Co. of New

Jersey and the American Tobacco Co. The r esult of this litigation was

to shape antitrust analysis through today and the foreseeable future.

Rule of Reason

The first suit was filed against Standard Oil in November 1906.

The litigation encompassed nine subsidiaries of the Standard Oil Co.

in as many different states, 62 other corpor ations and partnerships, and

seven individuals. The Government charged they engaged in a

conspiracy to restrain trade and commerce in petroleum and to

monopolize such commerce. The violations were alleged to have

occurred over 36 years, covering the time the defendants operated as

an informal pool, the Standard Oil Trust, and the Standard Oil of New

Jersey holding company.

The suit against American Tobacco was filed in July 1907. While

naming nearly as many defendants as the Standard Oil complaint, this

case focused on the combination of the five major producers of
89 United States v. Amer ican Tobacco Co. et al., 164 Fed. 700 (S.D. NY

1908).

90 United States v. Standard Oil Co. of New Jersey et al., 173 Fed. 177

(E.D . M o. 1909).

91 Some of the unusual appellate practices in antitrust cases result from the

so-called Expediting Act (the A ct of Feb ruar y 11, 1903, ch. 544, 32 Stat.

823), which provided that cases initiated by the U. S. governm ent under the

Sherman Act (and later the Clayton Act) we re appealable directly, by either

party, from the district court to the U.S. Supreme Court. T his provision was

repealed in 1984, Pub. L . 98-620, § 402(11), 98 Stat. 3358 (1984). Today,

a district court may still certify an impor tant antitrust case for direct app eal.

The Supreme Court can accept or reject the district court request, 15 U.S.C.

§ 29. 

92 Standard Oil Company or New Jersey et al. v. United States, 221 U. S.

1 (1911).

37

cigarettes and other tobacco products into a holding company in

January 1890.

The American Tobacco litigation was the first to be decided at the

district court level. A specially convened panel of four judges held,

on a 3-1 vote, that American Tobacco was an illegal combination in

restraint of interstate commerce under the Sherman Act and ordered

its dissolution. The judges felt compelled to apply the literal language

of the Sherman Act, but invited the Supreme Court to review the

issue.89

More than a year later, the court trying the Standard Oil case

reached essentially the same result. It concluded Standard Oil was an

agreement to combine competitors that reduced competition and was

therefore illegal. This court also ordered the holding company

dissolved.90

Both decisions were appealed directly to the Supreme Court. 91

They were decided on the same day. Fourteen years after his dissent

in Trans-Missouri Freight Ass' n, Mr. White, as Chief Justice, repeated

his views with respect to the rule of reason. He now spoke for an 8-1

majority on the Court.

The first opinion issued involved Standard Oil. 92 The Court

adopted the rationale that words used in a statute, which at the time of

enactment had "a well-known meaning at common law or in the law
93 221 U. S. at 59.

94 221 U. S. at 60.

95 Id.

96 United States v. Amer ican Tobacco Com pany, 221 U .S. 106 (1911).

97 Id. at 179-180.

98 The order to dissolve was supported by all nine justices. The m ajority

opinions, adopting the rule of reason, were signed by eight justices. Justice

Harlan dissented in both on the grounds that the Court shouldn't have

abandoned the stricter standard of the earlier opinions.

99 All Care N ursing Service v. H igh Tech Staffing Services, 135 F. 3d

740, 746 (11th Cir. 1998), cert. denied, 526 U .S. 1016 (1999).

38

of this country.. .are presumed to have been used in that sense unless

the context compels.. ." a different interpretation.93

Then the Court found that, at the time the Sherman Act was

passed, common law was well understood to only prohibit contracts

and combinations that "... unduly restrain interstate or foreign

commerce." 94 It concluded that a "standard of reason" was intended

by Congress to be the test used to determine if contracts or conduct

violate the statute.95

The Court further explained its holding in Standard Oil in the

American Tobacco case opinion.96 It said that the words "restraint of

trade" only include conduct, contracts, and combinations that harm the

public interest by unduly restraining competition. The Sherman Act

does not forbid normal contracts entered into in the normal course of

business. 97

While business interests won the battle to the extent that the Court

held that all contracts limiting competition were not per se illegal,

Standard Oil and American Tobacco lost their wars. The Court held

both entities engaged in unreasonable restraint of trade in violation of

the Sherman Act. Both were ordered to dissolve.98

The rule of reason remains today as the primary standard for

interpreting the Sherman Act. 99 But while the concept has a nice

sound, it also is a somewhat vague yardstick for measuring whether a

particular course of conduct, in a specific fact situation, constitutes a

legal or illegal restraint of trade.
100 Chicago Board of Trade v. United States, 246 U. S. 231 (1918).

39

One early case of particular interest to agricultur e provides a

useful discussion of this issue. In 1906, the Chicago Board of Trade

adopted a rule providing that when the exchange was closed its

members could only trade certain gr ain futures contracts at the closing

price of the last session. This rule was apparently adopted for two

reasons. First, many smaller members perceived that a few large

members had an unfair advantage as they were better able to hire large

staffs who could trade on a continuous basis. Also, many traders were

simply being worked into the ground trying to keep up with a

constantly changing market. In essence, the rule brought order to the

market and permitted member employees to lead a more normal life.

The Government argued that the rule was an illegal agreement

among competitors to fix prices. Noted jurist Justice Louis Brandeis

wrote an opinion for a unanimous Court, virtually devoid of references

to precedent or other citations, upholding the rule.100 Justice Brandeis

reasoned that the Government's case rests:

...upon the bald assertion, that a rule or agreement by

which men occupying positions of strength in any branch of

trade, fixed prices at which they would buy or sell during an

important part of the business day, is an illegal restraint of

trade under the Anti-Trust Law. But the legality of an

agreement or regulation cannot be determined by so simple

a test, as whether it restrains competition. Every agreement

concerning trade, every regulation of trade, restrains. To

bind, to restrain, is of their very essence. The true test of

legality is whether the restraint imposed is such as merely

regulates and perhaps thereby promotes competition or

whether it is such as may suppress or even destroy

competition. To determine that question the court must

ordinarily consider the facts peculiar to the business to which

the restraint is applied; its condition before and after the

restraint was imposed; the nature of the restraint and its

effect, actual or probable. The history of the restraint, the

evil believed to exist, the reason for adopting the particular

remedy, the purpose or end sought to be attained, are all
101 Id. at 238.

102 Id. at 239-240.

103 Id. at 240-241.

40

relevant facts. This is not because a good intention will save

an otherwise objectionable regulation or the reverse; but

because knowledge of intent may help the court to interpret

facts and to predict consequences. 101

The Court noted that the rule only restricted price competition

during part of the day, applied to a small part of the grain shipped to

Chicago each day, and had no appreciable effect on either the market

price or volume of grain being traded in Chicago or elsewhere. 102 It

also commented favorably on the impact of the rule in leveling the

field for country dealers, permitting trades to occur at smaller margins

for grain merchants, and shortening the time of great stress each day

for workers. 103

The general test of reasonableness enunciated in Chicago Board

of Trade--whether the restraint under review promotes or suppresses

competition--and the list of facts to be considered in making that

determination are still used today. But the rule of reasonableness is

not the only yardstick for measuring legality under the antitrust laws.

Rule of Per Se Illegality

The rule of per se illegality arose almost contemporaneously with

the rule of reason. They complement each other as tests for

interpreting the broad language of the Sherman Act. Today, they form

the basis for analyzing the legality of virtually all actions and

agreements that restrain trade.

The rule of per se illegality states that some conduct is so inherently anticompetitive that no investigation as to its "reasonableness" is

necessary. Simply doing the deed is to restrain trade or attempt to

monopolize in violation of the Sherman Act. This report discusses

precedent under the per se standard in some detail because of the

important implications of the rule for producer marketing associations.
104 United States v. Norther n Pacific Railway Co. , 142 F . Supp. 679

(W.D. Wash., N.D. 1956). The judge , usin g "quid p ro quo" analysis, held

that making a sale or lease contingent on agreeing to ship over the Northern

Pacific was a tying arrangement declared pre se illegal in Inter national Salt

Co. v. U nited States, 332 U. S. 392 (1947), and other cases cited in the

opinion.

41

The rationale for the rule of per se illegality is well stated in

another case involving railroad conduct. The Northern Pacific

Railway received about 40 million acr es of land when it built its line

from Lake Superior to the Puget Sound during the 1860s and 1870s.

In succeeding years, most of this land was sold or leased to others for

business development. Many of these contracts included "preferential

routing" clauses which required the land owner or lessee to ship goods

produced or manufactured on the land on the Northern Pacific,

provided that its rates were no higher than those of competing carriers.

In 1949, the Justice Department filed suit charging that the

"preferential routing" clauses were illegal restraints of trade under

Section 1 of the Sherman Act. A U.S. District Court Judge granted

the Government's request for summary judgment and enjoined the

railroad from enforcing its "preferential routing" clauses. 104

The railroad appealed directly to the Supreme Court. In affirming

the lower court order, the Court found these clauses stifled competition

by denying competitors access to these customers on the same terms

offered by the Northern Pacific. The Court said:

.. .(T)here are certain agreements or practices which

because of their pernicious effect on competition and lack of

any redeeming virtue are conclusively presumed to be

unreasonable and therefore illegal without elaborate inquiry

as to the precise harm they have caused or the business

excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are

proscribed by the Sherman Act more certain to the benefit of

everyone concerned, but it also avoids the necessity for an

incredibly complicatedand prolonged economic investigation

into the entire history of the industry involved, as well as re-
105 Northern P acific Railway Co. v. United States, 356 U. S. 1, 5 (1958).

106 Id. at 5.

107 NCA A v. Boar d of Regents of Univ. Of Okla., 468 U. S. 85, 103-104

(1984).

42

lated industries, in an effort to determine at large whether a

particular restraint has been unreasonable.. .

105

The first justification for the per se rule is that it is a useful

deterrent to undesirable conduct. When counsel can tell clients that

certain activity, such as agreeing on prices with your competitors, is

just as illegal as robbing a liquor store, the clients are likely to discard

the strategy. If a client is told certain questionable conduct is only

illegal if done in an "unreasonable" manner, some clients are tempted

to want to explore the outer limits of how much they can get away

with.

The second justification recognizes that antitrust litigation

frequently devours vast amounts of time and resources of the parties

involved, be they private or Government entities. When conduct is so

egregious that it will almost never be found reasonable, the Court has

said the benefit to society of avoiding such trials exceeds the cost to

that rare defendant who might have been able to show such conduct

was justified.

It is important to remember that the rules of reasonableness and

per se illegality are not separate and distinct. As the Court stated in

Northern Pacific Railway, per se illegal conduct is activity

". .. conclusively presumed to be unreasonable." 106 It is activity that

might be characterized as unreasonable under any circumstances.

Both rules measure compliance with the same basic standard. As

the Court said in a subsequent decision, "Both per se rules and the

Rule of Reason are employed ' to form a judgment about the

competitive significance of the restraint. ' (Citation omitted).. ..

(W)hether the ultimate finding is the product of a presumption or

actual market analysis, the essential inquiry remains the same--whether

or not the challenged" conduct restricts competition.

107

As noted in Northern Pacific Railway, practices considered

"... unlawful in and of themselves are price fixing, United States v.

Socony-Vacuum Oil Co., 310 U.S. 150, 210; division of markets,
108 Northern P acific Railway Co. v. United States, 356 U. S. at 5.

109 The four th instance of co nduct conside red illegal per se, tying

arrang ements, has not been an issue in cases against cooperatives. A tying

arrangem ent occurs when a seller, having one product a buyer wants, refuses

to sell it alone and insists any buyer who wants it must also purchase another

produc t. For example , Inte rnatio nal Salt refused to sell salt to customers

unless they also purchased expensive salt dispersing equipment from it. To

date, cooperatives have not been challenged on the grounds that they engaged

in tying arrangem ents.

110 United States v. Joint Traffic Ass' n, 171 U .S. 505, 568 (1898).

111 Standard Oil Co. V. U nited States, 221 U. S. 1, 65 (1911).

43

United States v. Addyston Pipe & Steel Co., 85 F. 271, aff'd, 175 U. S.

211; group boycotts, Fashion Originators' Guild v. Federal Trade

Comm'n, 312 U.S. 457; and tying arrangements, International Salt

Co. v. United States, 332 U. S. 392. "

108

The first three of these situations will now be examined in light of

their significance for cooperatives. 109

Price Fixing

In a sense, per se illegality was first espoused by the Supreme

Court in the Trans-Missouri Freight Ass'n and Joint Traffic Ass' n

decisions where it held any agreement, like price fixing, that has a

"direct and immediate effect.. .upon interstate commerce" is invalid.110

Even in Standard Oil Co. the Court recognized that price fixing

among competitors is in "nature, char acter and necessary effect"

adverse to competition and, therefore, subject to a "conclusive

presumption" of invalidity.111

After the rule of reason was adopted in Standard Oil Co., cartels

routinely argued that even if they were fixing prices they weren' t in

violation of the Sherman Act because they were only agreeing on

"reasonable" prices. Companies with more than 80 percent of the

manufactured pottery market took this position when appealing

criminal convictions for fixing prices and limiting sales to specific

jobbers from 1919 to 1922.

The U.S. Court of Appeals for the Second Circuit reversed the

conviction, holding incorrect an instruction to the jurors that if they
112 Trenton P otteries Co. v. U nited States, 300 Fd. 550 (2nd Cir. 1924),

rev'd , 273 U .S. 392 (1927).

113 United States v. Trenton P otteries Co., 273 U. S. 392, 397 (1927),

rev'g , 300 F d. 550 (1924).

44

found price fixing, then they should not consider whether the prices

fixed were reasonable.112

The U.S. Supreme Court reinstated the verdicts. In the process,

it laid to rest the possible defense that price fixing was permissible if

the agreed upon prices were "reasonable. " The Court said:

The aim and result of every price-fixing agreement, if

effective, is the elimination of one form of competition. The

power to fix prices, whether reasonably exercised or not,

involves power to control the market and to fix arbitrary and

unreasonable prices. The reasonable price fixed today may

through economic and business changes become the

unreasonable price of tomorrow. Once established, it may

be maintained unchanged because of the absence of

competition secured by the agreement.. .. Agreements which

create such potential power may well be held to be in

themselves unreasonable or unlawful restraints, without the

necessity of minute inquiry whether a particular price is

reasonable or unreasonable as fixed....

113

Trenton Potteries involved defendants who had sufficient market

power to adversely effect competition in a major way. The Court

expanded the scope of the per se rule in a subsequent opinion

involving, once again, the petroleum industry.

During the depression, oil refining was a depressed industry.

Major refiners were fully integrated to the retail level. They could

respond to changes in demand by either changing the amount of

product they placed in the market or by changing prices. But there

were also independent refiners without production and storage

capacity. They were often forced to offer product to retailers as it

came out of the refinery at prices, called spot market prices, that could

lower the price throughout the market and limit the strategies available

to the majors.
114 See, U nited States v. Standard O il Co. (Indiana), 23 F. Supp. 937

(W.D. Wis. 1938), upholding some of the convictions and overturning others.

115 United States v. Socony-Vacuum Oil Co., 105 F.2d 809 (7th Cir.

1939), rev'd , 310 U .S. 150 (1940).

116 United States v. Socony-Vacuum O il Co., 310 U. S. 150 (1940), rev'g ,

105 F. 2d 809. The author isn't sure if this is significant, but it is interesting

that this opinion was released the sam e day as Tigner v. Texas, 310 U .S. 141,

upholding a State antitrust law against a challenge that a provision excluding

agricultural producers when marketing their farm products violated the equal

protection clause of the F ourteen th Ame ndmen t.

117 310 U. S. at 223.

118 310 U. S. at 222.

45

Several major midwest refiners began a concerted program of

bidding for and buying gas on the spot market to hold spot market

prices at a level they regarded as appropriate. They were charged with

criminal conduct in violation of Section 1 of the Sherman Act. After

a jury trial, some defendants were found not guilty and others were

convicted.114 Those found guilty appealed to the Court of Appeals for

the Seventh Circuit. That court reversed and remanded the case to

have the remaining convictions overturned. 115

The Government appealed to the U.S. Supreme Court, which

reversed the 7th Circuit and upheld the convictions.

116 The Court

made several statements clarifying and expanding the scope of the

Sherman Act.

1. First, it is significant that the Court held the conduct in this

case--sporadically buying some product off the market--amounted to

price fixing at all. Most previous cases had dealt with an agreement

among competitors on the actual price(s) they would accept for goods

they sold. The Court, however, made it clear "these programs were

a species of price-fixing or manipulation...wholly consistent with the

maintenance of a floor under the market.. .. (T)he machinery employed

by a combination for price-fixing is immaterial. "

117

2. Second, the Court said that is was also not important "... that

the prices paid by the combination were not fixed in the sense that they

were uniform and inflexible."118 Just as an agreement to charge or pay

the same prices is illegal under the Sherman Act, so is an agreement
119 Id.

120 310 U. S. at 219-220.

121 310 U. S. at 220.

122 310 U. S. at 221-223.

46

"...to raise or lower prices whatever machinery for price-fixing was

used." 119

3. Third, the Court said that the Government doesn' t have to

establish that the challenged conduct is the sole reason for a price rise

to prove the conduct illegally restrains trade. That other factors "may

have contributed to that rise and stability of the markets (are)

immaterial.... Proof that there was a conspiracy, that its purpose was

to raise prices, and that it caused or contributed to a price rise is proof

of the actual consummation or execution of a conspiracy under § 1 of

the Sherman Act." (emphasis added)120

4. Fourth, the Court found "the fact that sales on the spot market

were still governed by some competition is of no consequence." 121 The

test the Court applied is that conduct does not have to eliminate

competition from the market to be illegal, but only needs to clearly

curtail it.

5. Fifth, the Court determined again that arrangements fixing

prices can not be justified as designed to diminish some businessperceived evil of competition. Using the phrase "per se" for the first

time, the Court said:

Congress has not left with us the determination of

whether or not particular price-fixing schemes are wise or

unwise, healthy or destructive. It has not permitted the ageold cry of ruinous competition and competitive evils to be a

defense to price-fixing conspiracies. It has no more allowed

genuine or fancied competitive abuses as a legal justification

for such schemes than it has good intentions of the members

of the combination... .Under the Sherman Act a combination

formed for the purpose and with the effect of raising,

depressing, fixing, pegging, or stabilizing the price of a

commodity in interstate or foreign commerce is illegal per

se.

122
123 310 U. S. at 221.

124 310 U. S. at 224-225, n.59.

47

6. Sixth, the Court noted that offending parties don' t need to

have monopoly power to violate Section 1 of the Sherman Act:

Any combination which tampers with price structures is

engaged in an unlawful activity. Even though the members

of the price-fixing group were in no position to control the

market, to the extent that they raised, lowered, or stabilized

prices they would be directly interfering with the free play of

the market. The (Sherman) Act places all such schemes

beyond the pale and protects that vital part of our economy

against any degree of interference.123

7. Seventh, the Socony-Vacuum opinion includes extensive

dictum that a price fixing agreement violates Section 1 regardless of

whether the conspirators possess the power to affect prices or have any

effect on the price prevailing in the market. The Court said:

[We do] not mean that both a purpose and a power to fix

prices is necessary for establishment of a conspiracy under

§ 1 of the Sherman Act. That would be true if power or

ability to commit an offense was necessary in order to

convict a person of conspiring to commit it. But...

conspiracies under the Sherman Act are not dependent on

any overt act other than the act of conspiring.. ..In view of

these considerations a conspiracy to fix prices violates § 1 of

the Act though...it is not established that the conspirators had

the means available for accomplishment of their objective.124

The rule that price-fixing is illegal per se raises significant

problems for producer marketing associations. What do producers do

when they decide to jointly market their products through a

cooperative marketing association? They agree on the prices they will

charge and other terms of trade. Absent some sort of special

protection, these actions constitute conduct that is per se illegal under

Section 1 of the Sherman Act.
125 United States v. Topco Associates, 405 U. S. 596 (1972).

48

Thus, the importance of the Capper-Volstead Act becomes

apparent. Without it, producers who market their products on a

cooperative basis would be in constant danger of prosecution and

conviction for violating the Sherman Act.

While not as crucial to cooperatives as the rules concerning price

agreements, the ability to engage in other conduct labeled illegal per

se can also be important to their overall ability to compete in the

marketplace.

Trade Territory Allocation

The U.S. Supreme Court has held that competitors who agree not

to compete with each other in geographic territories, like those that

agree not to compete on the basis of price, have committed a per se

violation of Sec. 1 of the Sherman Act. The leading case in this area,

United States v. Topco Associates,

125 is particularly important to

cooperatives. The defendant was a purchasing cooperative that

provides food products to its grocery store members, a type of

cooperative association without the special antitrust protection

accorded agricultural producer marketing associations.

Topco was founded in the 1940s by a group of small, local

grocery chains to provide themselves with high quality merchandise

under private labels so they could compete more effectively with larger

regional and national chains. No grocery business was conducted

under the Topco name and it didn't manufacture any products or own

any warehouses. Its basic function was to serve as a purchasing agent

for its members. By the mid-1960s, Topco purchased more than 1,000

different food and related nonfood items, most of which were

identified with brand names owned by Topco, for its members. The

products were usually shipped directly from the supplier to facilities of

the members.

Topco acknowledged that part of its organizational structure was

an agreement, included in its bylaws, that members would be assigned

exclusive rights to market Topco products in separate geographic

territories and would not enter the territory of another member without

the consent of that member. The United States brought an action in
126 United States v. Topco Associates, 319 F. Supp. 1031, 1043 (N.D. Ill.

1970), rev'd 405 U. S. 596 (1972).

127 United States v. Topco Associates, 405 U.S. 596 (1972), rev'g , 319

F. Supp. 1031 (N. D. Ill. 1970).

128 Cited at 405 U. S. 608.

49

Federal district court seeking an injunction prohibiting Topco members

from agreeing not to compete in the same territory.

The trial court agreed with Topco that its members could not

compete effectively with the large chain stores without private label

products, that joint purchasing was necessary because the members

were all too small to establish their own private label, and that the

exclusive territorial arrangements were reasonably related to the joint

purchasing arrangement as each individual member would be loath to

use a so-called private label which other retailers in the same area

could share. The court concluded that the territorial allocation scheme

was not a per se violation of antitrust law. Further, it found that

whatever anti-competitive effect the agreement had on competition in

Topco brands was "far outweighed by the increased ability of Topco

members to compete with both the national chains and other

supermarkets operating in their respective territories."

126 The court

entered a judgment for Topco.

The United States appealed directly to the Supreme Court. The

Court did not challenge most of the findings by the trial court, but

ruled that the case should have been decided under the rule of per se

illegality, not a rule of reason analysis. The lower court opinion was

reversed. 127

Topco is important for a couple of reasons. First, of course, it

involves a cooperative. So it removes any ambiguity that might exist

as to whether cooperatives as a whole ar e covered by antitrust law.

Second, the decision makes it clear that horizontal territorial

limitations on competition are illegal per se. While the Court had

made the point in several earlier decisions, 128 these cases usually also

involved price fixing or conspiracies by major players in an industry.

In Topco, all of the conspirators were relatively small firms trying to

survive and compete with the industry giants. The case applies the per

se rule to market division arrangements regardless of whether they are

linked to price fixing or other restraints. It also holds that the
129 Bascom Food Pr oducts v. Reese F iner Foods, 715 F. Supp. 616, 632

(D. N.J. 1989).

50

Government need not show significant market power on the part of the

conspirators and that it is irrelevant that the agreement facilitates

competition in some market other than the one in which the restraint

works.

A later private litigation by a dissident member attacked a

cooperative of specialty food wholesalers that also allocated trade

territories. The cooperative was unsuccessful in convincing the trial

court judge to rule that Topco was outdated precedent and that

horizontal agreements to divide territories should be judged by the rule

of reason. 129

These decisions further illustrate the importance of CapperVolstead to agricultur al producers and their marketing cooperatives.

The farmer-members are independent business people subject to the

antitrust limits in Section 1 of the Sherman Act. The courts have held

that the anti-competitive aspects of agreements to keep out of each

other's trade territory, as a matter of law, outweigh any justifications.

While this rule has been applied to purchasing associations without

Capper-Volstead protection, it has not been a barrier to coordination

among producers and their associations that are covered by CapperVolstead.

Group Boycotts, Refusals to Deal

A third activity that the courts have identified as illegal per se is

the group boycott. A boycott usually involves concerted action by a

group of persons at the same level of activity to keep other competitors

out of their market. The illegal conduct can involve either the

purchase of products from suppliers or the sale of finished goods to

customers.

For example, assume a group of tomato canners is facing potential

competition from a new entrant into their line of business. One course

of action they might take is to let the tomato growers know that if they

sell product to the new canner they will never be able to sell to any

member of the group again. A second possible tactic is to tell the

grocery chains and other purchasers of canned tomato products that if
130 Eastern States Retail Lumber Dealers' Ass' n v. U nited States, 234

U. S. 600, 614 (1914). Earlier, the Court had held illegal a boycott by labor

union members against employers u nder its " literal langua ge" ap proach to

Sherman. Loewe v. Lawlor, 208 U. S. 274 (1908). See also, United States v.

King, 229 Fed. 275, 279 (D. Mass. 1915).

51

they buy from the new firm, then they will no longer be able to buy

from any member of the group.

The boycotting group members, in effect, say to their suppliers or

to their customers, " If you don't stop dealing with non-group

members, we will stop dealing with you."

If the supplier or customer believes it is more important to

continue trading with group members than with non-group members,

the threat, whether overt or implied, will be effective. And if enough

suppliers or customers refuse to deal with nongroup members, the

boycott will be successful and the victims of the boycott will be

foreclosed from competing with the perpetrators of the boycott.

Group boycotts have been contentious for many years. One early

case involved an association of retail lumber dealers that published a

list of lumber wholesalers who sold directly to consumers. This was

found to be an illegal restraint of trade because it both tended to

prevent association members from dealing with those wholesalers and

to prevent wholesalers from selling to consumers. The Court held:

A retail dealer has the unquestioned right to stop dealing

with a wholesaler for reasons sufficient to himself,...

When the retailer goes beyond his personal right, and,

conspiring and combining with others of like purpose, seeks

to obstruct the free course of interstate trade and commerce

and to unduly suppress competition by placing obnoxious

wholesale dealers under the coer cive influence of a

condemnatory report circulated among others, actual or

possible customers of the offenders, he exceeds his lawful

rights, and such action brings him and those acting with him

within the condemnation of the (Sherman) act.. ..

130
131 Fashion Originators' Guild of America v. Federal Tr ade Comm ission,

312 U. S. 457 (1941).

132 Id. at 468.

133 Klor' s v. Broadway-H ale Stores, 359 U. S. 207 (1959).

52

Group boycotts were formally tabbed illegal per se in Fashion

Originators' Guild of America v. FTC.

131 The Fashion Guild was an

association of manufacturers of textiles and women's clothing who

tried to protect their original creations by refusing to sell to businesses

that produced or sold copies of their garments. The Federal Trade

Commission (FTC) brought an antitrust enforcement action against the

Guild and ordered Guild members to stop refusing to deal with these

businesses.

On appeal to the U.S. Supreme Court, the Guild argued that its

practices were reasonable and necessary to protect against piracy of

original designs. It challenged the FTC's refusal to hear much of the

evidence the Guild wanted to present on this subject.

The Court upheld the FTC's handling of the evidence, stating:

"Under these circumstances it was not error to refuse to hear the

evidence offered, for the reasonableness of the methods pursued by the

combination to accomplish its unlawful object is no more material than

would be the reasonableness of the prices fixed by unlawful

combination." 132

A third case involving a group boycott, Klor's v. Broadway-Hale

Stores,

133 is of particular interest to small businesses. Klor's, a small

retail store on Mission Street in San Francisco, sold consumer

electronic and appliance products. Broadway-Hale, a chain of

department stores, had a store next door to Klor' s that also sold

consumer electronic and appliance products. Klor's sued BroadwayHale and several manufacturers and distributors of such products

alleging Broadway-Hale pressured the suppliers not to sell products to

Klor's or to sell to it only at discriminatory prices and highly

unfavorable terms.

Broadway-Hale did not dispute the allegations. Rather, it sought

summary judgment and dismissal of the complaint for failure to state

a cause of action. It argued that the boycott did not harm competition

because there were numerous other stores within a short distance of its

Mission Street store that sold such products in competition with it. A
134 Klor' s v. Broadway-H ale Stores, 255 F .2d 214 (9th Cir. 1958).

135 Klor' s v. Broadway-H ale Stores, 359 U. S. at 212-213.

136 AP was created in 1848 by six New York City newspapers to negotiate

access and rates with telegraph companies. W hile still owned by U. S.

newspapers, it now serves more than 15,000 news organizations, including

broadcasters, in 112 coun tries.

53

Federal district court judge granted the motion and the 9th Circuit

Court of Appeals affirmed, 134 using logic that can best be described by

the cliche "antitrust law pr otects competition, not competitors."

The Supreme Court disagr eed and remanded the case for a trial,

stating:

Group boycotts, or concerted refusals by traders to deal

with other traders, have long been held to be in the

forbidden category. They have not been saved by allegations

that they were reasonable in the specific circumstances, nor

by a failure to show that they "fixed or regulated prices,

parceled out or limited production, or brought about a

deterioration in quality." (citations omitted)

...

...This combination takes from Klor's its freedom to buy

appliances in an open competitive market and drives it out of

business as a dealer in the defendants' products... .It

interferes with the natural flow of interstate commerce. .. .As

such it is not to be tolerated merely because the victim is one

merchant whose business is so small that its destruction

makes little difference to the economy. Monopoly can as

surely thrive by the elimination of such small businessmen,

one at a time, as it can by driving them out in large

groups. 135

Two leading cases on the issue of group boycotts have involved

nonagricultural cooperatives. The first concerned the Associate Press

(AP), a cooperative news gathering and disseminating service owned

by 1,550 United States daily newspaper members. 136 AP's bylaws

prohibited members from selling news to nonmembers and granted

each member powers to block nonmember competitors from joining
137 United States v. Associated Press, 52 F. Supp. 362 (S.D. NY 1943).

138 Associated Press v. U nited States, 326 U. S. 1 (1945).

139 Id. at 15.

140 "D ictum" is an incidental comment in a judicial opinion that is not

directly related to the issue(s) befor e the court. In this case, as AP is not an

agricultural mar keting coope rative, it has no special status under antitrust law.

So the Court's statements about AP operating as a cooper ative are not directly

relevan t to whether its conduct is legal or not.

54

AP. The United States sought an injunction blocking AP from

enforcing these bylaws on the grounds that they constituted a

conspiracy to restrain trade and an attempt to monopolize in violation

of Sec. 1 of the Sherman Act. The District Court awarded summary

judgment to the Government137 and the case was appealed directly to

the Supreme Court.

The Supreme Court affirmed the lower court ruling. 138 The Court

reasoned that the effect of these bylaws was to empower each

individual AP member to block any nonmember newspaper from the

opportunity to purchase news from AP or any of its members. The

Court noted that the owner of property can choose his business

associates and decide for himself with whom he will or won' t deal.

However, the court stated:

The Sherman Act was specifically intended to prohibit

independent businesses from becoming "associates" in a

common plan which is bound to reduce their competitor's

opportunity to buy and sell things in which the groups

compete. Victory of a member of such a combination over

its business rivals achieved by such collective means cannot

consistently with the Sherman Act or with practical,

everyday knowledge be attributed to individual "enterprise

and sagacity"; such hampering of business rivals can only be

attributed to that which really makes it possible--the

collective power of an unlawful combination.139

Although it appears to be dictum,140 the Court mentioned that the

fact that AP operated as a cooperative did not insulate it from antitrust

liability. The Court said, "It is significant that when Congress has
141 Id. at 14. This sentence is marked by a footnote referr ing to the

protection given farm cooperatives by the Capper-Volstead Act, 7 U.S.C.

291, 292.

142 Apparently a retail store member w as purchased by another firm that

operated as both a wholesaler and a retailer. The sparse record in the case

suggests the purchaser failed to notify Northwest that it had acquired the

"member" as required in Northwest's bylaws and Northwest alleged that was

the basis for the action. The former mem ber asserted the expulsion resulted

from its decision to maintain a wholesale operation.

55

desired to permit cooperatives to interfere with the competitive system

of business, it has done so expressly by legislation."141

This case doesn' t overturn the general rule that a business,

including a cooperative without Capper-Volstead protection, is free to

chose not to sell to any potential customer in the normal course of its

business. However, allowing each member to block the association

and other members of the association (including a Capper-Volstead

cooperative) from doing business with one of its competitors may be

vulnerable to challenge under antitrust laws.

The second case involved Northwest Wholesale Stationers, a

wholesale purchasing cooperative of office supply retailers in the

Pacific Northwest. Nonmember retailers were permitted to purchase

supplies from the cooperative. But since patronage refunds were only

paid to members, members effectively purchased supplies at a lower

price than nonmembers. Northwest' s membership voted to expel one

of its members--without notice, a hearing, or any other opportunity to

challenge the decision. 142

The expelled member, Pacific Stationary & Printing Co., sued in

Federal district court alleging the expulsion without procedural

protections constituted a group boycott that limited its ability to

compete and should be considered a per se violation of Section 1 of the

Sherman Act. The district court rejected application of the per se rule.

It applied rule of reason analysis, found no anticompetitive effect on

the basis of the record, and awarded a summary judgment for the

cooperative.

The Court of Appeals for the 9th Circuit reversed that decision,

holding that rule of reason analysis is only appropriate where a
143 Pacific Stationery & Printing Co. v. Northw est Wholesale Stationers,

715 F. 2d 1393 (9th Cir. 1983); rev'd , Northw est Wholesale Stationers v.

Pacific Stationery & Printing, 472 U .S. 284 (1985).

144 Northwest Wholesale Stationers v. Pacific Stationery & Printing, 472

U. S. 284 (1985); rev'g , P acific Stationery & P rinting Co. v. N orthwest

Wholesale Stationers, 715 F. 2d 1393 (9th Cir. 1983).

145 472 U. S. at 293.

146 Id. at 294.

147 Id. at 295.

148 Id.

149 Id. at 296.

56

cooperative provides safeguards sufficient to prevent arbitrary

expulsion. It found the expulsion per se illegal as a concerted refusal

to deal, or group boycott. 143

The Supreme Court r eversed the 9th Circuit. 144 The Court first

rejected the theory that application of the per se rule should turn on

whether procedural safeguards are employed. 145

The Court said that the expulsion, however carried out, was not

the type of practice which warr ants per se condemnation. It noted that

cases finding per se illegality involved a boycott that "cut off access to

a supply, facility, or market necessary to enable the boycotted firm to

compete.. ..In addition, the practices were generally not justified by

plausible arguments that they were intended to enhance overall

efficiency and make markets more competitive." 146

The Court recognized that the presence of a purchasing

cooperative in a market often furthers economic efficiencies by

enabling its members to realize "economies of scale" in the purchase

and handling of goods. 147 Since a purchasing cooper ative has a

legitimate, pro-competitive function, it is not "a form of concerted

activity characteristically likely to result in predominantly

anticompetitive effects. "

148 Reasoning that a cooperative, to function

effectively, must have rules for admitting and expelling members, the

Court noted that a member's expulsion "does not necessarily imply

anticompetitive animus and thereby raise a probability of

anticompetitive effect." 149
150 Id. at 298.

151 Bascom Food Pr oducts v. Reese F iner Foods, 715 F. Supp. 616, 634

and 641 (D.N .J. 1989).

57

In remanding the case for evaluation under the rule of reason, the

Court made clear that a member expulsion violates antitrust laws only

if it is likely to have a substantial anticompetitive effect. Furthermore,

an anticompetitive effect results only if continued membership is

essential to the member's ability to compete. The court concluded that

when a member "challenges expulsion from a joint buying cooperative,

some showing must be made that the cooperative possesses market

power or unique access to a business element necessary for effective

competition."150

Northwest Wholesalers should not be read as creating an

exemption for purchasing cooperatives to engage in group boycotts.

This case can be distinguished from Associated Press because the

cooperative here did not have a dominant position in the industry and

the expelled member was not denied access to the cooperative' s

services, only to patronage refund allocations.

In a subsequent litigation, a dissident member of a purchasing

cooperative of specialty food wholesalers alleged the association's

decision to refuse to continue selling him products constituted a group

boycott that was a per se violation of Section 1 of the Sherman Act.

The trial court judge determined the cooperative' s products wer e so

well received in the trade that the plaintiff couldn't compete in the

business without them.

The judge, relying on the "essential to compete" exception to the

general rule in Northwest Wholesale Stationers, gr anted plaintiff's

request for a preliminary injunction requiring the cooperative to sell

him products. The judge held that plaintiff would likely prevail on the

merits and suffer irreparable harm if denied access to the cooperative's

products during the time before a trial could be held. 151

In two additional decisions, Feder al courts have sustained

cooperative expulsions of members from antitrust attack. The U.S.

Court of Appeals for the Ninth Circuit affirmed a trial court entry of

a summary judgment against a member expelled from a farmer

marketing cooperative for cause (delivering product outside his
152 Whitney v. N ational Grape Cooperative Association, N o. 87-3854

(9th Cir. M arch 14, 1988), noted as unpublished at 842 F.2d 336.

153 Carleton v. Ver mont Dairy H erd Improvem ent Ass' n, 1992-1 Tr ade

Cases (CC H) ¶ 69, 761 (D. Vt. 1991).

154 1992-1 Trade Cases (C CH) at 67, 488-67,489.

58

marketing agreement). The expelled member was accorded a hearing

and other procedural safeguards. The court essentially determined the

expelled member had no legal basis to challenge his expulsion.152

A Federal district court reached a similar conclusion in antitrust

litigation initiated by dairy farmers expelled from their dairy herd

improvement association (DHIA). 153 The expelled members asked for

a ruling that their expulsion was a group boycott and refusal to deal

that is illegal per se. The court determined that they would have to

prove the unreasonableness of the DHIA's conduct. An issue in the

case concerned whether plaintiffs intentionally violated DHIA rules to

subvert its testing procedures. The court reasoned, "A contrar y rule

would render virtually any attempt by a DHIA to enforce its standards

illegal under the Sherman Act. "

154

Thus, cooperatives have flexibility to enforce their own rules as

to who may be members and customers, so long as they are

reasonable, without being liable for engaging in an illegal group

boycott or concerted refusal to deal. But that protection probably does

not extend to such tactics involving other participants in the industry

in which they operate.
155 Bruce Reynolds, Many Early Co-ops Had Clout, 46 Far mer

Cooperatives, Jan.-F eb. 1980, at 21.

59

CHAPTER 3. SHERMAN TO CAPPERVOLSTEAD, 1890-1922

The time between enactment of the Sherman Act and the CapperVolstead Act was one of great activity and change. The progressive

movement grew in importance with the rise of public resentment

toward large, abusive businesses. Farmer marketing cooperatives

became important participants on several lines of business. States

adopted their own antitrust laws and the first laws specifically

authorizing the formation of producer cooperatives. And the Federal

Government enacted additional legislation reining in the power of big

business and recognizing the special needs of producer associations

within the context of antitrust law.

COOPERATIVE GROWTH

Some persons who have attacked the special antitrust status of

farmer cooperatives under the Capper-Volstead Act, particularly

cooperatives with significant market power, have maintained that

"when the act was passed in 1922, cooper atives were small and had

limited market power, so Congress did not foresee the need to provide

in the act explicit limitations on the size of cooperatives. "

155

Reynolds points out that it was true that most cooperatives were

small, local organizations when the Sherman Act was passed in 1890.

However, beginning about 1895, larger centralized cooperatives and

federated regional associations began to emerge. By the time Congress

was considering legislation that became the Capper-Volstead Act,

cooperatives were a major national pr esence in several segments of the

food industry. For example:

 ! From 1913 through 1921, the share of California citrus shipped

by the California Fruit Growers Exchange (Sunkist) grew fairly

steadily from 61.5 percent to 72.5 percent.
156 Reynolds at 21-22.

157 Joseph G. Knapp, The Rise of American Cooperative Enterprise:

1620-1920 (Danville, IL: T he Interstate Pr inters & P ublishers, 1969), at 216.

60

 ! From 1913 through 1921, the share of r aisins shipped by the

California Associated Raisin Company (Sun-Maid) varied from

89.7 percent (1913) to 76.8 percent (1916) and held fairly

constant at around 86 percent from 1919 through 1921.

 ! From 1917 through 1921, the share of cranberries handled by the

American Cranberry Exchange increased from 56.0 percent to

66.0 per cent. 156

Debate on the Capper-Volstead Act, which is reviewed in detail

later in this report, is filled with references to the market power of

these and other producer associations, some on the national level and

others with considerable sway in local markets. A brief history of

these entities will lay some foundation for the battles ahead.

Creameries and Cheese Plants

Noted cooperative historian Joseph Knapp reports that by 1896

cooperative creameries and cheese plants were well established in the

United States. They were essentially local in nature, providing butter

and cheese to people living near their plants. However, in the early

1900s non-cooperative firms began building centralized creameries that

acquired large volumes of cream from a wide geographic area and

could provide branded-name butter to retail stores, at lower cost than

the local cooperatives. Most of the savings realized by the noncooperative firms were in wholesaling and jobbing, not in manufacturing.157

Several federated butter marketing associations were functioning

by 1921. In 1917, several California cooperatives serving the Los

Angeles market formed the Challenge Cream and Butter Association.

In 1918, the Dairy Extension Department of the University of

Minnesota began a program to federate local organizations in the State

to produce and market a uniform product. By 1921, more than onehalf of the 645 cooperative creameries in Minnesota had joined the
158 Id. at 217.

159 Id. at 218-219.

61

Minnesota Cooperative Creamery Association, later known by its Land

O'Lakes brand. 158

Cooperative cheese factories also began marketing on a largescale federated basis. As early as 1904, several cheese cooperatives

in Tillamook County, Oregon, hired a common sales agent to market

their products in West Coast cities. This success led nine such

associations to hire an inspector to help develop more uniform, higher

quality products. By 1921, 25 local cheese factories were members of

the Tillamook County Creamery Association and, marketing under the

"Tillamook" label, became the premier provider of cheese throughout

the West.

By 1919, 120 members of the Wisconsin Cheese Producers'

Federation were marketing 14 million pounds per year through their

cooperative. 159

Fluid Milk

In 1907, dairy leaders began an attempt to organize all of the milk

producers serving the New York City market. While membership

grew through the years, little was accomplished by the Dairymen's

League until 1916 when its executive committee took the bold step of

setting a minimum price that members expected for their milk.

Distributors refused to pay it, and the association called for members

to withhold their milk from the market. This boycott enjoyed

widespread support from nonmembers as well as association members,

and after 11 days the handlers agreed to the association demands.

Milk prices were subject to war-induced government controls

during 1917 and 1918. When controls were lifted in early 1919, a

second holding action was called to obtain a higher price for

producers. After 18 days, this boycott was also successful and the

reputation and membership of the Dairymen's League climbed again.

Similar associations formed and also organized boycotts, with

generally good results for producers in Boston, Chicago, Cincinnati

and Pittsburgh.
160 Id. at 219-223.

161 This subsection is based on Knapp, pp. 237-272.

62

The rapid growth of fluid milk associations was viewed with

alarm by handlers and some Government leaders who feared the

producers would achieve monopoly status and begin to act like the

industrial trusts. Several suits attacking dairy cooperatives as restraints

of trade were filed. These suits discouraged farmers from joining and

led the cooperatives in 1916 to form a political action arm, the

National Milk Producers Federation. This new political association

became a key player in enhancing Federal policy support for

cooperative marketing.160

California Fruit Growers Exchange161

Beginning in 1893, California citrus growers worked to develop

an effective marketing arm, finally forming the California Fruit

Growers Exchange in 1905. It consisted of local grower cooperative

associations which organized on a federated basis into a single

marketing exchange. While it began as simply a common sales agent,

in time it developed programs to solve a number of grower problems--

control of citrus pests and diseases, the collection of freight claims, the

high cost of packing materials, etc.

Association President F. Q. Story was one of the first cooperative

executives to grasp the power of advertizing. While he had a difficult

time convincing his farmer directors to spend any money, in 1905 they

authorized $250 to promote Exchange fruit in England and Continental

Europe. Two years later, $10, 000 was approved to test advertising of

oranges in Iowa.

This experiment proved that advertising oranges worked. Now

Story saw the need for a trademark. This led to the adoption, in 1908,

of the "Sunkist" brand, which has became synonymous with Exchange

fruit. By this time the Exchange was already handling 56 percent of

all citrus shipments from California.

Under the leadership of General Manager G. Harold Powell, the

decade from 1912-1922 was one of increased centralization and

efficiency for the Exchange. The local associations gradually,

sometimes grudgingly, relinquished their autonomy as they realized a
162 This portion of the report is based on both Knapp, pp. 294-299, and

a paper by Victoria A. Saker prepared for presenta tion at the Law and Society

Annual Meetings, June 10, 1989, in Madison, W isconsin.

63

single strong marketing entity offered the greatest returns to their

members. As the industry boomed, production began to outpace new

markets. In 1920, the Exchange launched a research department to

develop alternative uses for fruit not fit for the fresh market.

Thus, as Congress considered the Capper-Volstead Act, it was

well aware of "Sunkist" and the strong presence it commanded in the

citrus industry.

California Associated Raisin Company162

Like the citrus growers, the raisin grape growers tried, unsuccessfully, to develop a successful marketing association during the 1890s

and early 1900s. By 1912, the raisin industry was totally demoralized.

Prices didn' t cover the cost of production. Packers and other

businessmen in Fresno, whose prosperity was closely tied to that of the

raisin growers, helped develop an association strong enough to control

the marketing of a large fraction of the raisin crop.

A producer association named the California Associated Raisin

Company devised a marketing plan under which growers would agree

to pledge their crops to the association for 3 years, subject to renewal

by the association for 2 more years. The growers were promised fixed

minimum prices for their production. The plan would be abandoned

if less than 60 percent of the state's raisin acreage joined the effort.

By April 1, 1913, 76 percent of the raisin acreage was covered by

such contracts.

The organizers also departed somewhat from traditional

cooperative organization. Stock was sold to bankers and other nonproducer businessmen in the area, as well as to growers. To make the

stock attractive, it paid an 8 percent annual dividend. The widespread

sale of dividend-paying stocks was deemed necessary to raise enough

capital to be effective marketers and also unified the community behind

the association.

The association also adopted a controversial governance structure.

All stock was subject to a voting trust agreement that placed control in
64

the hands of 25 trustees who in turn elected 7 directors to oversee the

organization. This arrangement was similar to the one used by

Standard Oil and led detractors to refer to the association as "the raisin

trust. "

Starting with a dominant position in the market and skilled,

aggressive management, the association quickly secured a substantial

price increase for the growers. Faced with production capacity that

exceeded demand, it replicated the advertising program of the Citrus

Exchange, launching the "Sun Maid" trademark in 1916.

The association first tried to secure a set industrywide price.

When the packers (firms who bought grapes, packed them, and

shipped them to distant markets) couldn't agree on how to respond, the

association signed up packers on an individual basis. The packers

hoped the association would use their services and not threaten them

as a direct competitor.

The association's status under the antitrust laws was called into

question almost as soon as it began operation. Buyers immediately

called the Department of Justice and demanded an investigation of this

new association. When the association leased a large packing plant

and began processing part of the 1913 crop, the packers joined in the

protests.

In October 1913, the Attorney General asked the U.S. Attorney

in San Francisco to investigate these complaints. Later, he made a

similar request of the U.S. Attorney in Los Angeles. Both offices

already had heavy case loads and seemed to believe that stabilizing the

raisin industry was a beneficial development. Although the association

continued to buy packing houses, increased its market share to 80

percent of the raisin crop, and developed its own brokerage and sales

operation, the Attorney General's concerns were ignored for 3 years.

In 1916, the Los Angeles office reported that while the association

might be a monopoly, it had made raisin growing profitable without

increasing prices to consumers by removing excessive middlemen

margins from the marketing function. It also noted that even

nongrower investors were interested in a healthy raisin industry.

Also in 1916, the association had to decide whether to renew its

established contracts. Market share was declining because packers

were paying inflated prices to new growers and to growers who would

violate their contract with the association. Some trustees suggested the

company might do better by simply converting to private packer status.
163 Sager r eports that much of the success of the association in signing up

new growers in both 1916 and 1918 ma y have been as much the result of

blatant intimidation and coercion as it was the enhanced returns earned for

growers. Knapp doesn' t mention the use of night-rider mobs and other violent

tactics covered in detail by Sager.

65

Instead, the association declared that it would release all growers

unless substantial new acreage was committed. By the deadline, 85

percent of the raisin acreage was under association control. 163

In 1918, when the grower contracts were again scheduled to

expire, the association instituted a campaign to sign up nonmembers

and boosted market share to 88 percent. The association moved to

solidify its control of the industry by refusing to renew any contracts

with outside packers and began doing all processing in companyowned plants.

Also in 1918, just as the country was coming out from under

wartime price contr ols, untimely rain caused widespread damage to the

raisin grape crop. In early 1919, independent packers sold their

remaining stocks for twice the previous year's price. When demand

remained strong, the association set its 1919 price at 3 times the 1918

price. Independent packers, who had no raisins to sell, and buyers

who had committed some time ago to take raisins from the association

without fixing a price, besieged the Department of Justice with

complaints. Justice referred the matter to the Federal Trade

Commission (FTC) for r eview.

Justice's charge to the FTC was to review (1) whether the

association was obtaining and maintaining more than fair and

reasonable prices for its products and (2) recommend how the

association might be restructured to conduct its business in accordance

with the law.

The independent packers testified that the association's 1919 price

was so far above the combined grower and association costs that it was

inherently unreasonable and evidence of an illegal monopoly that was

abusing its power by attempting to drive them out of business.

The association countered the unreasonable price argument by

pointing out that the growers suffered substantial losses because of the

weather in 1918 and were entitled to recoup those losses in 1919.

However, it had no good response to effectively rebut the monopoly
164 The Re port is printed in the record of the Senate Judiciary

Committee' s hearings on the Capper-Volstead bill, 67th Cong., 1st Sess.,

H. R. 2373, June, 1921, pp. 8-16.

66

assertions. Association counsel was forced to admit it did not qualify

for protection under Section 6 of the Clayton Act and to rely on the

argument that it came within the spirit of Congress' intent in the

Clayton Act' s exemption for agricultur al organizations.

The FTC issued its report on June 8, 1920. 164 It found the

association's 1919 price was so far above the cost of production that

it "was in excess of a fair and reasonable price." FTC said the if the

association wanted the protection of Section 6 of the Clayton Act, it

had to eliminate its capital stock (and thus the voting trust

arrangement) and restrict membership to actual growers of raisin

grapes.

The Department of Justice threatened to prosecute the association

if it didn't restructure itself. With the 1920 harvest approaching, the

association feared litigation would jeopardize the confidence of the

raisin trade in the association so it delayed responding. In late July

1920, the association leaders notified Justice they believed the Raisin

Company had operated in the best interests of both growers and

consumers and could not accept the Government's conditions. In early

September 1920, Attorney General A. Mitchell Palmer ordered the

U.S. Attorney in Los Angeles to file suit, disregarding warnings of the

political and economic backlash that might follow.

On January 18, 1922, one month before the Capper-Volstead Act

became law, the California Associated Raisin Company and the United

States entered into a consent decree settling the litigation. The

association mainly agreed to refr ain from using coercion to obtain crop

contracts; purchasing additional packing plants and packing businesses

from competitors; discriminating among purchasers of raisins; making

any purchases of raisins from nonmembers to fix prices; or restricting

production in any way.

While the decree did not deal with structural issues, in 1923 the

association reorganized as a nonstock membership corporation. This

terminated the voting-trust agreement and gave direct control to the

grower members. The association also changed its name to the SunMaid Raisin Growers.
165 In re Grice, 79 F. 627, 647-650 (N.D. Tex. Cir. 1897); rev'd on other

grounds, 169 U. S. 284 (1898). The district court judge noted that 80 percent

67

Without a doubt, the California Associated Raisin Company was

on legislators' minds when they considered Section 6 of the Clayton

Act and the Capper-Volstead Act. While the primary focus would be

on its market power, subtle influences also appear likely. For

example, the 8 percent annual return to attract capital may have

influenced that figure becoming the permissible upper limit written into

Capper-Volstead. And the fact that the Justice Department asked the

FTC to review whether its 1919 price was unreasonably high may have

been a factor in the establishment of the "undue price enhancement"

test incorporated in Section 2 of Capper-Volstead. Regardless, the

California Associated Raisin Company story shows Congress was

aware that not all cooperatives were benign local associations when it

gave farmer cooper atives favorable status under the antitrust laws.

EARLY STATE ANTITRUST LAWS

The Sherman Act only applies to commer ce that crosses State

boundaries. At the time of enactment, and for some years thereafter,

much of the nation's commerce--including cooperative activity--was

still local in nature. State legislatures and courts made important

determinations concerning cooperative conduct during this period.

Around the time the Sherman Act was adopted, many states

enacted provisions in their constitutions or statutes prohibiting

monopolies, trusts, and restraint of trade. Efforts were made to

exempt farmers and their associations from these prohibitions. At

first, the courts interpreted these laws in a manner hostile to

cooperatives.

In 1889, the State of Texas enacted an antitrust statute which said:

"The provisions of this act shall not apply to agricultural products or

live stock while in the hands of the producer or raiser. " The legality

of this provision was questioned in a Federal court, which struck down

the entire law on the basis that this language violates that part of

Section 1 of the 14th Amendment of the U.S. Constitution which reads

"...nor shall any State.. .deny any person within its jurisdiction the

equal protection of the laws. "

165
of the people of Texas were exempted because they were engaged in raising

agricultural products and live stock, 79 F. at 647.

166 Ford v. Chicago Milk Shippers Ass' n, 39 N .E . 651 (Ill. 1895).

167 Id. at 655.

168 Id.

68

In 1891, Illinois enacted a statute making it illegal for any

individual, partnership, or corporation to enter into a combination to

fix prices or limit the amount of any article that would be produced or

sold. The law also provided that a purchaser who signed a contract to

buy goods from a participant in a combination that violated the law

could refuse to pay for the goods.

By the time the law became effective, dairy farmers serving the

Chicago market had already formed a cooperative marketing

association to establish the price members would receive for their milk

and delivery terms. A milk dealer signed a purchase agreement with

the cooperative but then refused to pay. When the cooperative sued

to enforce the contract, the dealer raised the 1891 law as a defense.

The Illinois Supreme Court, in an opinion that doesn't mention of

the Sherman Act, held for the dealer. 166 Using what today would be

called "per se" analysis, the court found the marketing agreement

between the cooperative and its members was intended to ".. .fix the

price and control and limit the amount (of milk) shipped. The

purposes attempted to be accomplished through the corporation were

illegal." 167

The cooperative argued that since it was a corporation the firm

and the members constituted a single entity under law, incapable of

conspiring with itself to restrain trade. The court in essence "pierced

the corporate veil" and determined that acts of the cooperative:

... are the acts of the associated persons, as corporators or

as individuals.. .. The corporation as an entity may not be able

to create a trust or combination with itself, but its individual

shareholders may in controlling it, together with it, create

such trust or combination that will constitute it, with them

alike, guilty. 168
169 Connolly v. Union Sewer Pipe Co., 184 U. S. 540 (1902); followed

in Georgia in a similar case, Brown v. Jacobs' Pharm acy Co. , 41 S. E. 553

(Georgia 1902).

170 Reeves v. D ecorah Far mers' Co-operative Society, 140 N .W . 844

(Iowa 1913). It is, of course, doubtful either party had the resourc es of

Standard Oil and the U .S. Gover nment to m ake a case o n the issue of

reasonableness.

69

In 1893, Illinois amended its antitrust act by adding an

agricultural exemption identical to that in the Texas law. This time the

constitutionality of the statute reached the U.S. Supreme Court.

Thomas Connolly purchased some pipe on credit from the Union

Sewer Pipe Company. When Connolly failed to pay his bill, the

company sued to collect. Connolly contended that Union Sewer Pipe

was a trust and, as the Illinois antitrust act specified that any purchaser

of any article from any corporation operating as a trust was not liable

for the purchase price, he could not be held liable for the purchase

price of the pipe.

The company claimed that the Anti-Trust Act of Illinois was void

because it exempted farm products in the hands of the producer in

violation of the equal-protection clause of the 14th Amendment of the

U.S. Constitution. The Federal district court agreed and the Supreme

Court affirmed the decision.169

One practice of early marketing cooperatives that provoked a

number of lawsuits was the assessment of penalties--called liquidated

damages--against members who sold product to another buyer in

violation of their marketing agreement with their cooperative. In one

case, the bylaws of an Iowa hog marketing cooperative provided that

a member had to pay it 5 cents for each hundredweight sold to a

competitor. A buyer sued under Iowa's antitrust law forbidding

combinations designed to prevent full and free competition among

buyers and sellers.

In its opinion, the Iowa Supreme Court made several statements

and cited several cases it said invoked the common law. However,

without any attempt to determine if the liquidated damages were

"reasonable," the court found they violated the Iowa law and

permanently enjoined the cooperative and its leaders from collecting

them. 170
171 Georgia Fr uit Exchange v. Tur nipseed, 62 So. 542 (Ala. 1913). In a

subsequent decision, the Alabama Suprem e Court held a bylaw setting a

uniform fee on all sales of members, w hether through the cooperative or not,

was not a restr aint of trade. Ex p arte Baldwin County Produ cers'

Corpor ation, 83 So. 69 (A la. 1919).

Also, in other states it was held, apparently in pursuance of common law

principles, that the associatio ns involved were not operating in restraint of

trade even though their contr acts, or bylaws, provided for liquidated damages.

See, Burley Tobacco Society v. Gillaspy, 100 N .E . 89 (1912), wherein the

court noted a cooperative designed "to secure a fair and adequate price" for

grower members confronted by a high degree of concentration among buyers

(the tobacco trust) "could not be held.. .to contravene any established interest

of society. Public policy does not ask those who till the soil to take less than

a fair return for their labor. " 100 N. E. at 94. See also, Bullville M ilk

Produc ers' Ass' n v. Ar mstrong, 178 N. Y.S. 612 (1919); Castorland M ilk &

Cheese Co. v. Shantz, 179 N. Y.S. 131 (1919).

70

A month later, the Alabama Court of Appeals took a slightly

different tack but reached the same conclusion. A fruit marketing

cooperative sued to collect liquidated damages from a member who

sold to another buyer in violation of their marketing agreement. The

court found no need to look at whether the contract violated any State

or Federal law. It noted the cooperative openly espoused the goal of

enhancing prices paid to its members and said an agreement among

producers to seek this goal is in and of itself an unreasonable restraint

of trade that violates common law. 171

Agricultural producers were between the proverbial rock and the

hard place in their relationship to State antitrust law. Without an

exemption, efforts to do business on a cooperative basis were subject

to challenge as an illegal conspiracy to restrain trade. And State

efforts to provide special antitrust protection for farmers to market

their products on a cooperative basis were stymied by court cases

striking down such provisions as invalid under the 14th Amendment to

the U.S. Constitution.
172 Edwin G. Nourse, "The F irst Cooperative Statutes" and "The

Emergence of the Nonstock Association," in American Cooperation: Selected

Readings, 226-244 (Martin Abraha msen & Claud Scroggs, eds. , 1957). Many

new cooperatives we re form ed under these statutes as non-stock associations.

Most existing coope ratives sim ply ignored the new laws. A few mar keting

cooperatives, notably California Fruit Growers Exchange (Sunkist), converted

71

EARLY COOPERATIVE INCORPORATION LAWS

The rise of cooperatives as a major factor in the rural economy

and the enactment of laws permitting widespread use of the corporate

form of doing business happened about the same time.

Only a few states passed laws specifically dealing with the

formation of cooperatives before 1911. They were modifications to

existing State laws authorizing general business corporations.

Cooperatives organized during this time issued stock and established

their cooperative characteristics (one-member one-vote and

distributions of earnings on the basis of patronage) in their articles of

incorpor ation and bylaws.

In the early 20th century, some leading cooperative scholars

adopted the theory of cooperation espoused by the Farmers Alliance.

They decided cooperatives that paid competitive prices and retained

earnings to accumulate capital were just regular corporations with a

unique way of allocating earnings. They felt a new structure that more

closely adhered to the "operating at cost" principle was needed.

Writers at the time characterized it as a movement away from the

commercial "company" approach and toward a fraternal "association"

of producers. The basic scheme they devised included:

1. Eliminating capital stock, with all invested capital being

"debt. "

2. Treating each individual tr ansaction on an " at cost" basis.

3. Eliminating nonmember business.

This approach influenced several State legislatures that were

enacting cooperative laws, including important agricultural states such

as California, Alabama and Texas. None adopted all of the suggestions, but they did generally promote non-stock associations of

producers that would operate on a not-for-profit basis. 172
from a stock to a nonstock association to take advantage of Section 6 of the

Clayton A ct.

173 Standard Oil Co. of New Jersey v. United States, 221 U. S. 1 (1911);

United States v. Ame rican Tobacco Co. , 221 U .S. 106 (1911).

174 The Feder al Trade Com mission Act is the Act of September 26, 1914,

ch. 11, 38 Stat. 717, as am ended, 15 U .S. C. §§ 41-58.

175 15 U. S.C . § 45.

176 Act of March 21, 1938, ch. 49, 52 Stat. 111.

177 Pub.L. 93-637, Sec. 201(a), 88 Stat. 2193 (1975). This change

responded to Supreme Court rulings that the coverage of the Clayton Act,

72

CONGRESS RESPONDS TO STANDARD OIL

AND AMERICAN TOBACCO

Antitrust proponents were not pleased by the Supreme Court

decisions in 1911 holding the Sherman Act only forbids

"unreasonable" restraints of trade. 173 Although both trusts were

ordered to dissolve, the decisions created considerable uncertainty as

to conduct the courts might sustain or rebuke. In 1914, Congress

responded with the passage of two acts designed to provide further

protection against anticompetitive conduct.

Federal Trade Commission Act

The first to be enacted is the Federal Tr ade Commission Act. 174

Congress believed that antitrust policy could best be developed by an

independent administrative body that could acquire economic expertise

beyond that available to Congress itself or the courts. The Federal

Trade Commission (FTC) was granted powers to investigate suspected

violations of the law, hear evidence, and issue cease and desist orders.

The FTC' s mandate was contained in Section 5 of the Act, which gave

it the power to order the cessation of a category of behavior identified

only as "unfair methods of competition in commerce." 175

The Act was amended in 1938 to expand the FTC' s responsibility

to also include preventing "unfair or deceptive acts in commerce. 176

The Act was amended again in 1975 to expand its coverage to

transactions "in and affecting commerce." 177 (Emphasis added)
which (like the FTC A ct) omitted transactions "affecting" commer ce, was

consider ably less extensive tha n that of the Sher man A ct. See, United States

v. Am erican Building Maintenance Industries, 422 U. S. 271 (1975).

178 The Clayton Act is the Act of October 15, 1914, ch. 323, 38 Stat. 730,

as amended, 15 U. S.C . §§ 12-27, 29 U. S.C . § 52.

179 Sec. 2 of Clayton, 15 U. S.C . § 13.

180 Sec. 3 of Clayto n, 1 5 U. S.C . § 14 . Suc h contrac t provisions are

commonly called "tying agr eements. "

181 Sec. 7 of Clayton, 15 U. S.C . § 18.

73

Clayton Act

The second new law enacted in 1914 was the Clayton Act. 178 It

prohibits specific business practices which were being employed at the

time to suppress competition and give large businesses undue

advantages over smaller ones. Three pr actices of particular

importance to cooperatives are made illegal:

 ! "...to discriminate in price between different purchasers of

commodities of like grade and quality...where the effect of such

discrimination may be to substantially lessen competition.. .. "

179

 ! "...to lease or make a sale (of one product). .. on the

condition...the lessee or purchaser thereof shall not use or deal in

(another product) of a competitor or competitors of the lessor or

seller, where the effect... may be to substantially lessen

competition... ." 180

 ! "...(to) acquire directly or indirectly, the whole or any part of the

stock...or assets of another person engaged in commerce or in

any activity affecting commerce... where. .. the effect may be to

substantially lessen competition.. .. "

181

Section 6 of the Clayton Act

While the Clayton Act was designed to clarify and strengthen

public policy against restraints of trade, it also included important
182 Loewe v. Lawlor, 208 U. S. 274 (1908).

183 208 U. S. at 279-280.

184 208 U. S. at 301.

74

language recognizing in Federal law, for the first time, the unique

marketing challenges confronting agricultural producers.

Following the passage of the Sherman Act, as larger and larger

marketing and bargaining associations of producers were formed, the

question of the application of the Sherman Act to such associations

claimed the attention of agricultural leaders. Their belief (hope?) that

it didn't apply was shattered in a statement by the U.S. Supreme Court

in the famous "Danbury Hatters" decision, Loewe v. Lawlor.

182

Members of the United Hatters of North America labor union

called a strike against manufacturers of hats in Danbury, CT, to force

the manufacturers to recognize and negotiate wages and working

conditions with their union. The manufacturers sued for damages

alleging the union was an illegal combination in restraint of trade

under Section 1 of the Sherman Act.

The Court ruled in favor of the manufacturers. Cooperatives

were impacted because of an argument made by counsel for the

manufacturers. He asserted congressional intent to include labor

unions under the Sherman Act was evidenced by several bills

introduced in Congress after its enactment to make Sherman

inapplicable to labor unions, none of which were passed.183 When

commenting on this argument, the Court stated:

The (Sherman) act made no distinction between classes.

It provided that ' every' contract, combination or conspiracy

in restraint of trade was illegal. The records of Congress

show that several efforts were made to exempt, by

legislation, organizations of farmers and laborers from the

operation of the act and that all these efforts failed, so that

the act remained as we have it before us. 184 (emphasis

added)

The Court' s reference to Senator Sherman's amendment to

exclude farmer cooperatives from the Act doesn' t appear germane to

the case. But it sent a clear signal to cooperatives that should a case
185 15 U. S.C . § 17.

186 H.R. 15657, 63rd Cong. , 2nd Sess, at 51 Cong. Rec. 6714 (1914).

At the time, Rep. Clayton was chairman of the House Judiciary Comm ittee.

While the bill is named for Rep. Clayton, he r esigned his house seat in a little

more than a month after its introduction to accept a U.S. District Court

Judgeship in his native Alabama, a position he held until his death in 1929.

75

alleging one of them was a combination in restraint of trade reach the

Court, it was likely to be decided against them.

After Loewe v. Lawlor, there was a widespread demand for an

end to the threat of prosecution as unlawful combinations in restraint

of trade that hung over labor and farm organizations. Section 6 of the

Clayton Act is the r esult. It provides:

That the labor of a human being is not a commodity or

article of commerce. Nothing contained in the antitrust laws

shall be construed to forbid the existence and operation of

labor, agricultural, or horticultural organizations, instituted

for the purposes of mutual help, and not having capital stock

or conducted for profit, or to forbid or r estrain individual

members of such organizations from lawfully carrying out

the legitimate objects thereof; nor shall such organizations,

or the members thereof, be held or construed to be illegal

combinations or conspiracies in restraint of trade under the

antitrust laws. 185

On its face, the scope of Section 6 is unclear. Competing farmers

are unmistakably authorized to combine in organizations which, of

themselves, do not violate antitrust law. Ambiguity arises because the

statute exempts both the "existence and operation" of farm

organizations, but limits that exemption to "lawfully carrying out" their

"legitimate objects." The legislative history of Section 6 demonstrates

that this ambiguity was the fruit of compromise between those who

opposed any exemption and advocates of complete immunity.

Legislative History

The Clayton Act was introduced by Rep. Henry Clayton (D-AL)

on April 14, 1914, and referred to the House Judiciary Committee.186
Thus Clayton had little impact on the legislative history of the bill that bears

his name.

187 51 Cong. Rec. 9086 (1914). The language was Sec. 7 of the original

bill.

188 H.R. Rep. N o. 627, 63rd Cong. , 2d Sess. 16 (1914).

189 Id. at 10.

76

As introduced, the provision covering farmer cooperatives read:

That nothing contained in the antitrust laws shall be

construed to forbid the existence and operation of fraternal,

labor, consumer, agricultural, or horticultural organizations,

orders, or associations, instituted for the purpose of mutual

help and not having capital stock or conducted for profit, or

to forbid or restrain individual members of such

organization, orders, or associations from carrying out the

legitimate objectives thereof. 187

Uncertainty as to the scope of this provision arose even before the

bill reached the House floor. The Judiciary Committee report said that

the provision was designed to remove all doubt about the legality of

farm and labor organizations and that "the law should not be construed

in such a way as to authorize their dissolution by the courts under the

antitrust laws. "

188

A minority report filed by several Republicans on the Committee

complained that the bill did not sufficiently aid farmers. Their view

was that:

...the only sort of farmer organization which this section

sanctions is one which does nothing more than discuss better

agricultural methods. As soon as farmers combine to get

better prices for their products, or to sell directly to

consumers, this paragraph affords them no relief from the

antitrust laws. 189

On June 1, during floor debate, Rep. Edwin Webb (D-NC), who

was the of floor manager of the bill, offered a Judiciary Committee

amendment which became the last part of Section 6:
190 51 Cong. Rec. 9538 (1914). Rep. Webb was elected chairman of the

Judiciary Comm ittee on July 18th. 51 Cong. Rec. 12,327 (1914).

191 51 Cong. Rec. 9540 (1914). Rep. H enry was the great-great-gr eatgrandson of revolutionary patriot Patrick Henry . Re p. H enry also

commanded considerable r espect in his own right as chair man of the H ouse

Comm ittee on Rules.

192 51 Cong. Rec. 9554 (1914). Rep. Barkley later served for many years

as leader of the D emocr ats in the Senate and then as Vice-President under

President Harr y Truman.

193 51 Cong. Rec. 9564 (1914).

77

...nor shall such organizations, orders, or associations, or

members thereof be held or construed to be illegal

combinations or conspiracies in restraint of trade under the

antitrust laws. 190

Rep. Robert Henry (D-TX), the Judiciary Committee member

who had drafted this language, said:

In my judgment, when Congress was dealing with

"combinations in restraint of trade" it never intended that the

law should apply to labor organizations or farmers'

organizations without capital and not for profit. The courts

took a different view of it and construed the act as it was

never intended that it should be interpreted. The time has

come when we can correct that error and write the

languagein the law as those gentlemen insist that it should be

and should have been.191

Another influential Congressman, Rep. Alben Barkley (D-KY),

also expressed the view that the Webb amendment exempted labor

organizations and farmer cooperatives from the antitrust laws. 192

But numerous other Congressmen took an opposite view. Rep.

Andrew Volstead (R-MN) urged that the amendment be clarified "so

that it will not be open to dispute as to its meaning." 193 He said:

It is very unfortunate that an amendment should be

proposed to this bill which must of necessity go into the
194 Id. Rep. Volstead was, at this time, already a senior member of the

minority on the Judiciar y Com mittee. As chair man of the Judiciary

Committee in the Republican-controlled 67th Congress, he would play a major

role in further strengthening public policy support for farmer mar keting

cooperatives.

195 51 Cong. Rec. 9566 (1914).

196 51 Cong. Rec. 9538 (1914).

197 51 Cong. Rec. 9566 (1914).

78

courts after it becomes a law before anybody will know

definitely just what it means. It looks as though it has been

drawn to deceive somebody.194

His plea was echoed by others but the Webb amendment was

adopted unanimously without change, 207 to 0.195

Dissatisfied with the committee language, Rep. Robert Thomas

(D-KY) offered a substitute:

The provisions of the antitrust laws shall not apply to

agricultural, labor, consumers, fraternal, or horticultural

organizations, orders or associations. 196

Thomas knew that an agreement between Rep. Webb and the

labor union movement about the wording of the exemption provision

doomed his amendment. The Thomas amendment wasn't taken up

until the committee language had already passed by unanimous vote.

But, he nonetheless sparked some interesting floor debate.

In his opening remarks, Thomas pointed out the committee

language only applied to unions and cooperatives that do not have

capital stock or are not operated at a profit. He questioned whether a

cooperative that made it possible for farmers to obtain a better price

for their products and thus gener ated a "profit" for its members was

covered by the bill. He challenged those members who said they

wanted to protect union members and farmers from antitrust exposure

to "vote for this amendment of mine and you will get it; otherwise you

will not." 197
198 Rep. Mur dock subsequently left the House to launch an unsuccessful

bid for a Sen ate seat. He was appointed to the FTC and was chair at the time

of the investigation and report on the California Associated Raisin Company.

199 51 Cong. Rec. 9567 (1914).

79

Rep. Webb's true feeling came out in a floor discussion with Rep.

Victor Murdock (R-KS).198

Mr. MURDOCK: From the debate I will say to the

gentleman that there is a great differ ence of opinion as to just

what (the committee language) does.. .. Did the Committee on

the Judiciary intend the Webb amendment to exempt

organized labor from the provisions of the Sherman antitrust

law?

Mr. WEBB: It certainly does exempt their existence and

operation if organized for mutual help and without profit.

Mr. MURDOCK: Does it say anything--

Mr. WEBB: We wanted to make it plain that no labor

organization or farmers' organization organized for mutual

help without profit should be construed to be a combination

in restraint of trade or a conspiracy under the antitrust laws.

Now, I will say frankly to my friend that we never intended

to make any organizations, regardless of what they might do,

exempt in every respect from the law. I would not vote for

any amendment that does that. 199 (Emphasis added)

Rep. A. W. Gregg (D-TX) offered perhaps the most eloquent

support of the Thomas amendment:

What is the object of farmers' organizations? One of the

main objects is by cooperation to secure the best market and

price for their products. Should they agree not to sell their

cotton, wheat, corn, or other products at less than a given

price, I fear the courts would hold that they were an

organization for profit, and under this provision as now

worded they would not be exempt from prosecution and punishment under the antitrust laws. Thus would be destroyed
200 51 Cong. Rec. 9568 (1914).

201 51 Cong. Rec. 9569 (1914). The limited application of the committee

language is highlighted by a later comment of Rep. E dward Browne (R-WI)

that "At least 75 per cent of the farmer organizations in the United States are

organized for profit and have capital stock." 51 C ong. Rec. 9571 (1914).

80

one of their main objects for organization. I am not willing

to subject them to any such danger.

Again, suppose an agricultural or horticultural

organization in my county or anywhere else should, in

addition to their other purposes, wish to organize for the

purpose of erecting a warehouse and issue stock for that

purpose, a thing which they have done in some cases, in

order to have some place in which to store their products,

while they are holding them for more favorable conditions in

the market. Most of them are people of small means and not

able by voluntary contributions to build warehouses, and if

they should issue capital stock to build one, they at once,

under the provisions of this section as worded, would

become subject to the operations of the antitrust laws. Thus

you force them either to expose their products to the weather

or rent warehouses possibly at exorbitant rent. For one I am

not willing to do this, but want them to have the right by

issuing stock or otherwise to build and own their own

warehouses. If we are going to do anything for them, let us

do it ungrudgingly.200

Faced with strong opposition from Rep. Webb, the Thomas

amendment was rejected, 105 to 69.201

Rep. John Nelson (R-WI) then offered an amendment as a

compromise between the committee and the Thomas language. While

it was pending, he engaged in a spirited discussion with Rep. Webb

over the issue of a possible cooperative monopoly.

Mr. WEBB: Does the gentleman think that it would be

right to allow the cotton farmers in the South or the corn

raisers of the West to form corporations whereby they could

hold, corner, or monopolize the entire cotton or corn crop of
202 51 Cong. Rec. 9571 (1914).

203 51 Cong. Rec. 9911 (1914).

81

the season and compel the world to pay them 25 or 30 or 40

cents a pound for it, or $2 a bushel for corn, and clean up

two or three hundred million? Does the gentleman think that

would be right? I want to get his opinion.

Mr. NELSON: Mr. Chairman, I want to say to the

gentleman that I have had that query propounded to me by

the gentleman before, and this is my candid judgment. The

gentleman is conjuring up an imaginary evil.

Mr. WEBB: Oh, no... .(w)hen the farmers or any other

class of men form a corporation for profit, to pay dividends,

and undertake to monopolize any product in this country

they ought to come within the Sherman antitrust law... .

...

Has the gentleman any metaphysical scissors that will tell

us the difference between the man who forms corporations

for monopolistic purposes and the man who spins in the

factory or the man who raises sheep?

...

Mr. NELSON: . .. what I am insisting upon (is) not special

privilege, but equal rights. You permit (capitalists to)...put

their money together, and the money is represented by

capital stock, but you deny the farmers of this land the right

to do the same.

...

...The farmer wants to keep his individual farm. He does

not want to hold it under a corporation. He wants to be

independent, but he wants to cooperate with other

independent farmers in buying supplies and marketing his

products without being under the ban of the law--without

being a criminal. This you do not permit him to do.202

Shortly thereafter, Rep. Nelson's time expired, and so did his

proposed amendment. The bill passed the House without further

change to the labor and agricultural cooperative provision.203
204 S. Rep. No. 698, 63rd C ong., 2d Sess. 2 (1914). 

205 51 Cong. Rec. 13, 848 (1914).

206 Id. Colloquy between Senator Wesley Jones (R-WA), whose remar ks

are quoted here, and Senator William Thompson (D -KS).

207 51 Cong. Rec. 13, 911 (1914).

208 51 Cong. Rec. 13, 967 (1914). 

82

When the bill reached the Senate, it was also referred to the

Judiciary Committee. Its report said, "The other important and

general purposes of the bill are to exempt labor, agricultural,

horticultural and other organizations from the operations of the

antitrust acts. "

204

Confusion over the scope of the provision, which arose in the

House, continued in the Senate. Senator Charles Culberson (D-TX),

Chairman of the Judiciary Committee, declared on the floor:

Following the original purpose of the framers of the

Sherman antitrust law, the bill proposes expressly to exempt

labor, agricultural, horticultural, and other organizations

from the operation of the antitrust laws. 205

Some Senators who were sympathetic to farmers took a narrower

view. They thought: "... this provision does not really exempt any of

these organizations from prosecution for the commission of acts which

would, in fact, be in restraint of trade, and therefor e prohibited by the

Sherman antitrust law, but it does recognize their right to exist as

organizations."

206

Senator Atlee Pomerene (D-OH), on the other hand, believed this

provision was drafted too broadly because it would permit

organizations to engage in unlawful activities. 207

Senator Henry Hollis (D-NH), who favored the language because

he thought it placed agricultural organizations outside the Sherman

Act, suggested that the permission given by the bill for "lawfully

carrying out the legitimate objects thereof" meant that "An act will be

lawful in this connection unless it is prohibited by some special statute

or by common law. "

208
209 51 Cong. Rec. 14, 011 (1914).

210 51 Cong. Rec. 14, 586 (1914).

211 51 Cong. Rec. 14, 590 (1914).

212 For example, references to "consum ers and fra ternal organiza tions"

were removed to make the exem ption section covering labor and cooperatives

apply only to groups composed of peo ple "who produce som ething." House

floor remarks of newly-elected Judiciary Chairman Webb, 51 C ong. Rec.

16,342 (1914).

213 51 Cong. Rec. 16, 756 (1914).

83

As in the House, there were fervent pleas to clarify the scope of

the section since it was being supported by so many who held

conflicting views as to its meaning. 209

Near the end of the debate, Senator Albert Cummins (R-IA)

offered an amendment to delete the words "agricultural and

horticultural" because he felt they would repeal the antitrust laws in

important respects. He did not want to permit such organizations to

"forestall the market" or "to come together for the purpose of

increasing the price or affecting the trade in the things in which the

members of the association deal." 210 The Cummins amendment was

rejected, 39 to 20. 211

After some rewriting by a conference committee,212 the final

version was passed by the House and Senate and signed by President

Woodrow Wilson on October 15, 1914. 213

Judicial Interpretation

Unfortunately for cooperatives, the first judicial review of a case

involving Section 6 of Clayton involved some very bad facts. Persons

marketing 75 percent of the Aroostock (ME) county potatoes formed

an association called the Aroostock Potato Shippers' Association. The

members appointed a "committee" to determine whether any person

who produced, received, or dealt in such potatoes was "undesirable."

Persons found to be "undesirable" were placed on a black list. The list

was circulated among the members who were forbidden by association

bylaws from having any business dealings with blacklisted persons.

Heavy fines were assessed against members who violated this bylaw.

The black list was also circulated among other persons dealing in

potatoes who were not members of the association. They were notified
214 United States v. King, 229 F ed. 275 (D. Mass. 1915).

215 229 Fed. at 279.

216 United States v. King, 250 F ed. 908, 909 (D. M ass. 1916).

84

that, unless they ceased dealing with the blacklisted person, they would

also be blacklisted and association members would no longer deal with

them.

The U.S. Department of Justice brought criminal charges under

Section 1 of the Sherman Act against Carl King and other association

members alleging participation in a conspiracy in restraint of trade. In

two opinions, Federal District Court Judge James Morton refused to

grant the cooperative's requests to dismiss the complaints for failure

to state a claim of action.214

In his first opinion, Judge Morton noted the indictment was very

vague, so he assumed association members had some business

justification for refusing to deal with the blacklisted persons. He

accepted the association's argument that its members could agree

among themselves not to deal with certain persons and compel each

other to honor that agreement. However, he held that when the

association circulated its blacklist to nonmembers and coerced them to

refuse to deal with persons listed thereon, the members were engaged

in an illegal restraint of trade. And to support his finding, the judge

called this activity a "secondary boycott. .. outlawed by the United

States Supreme Court" 215 in the very opinion that played a major role

in spurring cooperatives to seek enactment of Section 6 of Clayton in

the first place, the Danbury Hatters' case, Loewe v. Lawlor.

After this ruling, the Government issued a second, more specific

indictment. In seeking its dismissal, the defendants raised the

affirmative defense that they were ". .. an agricultural organization

within the Clayton Act, and that they are not therefor e subject to

prosecution, even assuming that otherwise they would be." 216

Judge Morton disagreed. First, he noted that the court record

lacked any evidence that the association members were persons who

raised potatoes. Rather, it suggested they wer e commercial shippers.

The record also failed to establish that the association did not have

capital stock and did not operate for profit. On this basis alone, he

wrote, the association was not shown to meet the requirements of

Section 6 of the Clayton Act.
217 250 Fed. at 910. T he U.S. Supreme Court reached a similar

conclusion about the limited scope of Clayton § 6 in a case involving a

secondary boycott by a labor union. Duplex Pr inting Press Co. v. D eering,

254 U. S. 443, 469 (1921).

218 United States v. Borden, 308 U. S. 188, 195-196 (1939). The Borden

case is described in detail at pp. 155-162.

219 United States v. Dairy C o-op Ass' n, 49 F. Supp. 475 (D. O re. 1943);

United States v. Maryland & Virginia Milk Producers Ass' n, 167 F . Supp. 45

(D.C. D. C. 1958). Another district cour t refused to follow the Maryland &

Virginia opinion even before it was overturned. A pril v. National Cranberry

Association, 168 F. Supp. 919, 921 (D. M ass. 1958).

85

 Second, the court stated that:

Even if it were (covered by Sec. 6 of Clayton), I do not

think that the coercion of outsiders by a secondary boycott,

which was discussed in my opinion on the former

indictment, can be held to be a lawful carrying out of the

legitimate objects of such an association. That act means, as

I understand it, that organizations such as it describes are not

to be dissolved and broken up as illegal, nor held to be

combinations or conspiracies in restraint of trade; but they

are not privileged to adopt methods of carrying on their

business which are not permitted to other lawful

associations. 217

In the next case applying Section 6 of Clayton, the U.S. Supreme

Court reached a similar conclusion. It held that this provision protects

producers from prosecution simply for forming a cooperative and

engaging in normal business operations. But it does not shield

cooperatives from antitrust prosecution for engaging in anticompetitive

conduct with non-cooperative firms. 218

Two subsequent Federal district court opinions came to the

conclusion that associations of farmers meeting the organizational tests

of Section 6 of Clayton, acting alone and not in concert with others,

enjoy total immunity under Section 6 from charges of monopolization

under Section 2 of the Sherman Act. 219 However, in its Maryland &
220 Mar yland & Vir ginia Milk Pr oducers A ssociation v. U nited States, 362

U. S. 458, 465-466 (1960), rev'g 167 F. Supp. 45. This complex litigation

involves three distr ict court op inions discussed in mor e detail later in this

report at pages 224-230.

86

Virginia opinion, the Supreme Court rejected this analysis. The Court

said:

The language shows no more than a purpose to allow

farmers to act together in cooperative associations without

the associations as such being "held or construed to be illegal

combinations or conspiracies in restraint of trade, under the

antitrust laws," as they otherwise might have been. This

interpretation is supported by the House and Senate

Committee Reports on the bill. Thus, the full effect of § 6

is that a group of farmers acting together as a single entity in

an association cannot be restrained "from lawfully carrying

out the legitimate objects thereof" (emphasis supplied), but

the section cannot support the contention that it gives such as

entity full freedom to engage in predatory trade practices at

will." 220

Thus, Section 6 of the Clayton Act gives a limited protection to

farmers to form marketing cooperatives without capital stock. They

are authorized to combine and carry out legitimate business operations

just as if they were shareholders in an investor-owned firm. However,

it does not provide broad general immunity from the antitrust laws.

Conduct intended to stifle or eliminate competition is subject to

review, just as if it were conducted by any other business entity.

Criminal prosecutions such as King were oppressive to farmer

organizations, even if association conduct was questionable. Even

unsuccessful prosecutions disturbed producers. The fact that Section

6 did not remove the threat of indictment led to pleas that Congress act

again.

One step taken was the addition of language to the appropriations

acts for the Department of Justice beginning with the fiscal year ending
221 38 Stat. 53.

222 44 Stat. 1194. T his rider became an important precedent when

cooperatives were confronted with what they viewed as over-zealous

enforcem ent by the Feder al Trade C ommission in the 1970s.

223 40 Stat. 276, 2 86. This wa rtime la w ma de it a crim inal felony to

hoard or destr oy food or other nec essities of life for the purpo se of limiting

the supply or affecting the m arket price of suc h items.

87

June 30, 1914, 221 through the fiscal year ending June 30, 1928. 222 It

stated that none of the funds provided the Department of Justice to

enforce the antitrust laws could "be expended for the prosecution of

producers of farm products and associations of farmers who co-oper ate

and organize in an effort to and for the purpose to obtain and maintain

a fair and r easonable price for their products. "

While not an antitrust law, cooperatives were encouraged by the

inclusion of language in Sec. 26 of the so-called Food Control Act of

1917 providing "...farmers and fruit growers, co-operative and other

exchanges, or societies of a similar character shall not be included in

the provisions of this section..." 223

Of greater long-term significance was the drive to enact additional

permanent legislation granting broader public policy support for

cooperative marketing by agricultural producers.
224 42 Stat. 388 (1922), 7 U. S.C . §§ 291-292. The statute is comm only

referred to as the Capper-Volstead Act in honor of its principal sponsors,

Senator Arthur Capper and Rep. Andrew Volstead. The actual title is "An

Act To author ize association of producers of agricultural pr oducts."

225 7 U. S.C . § 291.

88

CHAPTER 4. THE CAPPER-VOLSTEAD ACT

Enacted in 1922, the Capper-Volstead Act224 has served as the

foundation supporting the development of many effective cooperative

marketing ventures controlled by their producer-owners. It has given

producers assurance that if they organize in compliance with a few

easily-understood constraints and conduct their joint marketing

activities in a responsible manner, they will not be considered as being

engaged in an illegal restraint of trade.

This is not to say that implementation of the Capper-Volstead Act

has been free of controversy. Several contentious issues of

interpretation and application have arisen and others ar e likely to

surface in the future. But these skirmishes have not diminished the

value of this statute to farmers and r anchers.

GENERAL OVERVIEW

Capper-Volstead has two provisions. Section 1 provides a limited

exemption from the antitrust laws for agricultural producers to market

their products on a cooperative basis. Section 2 provides a mechanism

to make sure producers do not abuse their collective power to the

detriment of the general public.

Section 1 describes the "persons" and "associations" entitled to

claim the limited antitrust exemption and the elements and scope of the

exemption.225 This modified outline breaks out the key concepts in the

statutory language:

 A. Membership must be limited to "persons engaged in the

production of agricultur al products as farmers, planters,

ranchmen, dairymen, nut or fruit growers.. ."
226 7 U. S.C . § 292.

89

 B. Agricultural producers may:

 i) "act together in associations, corporate or otherwise, with or

without capital stock"

 ii) "in collectively processing, preparing for market, handling,

and marketing such products of persons so engaged."

 C. Such associations may:

 i) "have marketing agencies in common," and

 ii) "make the necessary contracts and agreements to effect such

purposes. "

 D. Provided:

 i) "such associations are operated for the mutual benefit of the

members. .. as... producers. "

 ii) "no member.. .is allowed more than one vote because of the

amount of stock or membership capital he may own, or

 the association does not pay dividends on stock or membership

capital in excess of 8 per centum per annum. "

iii) "the association shall not deal in the products of nonmembers

to an amount greater in value than such as are handled by it for

the members."

Section 2 confers on the Secretary of Agriculture the authority to

prevent producers from abusing their collective marketing power.226

It provides, in part:

"If the Secretary of Agriculture (has) reason to believe

that any such association monopolizes or restrains trade in

interstate or foreign commerce to such an extent that the
90

price of any agricultural product is unduly enhanced thereby,

he shall serve upon such association a complaint stating his

charge.. .(with) a notice of hearing...requiring the association

to show cause why an order should not be made directing it

to cease and desist from monopolization or restraint of

trade."

. . .

"The Department of Justice shall...(enforce any) such

order."

The Capper-Volstead Act makes three significant changes in the

nature of the cooperative exemption found in Section 6 of the Clayton

Act. First, it liberalizes the eligibility requirement for cooperatives.

While Clayton only refers to agricultural organizations without capital

stock, Capper-Volstead covers all such "associations, corpor ate or

otherwise, with or without capital stock."

Second, the Clayton Act language is exclusively negative, stating

simply that the antitrust laws shall not apply to the lawful conduct of

cooperatives. Section 1 of Capper-Volstead, however, makes an

affirmative grant of authority. It says that farmers may act together for

the purposes of processing, preparing for market, handling and

marketing the agricultur al products they produce. Farmers and their

associations may have marketing agencies in common and may enter

into other contracts necessary to carry out these purposes.

Third, Section 6 of Clayton offers no alternative procedure to

standard antitrust enforcement. Section 2 of Capper-Volstead,

however, prescribes an administrative enforcement function in the

Department of Agriculture to assess whether otherwise permissible

conduct by producers results in prices that are unduly higher than they

would have been without the collective activity. Cooperatives were

unsuccessful in their efforts to establish that Capper-Volstead grants

exclusive jurisdiction in the Secretary of Agriculture over anticompetitive conduct by cooperatives. But Section 2 provides a shield

from hostile action by the antitrust enforcement agencies over conduct

authorized by Section 1.
227 National Broiler Marketing Ass' n v. United States, 436 U. S. 816, 824-

827 (1978).

228 436 U. S. at 824-825.

229 436 U. S. at 825-826.

230 436 U. S. at 826.

91

RATIONALE FOR CAPPER-VOLSTEAD

Justice Blackmun, in his majority opinion in a leading case

interpreting Capper-Volstead, National Broiler Marketing Ass'n v.

United States, explained from the Supreme Court's perspective why

Congress passed the Capper-Volstead Act.227

First, Justice Blackmun noted the exemption under Section 6 of

the Clayton Act was proving inadequate because it was limited to

nonstock organizations. Agricultural groups were finding that to serve

the needs of their members, they had to sell stock to raise capital to

finance handling and processing services essential to selling member

production profitably. Thus, the first reason for the enactment of

Capper-Volstead was to allow farmers to raise capital and engage in

value-adding activities that prepared their products for market without

violating antitrust law. 228

Second, individual farmers were considered to be at a severe

disadvantage in the marketplace. They lacked the economic strength

to deal with the vagaries of agricultural markets. And they were

subject to manipulation by processors and distributors who could force

farmers to sell at prices and terms of sale dictated by the buyers. So

the second reason for allowing farmers to join together in cooperatives

was to bolster their economic strength, so they could weather adverse

economic periods and deal on a more equal basis with processors and

distributors. 229

The National Broiler Marketing Association argued that CapperVolstead was intended to protect all entities who bear the costs and

risks of fluctuating agricultural markets. The Court disagreed, stating

it was not the exposure to these costs and risks that concerned

Congress, but rather the inability of individual farmers, "whose

economic position rendered them compar atively helpless," to

effectively respond.230
231 436 U. S. at 827-829.

92

The Court then concluded that processors and packers, who had

no farming operations were not "farmers" as the term is used in

Capper-Volstead and not eligible to be members of an association with

Capper-Volstead protection.231 The Court left unanswered key

questions that remain unanswered today: Is there a point at which an

entity with agricultural production becomes either so large or so

involved in processing that it is no longer a "farmer" under CapperVolstead and, if so, how is it determined when that point is reached or

passed?

LEGISLATIVE HISTORY

Exemptions from the antitrust laws are not taken lightly on

Capitol Hill. Enactment of the Capper-Volstead Act involved a

substantial dedication of time and effort by cooperative leaders and

their allies in Congress. This section relates how Capper-Volstead

became law.

In the process, an extensive legislative history developed that still

provides valuable guidance in applying the provisions of the law to real

life situations. While legislative history doesn't alter the clear

language of the statute, it gives insight into the intent of the framers

when the language is ambiguous.

Building Momentum

In 1916, dairy marketing organizations, who felt they were being

singled out for antitrust enforcement, formed the National Cooperative

Milk Producers Association to solidify their strength and protect their

general interests. Shortly thereafter, the Milk Producers joined with

the National Grange, the National Farmers Union, and other farm

organizations to form the National Board of Farm Organizations,

headquartered in Washington, DC. For the first time, cooperative

supporters had a unified voice in the Nation's capitol.

At a National Board meeting in the fall of 1917, the Milk

Producers proposed taking steps to establish the farmers' right to

organize and operate cooperative associations without fear of conflict
232 Laws of New York, 1918, chap. 491.

233 Much of the information on the history of Capper-Volstead, not taken

from the Congressional Record, is based on a memorandum written by Mr.

Miller and provided to this agency by letter dated July 18, 1946. 

93

with the antitrust laws. This resulted in a resolution passed by the 200

organization representatives that declared:

Producers and consumers are bound together by

economic laws which they did not make and which they

cannot repeal. Between these two are powerful agencies

whose only interest it is to take such toll as they may, as

products are passing from producer to consumer. These

agencies, by r eason of their financial strength, their perfect

organization, and their far-flung financial connections,

exercise an influence greater than is warranted by their

numbers or the service they perform. We therefore urge

upon Congress the necessity of such an amendment to the

antitrust laws as will clearly permit farmers' organizations to

make collective sales of the farm, ranch, and dairy products

produced by their members. Such organizations, with

liberty of action, can insist that the agencies engaged in

processing and distribution sell such products at prices as

low as may be consistent with the cost of production and

distribution."

John D. Miller, chairman of the legislative committee of the

Dairymen' s League, had been instrumental in the State of New York

adopting an amendment to its penal code in 1918 providing agreements

by agricultural producers "engaged in making collective sales or

marketing and prescribing the terms and conditions thereof are not

conspiracies and they shall not be construed to be injurious to trade or

commerce." 232 Based on this success, Miller was recruited to draft

legislation to implement the resolution.

National Board officials thought it best to have the bill appear as

nonpartisan as possible.233 Thus Miller's original draft was first

introduced in the Senate on May 28, 1919, by a newly-elected
234 S. 845, 66th Cong., 1st Sess., 58 C ong. Rec. 348 (1919).

235 H.R. 7783, 66th Cong, 1st Sess., 58 C ong. Rec. 3116 (1919).

Another new California congressm an, Republican Henry E. Barbour,

introduced a companion bill at the same time as Hersman. H. R. 7784, 66th

Cong, 1st Sess., 58 C ong. Rec. 3116 (1919). Congr essman Barbour

represented the area in and around Fresno, which included Sum-M aid' s main

office and many of its m embers' vineyards.

236 Collective Bargaining for Farmers, Hearings on H.R . 7783 before the

House Com m. on the Judiciary, 66th Cong. , 1st Sess. (1919).

237 Labor, Agriculture, Dairy, and Horticultural Organizations, Hearings

on S. 845 before the Senate Comm . on the Jud iciary, 66th C ong., 2d Sess.

(1920).

238 The interest of Cong. Volstead, a lawyer, in the bill may have been

sparked by the fact that he received his college degree from the Decorah

Institute, Decorah, Iowa, home of the hog m arketing cooper ative whose use

of liquidated damages was held to be an illegal restraint of trade. Reeves v.

Decorah F armers' Co-operative Society, 140 N .W . 844 (Iowa 1913).

94

Republican from Kansas, Senator Arthur Capper.234 An almost

identical bill were introduced in the House on July 24, 1919, by a

newly elected Democrat from California, Hugh S. Hersman. 235

The Capper-Hersman bill, as it became known, was written as an

express amendment to Section 6 of the Clayton Act. The bill deleted

the words "not having capital stock" and provided that "Associations

corporate or otherwise of farmers... engaged in making collective sales

for their members or shareholders' of "products produced by their

members or shareholders are not contracts, combinations, or

conspiracies in restraint of trade or commerce."

Hearings were held by the House Judiciary Committee in October

1919.236 Miller and representatives of all the major members of the

National Board appeared and urged adoption of the bill. In January

1919, hearings were also held on the Senate side.237 However, no

action was taken on the Capper-Hersman bill.

Miller wrote that following the hearings in the House he was

called to the office of Andrew Volstead, a Republican congressman

from Minnesota, who had just risen to chair of the House Judiciary

Committee. Volstead reportedly told him that the committee favored

the concept of the bill,238 but he had three suggestions to improve its
239 H.R. 13,931, 66th Cong., 2d Sess., 59 Cong. Rec. 6553 (1920).

Volstead had introduced an earlier version of the legislation, but it was

disregarded. H.R. 13703, 66th Cong., 2nd Sess., 59 Cong. Rec. 5925 (1920).

240 S. 4344, 66th Cong., 2d Sess., 59 Cong. Rec. 6671 (1920).

241 H.R. Rep. 939, 66th Cong., 2d Sess. (1920), reprinted at 59 Cong.

Rec. 8033.

95

chances of enactment.

First, Volstead recommended that the bill be sponsored by

Republicans in both chambers, because the Republican party was likely

to be the majority party in the upcoming Congress. Rep. Hersman

consented. The farm groups asked Volstead to sponsor the House

version, and he agreed.

Second, Volstead suggested rewriting the bill as an affirmative

statement of rights and powers given to farmers without any mention

of existing legislation.

Third, Volstead stated that the bill's chances in the House would

be greatly improved if language was added providing for the regulation

of farmer cooperatives by some public official to keep them from

demanding excessive prices.

Several re-writes involving staff of the farm organizations,

Senator Capper, and Mr. Volstead produced a mutually acceptable

draft. On May 4, 1920, Chairman Volstead introduced the bill in the

House. 239 Three days later, Senator Capper introduced identical

legislation in the Senate.240 Both bills were referred to the respective

Judiciary Committees.

House Consideration, 66th Congress

The House Judiciary Committee apparently feltsufficient hearings

had been held on the issue with regard to the Capper-Hersman bill. It

reported H.R. 13931 without amendment on May 7, 1920, only three

days after it was introduced.241 In pertinent part, the report r ead:

The object of this bill is to authorize the producers of

agricultural products to form associations for the purpose of

collectively preparing for market and marketing their

products.
96

Section 1 defines and limits the kind of associations to

which the legislation applies. These limitations are aimed to

exclude from the benefits of this legislation all but actual

farmers and all associations not operated for the mutual help

of their members as such producers. Unless each member

has but one vote in his association, irrespective of the

amount he may have invested as capital therein, the

association must not pay a dividend of to exceed 8 per cent

per annum. This limitation of 8 per cent is designed to

compel payment to the members of as large a part of the

proceeds derived from the sale of their products as possible,

instead of paying it as a dividend upon the money used as

capital

...The aim has been to make the provisions of the bill

sufficiently liberal so that all cooperative farm associations

operated in good faith for the benefit of its members might

avail themselves of the provision of this bill.. ..

Section 2 makes applicable to these associations in a

modified form the provisions of the Clayton Act. Briefly, it

gives the Secretary of Agricultur e power to pr event these

associations from exploiting the public. In the event that any

association should refuse to comply with the order of the

Secretary, a suit may be brought in the appropriate district

court to enforce his order. The farmers are not asking a

chance to oppress the pubic, but insist that they should be

given a fair opportunity to meet business conditions as they

exist--a condition that is very unfair under the present law.

Wherever a farmer seeks to sell his products he meets in the

market place the representatives of vast aggregations of

organized capital that largely determine the price of his

products. Personally he has very little if anything to say

about the price. If he seeks to associate himself with his

neighbors for the purpose of collectively negotiating for a

fair price, he is threatened with prosecution. Many of the

corporations with which he is compelled to deal are each

composed of from thirty to forty thousand members. These

members collectively do business as one person. The

officers of the corporation act as agents of these members.

This bill, if it becomes a law, will allow farmers to form like
242 Id.

243 59 Cong. Rec. 7851-2 (1920).

97

associations, the officers of which will act as agents for their

members.

...It is no answer that farmers may acquire the status and

secure the rights of a business corporation by deeding their

farms to a corporation. That is neither practical nor

desirable from any standpoint. Without doing that they can

not associate themselves together for the mutual profit of the

members without being threatened with prosecution.

.. .(Several) States have granted the right to form

associations such as those contemplated in this bill. But

these States can not confer any right upon their organizations

to engage in interstate and foreign commerce. This bill is

designed to grant that right. .. .

242

H.R. 13931 was first debated on the floor of the House on May

28, 1920. Rep. Dick Morgan (R-OK), a member of the Judiciary

Committee, was the first spokesman favoring it. Six years earlier,

Morgan had dissented from the Judiciary Committee Report on the

Clayton Act because he believed the exemption language in that

legislation was not broad enough. Morgan traced the development of

cooperatives, stated the exemption provided in Section 6 of the Clayton

Act was unfortunately ambiguous, and declared it to be the intention

of the proposed bill to make:

...a broader and more comprehensive declaration as to

the kind and character of cooperative farm organizations

which sha11 not be prohibited by the provisions of any of the

antitrust laws. 243

Rep. Morgan summarized the economic goals of the bill:

Cooperative farmers, organizations will bring producers

and consumers closer together. The excessive charges of

unnecessary middlemen will be eliminated, and the cost of

marketing, manufacturing, and distributing farm products
244 59 Cong. Rec. 7852 (1920). The purpose to eliminate the middleman

through the formation of marketing cooperatives was echoed frequently in the

course of debate on the Cappe r-Vo lstead Act. See, e. g., Congressmen Swope

of Kentucky (59 Cong. Rec. 8022); Mann of Illinois (59 Cong. Rec. 8027);

Browne of Wisconsin (59 Cong. Rec. 8035).

245 59 Cong. Rec. 7857 (1920). Rep. Cannon similarly complained that

if the Secretary of Agriculture sympathized with a cooperative, there w ould

be no remedy for its restraints of trade. 59 Cong. Rec. 7858 (1920).

98

will be greatly reduced. The producers and consumers will

share equitably in the profits derived from cooperative

business organizations among farmers. Prices will be

stabilized, production will be more uniform and larger in the

aggregate, the supply of food products will increase in

proportion to the demand, speculations, gambling and

profiteering in food products will be curtailed, controlled,

and in a large measure prevented, as a result the farmers will

be more prosperous, the cost of living will be reduced, and

the general public welfare will be benefitted.244

Rep. Joseph Walsh (R-MA), also a member of the Judiciary

Committee, made the opening statements for the opponents of special

antitrust treatment of agricultural cooperatives. He focused on Section

2 of the bill, alleging that if the Secretary of Agriculture did not

prosecute farmers, nobody could:

Under the provisions of this bill we turn over to the

Secretary of Agriculture, the guardian angel of the farmers

of this country, the say so as to whether men shall be

prosecuted in case they have, through the enhancement of

price, lessened competition or restrained trade. That

authority now in other industries is vested elsewhere.

Furthermore, there is no provision in this bill for anybody

to lodge a complaint or to require an investigation or

prosecution.245

After opening statements, the House adjourned for the day.

Consideration of H.R. 13931 resumed May 31, 1920.
246 59 Cong. Rec. 8017 (1920).

99

Rep. Volstead, the first to speak, emphasized the need for

cooperatives to raise capital. He also explained how the 8 percent

limit on dividends on equity capital was selected:

It is necessary for (cooperatives) at least to have some

capital on which to do business, and to make some profit that

they can save for the purpose of taking care of losses that are

always incident to any business, and it seems to me that we

ought to give them that right. The provision in the bill that

the profit must not exceed 8 per cent is intended to protect

the farmers. It is designed to compel the officers of these

associations to pay the proceeds from the products of the

members to the members, to the farmers. Some of them

insist that the dividend should not exceed 5 or 6 per cent

instead of 8 per cent. These associations should make

money for the members and not for the association. In these

days of high money rates it is thought necessary to make the

rate 8 per cent, otherwise it might not be possible to get the

necessary money to do business. 246

A lengthy discussion followed between urban representatives, who

claimed the legislation would r aise prices to consumers, and rural

representatives, who claimed it wouldn't. The most important

contribution came from Rep. Hersman, who used examples from his

home State of California to illustrate the positive influences of

cooperative marketing:

I picked up in my office before I left a copy of the report

of the California Almond Growers' Exchange. That triangle

that you see here [indicating] represents what the farmer got

before he was organized. It is one-quarter of the price that

the consumer paid. The farmer got 25 cents out of the

consumer's dollar. The first year after the organization he

got what is represented by the second black figure, almost

half of the consumer's dollar. To-day he is getting close to

three-quarters of the consumer's dollar. They have cut down
247 59 Cong. Rec. 8024-8025 (1920).

100

the tax in transit, and the consumer was not paying any more

for almonds last year than he was nine years ago.

. . .

Now I would like to discuss what the prune and apricot

growers and the raisin growers have done for themselves.

Their organizations have raised the price to the farmers and

taken away the profits of the middleman, and not until last

year was the price increased to the consumer. Under the

stimulating influence of increased price, planting has greatly

increased. The acreage in some fruits has increased 200 per

cent. What does this mean? It means that the product will

be greatly increased and ultimately the farmers can afford to

sell them for less when the market is stabilized and a price

can be reasonably assured by his association.247

Rep. Barkley addressed the key issue of the individual producer's

lack of market power compared with firms that sell him equipment and

supplies and market his output:

.. .No farmer can compete alone with the conditions that

surround him. We all know that it is economically

impossible for any individual farmer to compete with the

conditions under which he must live. When he buys from a

merchant he buys at the merchant's price, and he has no

power to compel the merchant to reduce the price. When he

buys agricultural machinery from implement houses he has

no power as an individual to exercise a voice in determining

the price he pays for it.

When he sells his product.. .he must sell it at a price

dictated not by himself but by others who have had no part

in its production. For that reason I favor the passage of laws

that will enable him and encourage him to cooperate with

others similarly situated in order that greater efficiency may

be secured and in order that the farmer may produce that
248 59 Cong. Rec. 8034 (1920).

249 59 Cong. Rec. 8035 (1920).

250 59 Cong. Rec. 8031 (1920).

251 59 Cong. Rec. 8039 (1920).

252 59 Cong. Rec. 8040-8041 (1920).

253 59 Cong. Rec. 8051 (1920).

254 59 Cong. Rec. 8345 (1920).

255 S. Re p. N o. 655, 66th Cong. , 2nd Sess. (1920). This re port is bar ely

more than one pag e in length. None of th e four r eports cited in this section

is longer than three pa ges.

101

which must feed and clothe us under conditions that will

encourage the greatest production and conservation.248

Rep. Browne noted that while some States, including Wisconsin,

had already passed similar laws, these State laws could not confer any

right on producers to market cooperatively in interstate and foreign

commerce. Federal legislation was needed to convey this privilege.249

Rep. William Igoe (D-MO), floor manager for the opposition,

focused on potential anti-competitive conduct by producers which, the

courts later held, was not authorized at all by the bill. Igoe suggested

cooperatives would be empowered to dictate the prices distributors

could charge when they resold products purchased from cooperative

members and that they would be totally free of any control under any

of the antitrust laws. 250 As the debate neared conclusion, Igoe asserted

cooperative members would be free to employ group boycotts to

prevent nonmembers from selling their production to anyone.251

Despite such criticism, on May 31, 1920, the House passed the

legislation, 234 to 58.252

Senate Consideration, 66th Congress

The House referred its bill to the Senate the next day, June 1,

1920.253 It was reported to the Senate by the Judiciary Committee in

only two days. 254 The report recommended that the bill be approved,

but with two important amendments to Sec. 2, the enforcement

provision:255
256 Id. at 1-2.

257 Id. at 2.

258 The outcome, passage of the bill with the Judiciary Committee

amendm ents, w as anticipated by all participants.

102

 ! The Federal Trade Commission would be substituted for the

Secretary of Agriculture throughout the provision.

 ! The following language would be added:

Nothing herein contained shall be deemed to authorize the

creation of, or attempt to create, a monopoly, or to exempt

any association organized hereunder from any proceedings

instituted under the (Clayton) (A)ct... on account of unfair

methods of competition in commerce.256

The report' s only comment on the bill read:

It was felt by the committee that it was safer to leave the

supervision of associations provided for in the bill in the

hands of the Federal Trade Commission than under the

jurisdiction of the Secretary of Agriculture, especially as the

commission is already equipped with the requisite machinery

to obtain information to carry out the provisions of section 2

of the bill.257

The bill lay dormant for more than six months until it was called

to the Senate floor December 14, 1920. Although debate consisted

primarily of posturing,258 several important comments were made.

Senator William King (D-UT), a member of the Judiciary

Committee who opposed the House bill, opened debate by saying that

the purpose of the Act was to:

...legalize all forms of combination upon the part of

agricultural producers...for the purpose of enabling them to

deal with their products in a collective manner and through

the instrumentality of combinations and or ganizations. Not

only that; it provides, as I interpret the measure, that they
259 60 Cong. Rec. 312 (1920). Senator King wielded considerable power

in the Senate during the 66th Congress as its President pro tempore.

260 Id.

103

shall not only be permitted to combine for the purpose of

marketing their products, but for the purpose of holding

them for an indefinite period in order to secure higher

prices, even though such action might constitute a monopoly

or restrain trade or be destructive of competition.

Moreover, the bill provides that such associations may

combine for the purpose of preparing their products for

market, and also for the purpose of handling the same, and

they may likewise "process" such products. The word

"process, " I presume, comprises all steps necessary to

convert the raw materials into finished products. 259

King said agricultural producers could build warehouses and store

products to force higher prices; construct factories to process their

products, and might thus "take the form of monopolies, not only in

production but in 'processing,' in handling, and in placing the

products, raw or finished, upon the market. "

260

King stressed to his fellow Senators that the bill would permit

producer associations to engage in substantial value-added processing

and marketing when he said:

I suggest that under the first section of the bill the right

seems to be given to such combinations and associations to

fix prices for all products, whether raw or finished. There

is nothing in the bill, it would seem, to prevent the classes

referred to from erecting mills for the purpose of making

flour and from withholding flour from the market for

indefinite periods in order to enhance prices. I think it can

be reasonably contended that this bill would authorize the

manufacture of all sorts of products, from cereals to

dehydrated and prepared and preserved fruits, as well as the

productions of planters, ranchmen, and dairymen. The

ranchmen produce meat. They would be permitted, it would

seem, the right to build packing houses to care for their
261 Id.

262 60 Cong. Rec. 369 (1920).

263 Senator Thomas W alsh (D-MT) should not be confused with Rep.

Joseph Walsh (R-MA ) who also took part in the debate over the CapperVolstead bill.

104

products, hold them in storage, fix prices, and form

combinations that would be restrictive of trade and, possibly,

destructive of competition. 261

Later in the debate, Senator Irvine Lenroot (R-WI) challenged

Senator King' s assessment. Part of their colloquy reads:

Mr. KING: Might not the ranchmen--that is the word that

is used--erect packing establishments, buy refrigerating cars,

and do all the things that the packers now do and take care

of the by-products, and for that reason launch out into all

sorts of business and combine for the purpose of maintaining

prices and creating monopolies with respect to the

commodities in the production of which they are engaged?

Mr. LENROOT: They could not, for this reason: As I

said a moment ago, the members of the association are

confined to dealing in the things produced by their own

members--in agricultural products. They can not.. .attempt

to monopolize the food products of the country as the

packers do; they can not go into the wholesale grocery

business; they can do nothing of the kind. They are confined

to dealing with the things that the members themselves

produce; that is all.

Mr. KING: I think the interpretation of the Senator is the

one, doubtless, which the members of the committee desire

to have placed upon the bill, but I doubt whether that

interpretation is the one which will be followed.262

At this point, Senator Thomas Walsh (D-MT)263 took the floor and

sided with Senator King, saying the bill ".. .beyond a doubt, permit(s)
264

 60 Cong. Rec. 370 (1920). During this statement, Senator Walsh

pointed out that the thre at of prod ucer ass ociations to the great agribusiness

firms of the day was limited because the bill did not authorize federated

associations or the handling of nonmem ber prod uction. Both of these

activities were specifically sanctioned by language added to the bill later in the

legislative process.

265 60 Cong. Rec. 313 (1920).

266 Id.

105

a number of hog raisers, if they see fit to do so, to erect a packing

house in which their own product will be treated.. ." 264

Senator King's statement also makes it clear that the Senate was

aware the cooperatives had already achieved substantial market share.

He asserted that raisin grape growers:

...formed an association by means of which they control

all of the grapes of California. They control the raisin crop,

and they have advanced the price more than 300 per cent.

They have a monopoly of the raisin industry, and so

powerful is this monopoly that it fixes prices and holds the

country, so far as raisins are concerned, in its grasp. 265

While Senator King obviously thought this was an undesirable

outcome, Senator Porter McCumber (R-ND) wasn' t so sure. He

commented that while he didn' t know all the facts about the raisin

industry, ". ..I know that for a number of years (growers) did not even

get living prices for their raisins, and if they should get good prices for

a year or two I certainly should not object to it." 266

The debate carried over to the next day, when Senator Frank

Kellogg (R-MN) spoke on behalf of the House language. After

commenting on the small percentage of the consumer's food dollar that

reaches many farmers, he also discussed the rise of sophisticated

cooperatives in California, but in kinder terms than Senator King:

I can remember only a few years ago when the fruit

producers of California were bankrupt all the time. They

had no facilities for marketing their products and no agents

fo furnish the products to the country as the country required
267 60 Cong. Rec. 361 (1920).

268 60 Cong. Rec. 365 (1920).

106

them. There were no storage facilities and no coordination,

but each man proceeded to dump his stuff upon the railroads.

Consequently the markets were glutted; people could not buy

all the products when they were glutted, and at other seasons

of the year they had to pay enormous prices and many times

could not get fruit. Now the producers have real scientific,

businesslike organizations. They have built their own

warehouses for the handling of their fruit; they have their

own agents; they guarantee deliveries of good oranges and

other fruit so that any man can buy from one of those

farmers' organizations and know that the product will be

good. The same thing to some extent applies to apples. The

result has been that the public has paid less according to the

standard prices of the country, and the producer has received

more. 267

Confusion on the Senate floor over the rationale for the 8 percent

limit on dividends on stock and membership capital was resolved by

Senator Walsh. He said that the general plan for cooperatives is to

allocate earnings on the basis of patronage. However, it is sometimes

difficult to get farmers to provide needed equity capital. To be fair to

those who do contribute capital, the associations are authorized to pay

them a return of up to 8 percent before allocating the remaining

earnings to all members on a patronage basis. 268

As the debate was winding down, Senators Walsh and King

engaged in a colloquy to clarify any doubt about a key issue, whether

the bill authorized an unregulated monopoly by agricultural producers.

Mr. KING: Does the Senator think the bill would exempt

from prosecution under the Sherman law any individuals of

any association organized under the bill which created a

monopoly or developed a monopoly in any of the products

referr ed to in the bill?
269 60 Cong. Rec. 373 (1920).

270 60 Cong. Rec. 376-377 (1920).

107

Mr. WALSH of Montana: That is very carefully taken

care of by the amendment offered by the Senate committee,

reading as follows:

Nothing herein contained shall be deemed to

authorize the creation of or attempt to create a

monopoly, or to exempt any association organized

hereunder from any proceeding instituted under the

act entitled "An act to supplement existing laws

against unlawful restraints and monopolies, and for

other purposes" approved October 15, 1914 on

account of unfair methods of competition in

commerce.

If any one of these organizations should resort to any

monopolistic practices or attempt to drive any rival out of

business or resort to corruption in the case of purchasing

agents or anything of that kind, they would all be subject to

the operation of the Feder al Trade Commission act.

Mr. KING: Would they be subject to the operations of the

Sherman law?

Mr. WALSH of Montana: Undoubtedly; it so provides.

Mr. KING: If they should create a monopoly?

Mr. WALSH of Montana: Yes. 269

Just prior to passage of H.R. 13931 by the Senate, amendments

were adopted (1) to substitute the words "Federal Trade Commission"

in every place in which the term "Secretary of Agriculture" appeared,

and (2) to add the "nothing herein" amendment of Senator Walsh as a

separate paragraph. Thus, under the Senate version, the antitrust laws

were to remain applicable in their entirety to cooperatives. The

amendments and the bill as amended were all approved without

recorded votes. 270
271 60 Cong. Rec. 377 (1920).

272 60 Cong. Rec. 571.

273 Senator Capper w as a career journalist and publisher. He was

virtually the only non-lawyer to play a significant role in the development of

the Capp er-V olstead Act.

108

The Senate immediately requested a conference with the House

and appointed its confer ees. 271 On December 20, 1920, the Senate

version was briefly discussed on the House floor. Rep. Volstead

indicated the House was not ready to accept the Senate amendments

and the House appointed its confer ees. 272

The conferees were unable to agree on provisions of their

conflicting bills. The measure died with the adjournment of the 66th

Congress.

Regrouping for a Second Campaign

John Miller' s memo recalling events leading to enactment of

Capper-Volstead reports that new President Warren G. Harding, some

time after his inauguration, called a conference of farm leaders. He

spoke to the group and expressed support for a new law giving farmers

greater rights to combine for the purpose of preparing and marketing

their products. However, he did not explicitly endorse the CapperVolstead bill.

After Harding left the conference, the farm leaders discussed the

Capper-Volstead bill and unanimously approved a resolution urging its

enactment as passed by the House in the previous Congress. The

resolution was presented to President Harding who then endorsed the

bill.

Miller also reported that Senator Capper was concerned that the

upcoming fight in the Senate would be largely a lawyer's battle. 273

Capper suggested the President ask Senator Frank Kellogg (R-MN) to

serve as floor leader for the bill. Kellogg was a very able lawyer and

speaker, who would later serve as Secretary of State and one of the

judges of the World Court. Kellogg consented and the stage was set

for the final push to enactment.
274 H. R. 2 373, 67 th Cong. , 1st Sess. , at 61 Cong. Rec. 98 (1921).

275 60 Cong. Rec. 370 (1920).

276 H.R. Rep. N o. 24, 67th Cong., 1st Sess. (1921).

109

House Consideration, 67th Congress

Rep. Volstead reintroduced his bill "to authorize association of

producers of agricultural products" on April 11, 1921, the first

business day of the 67th Congress. 274 The bill, H. R. 2373, was

referred to the Judiciary Committee, which he still chaired.

H.R. 2373 included two significant changes from the Volstead bill

in the previous Congress. Both were designed to meet concerns raised

in the Senate.

 ! A provision in Sec. 1 of the earlier bill stating farmer collective

marketing could occur "any law to the contrary notwithstanding"

was deleted. Several Senators had questioned whether this could

be interpr eted as a blanket exemption from the antitrust laws.

 ! Language was added to Sec. 1 providing "Such associations may

have marketing agencies in common. " Senator Walsh had

commented that ".. .there ought to a provision for the federation

of marketing associations. "

275

The bill was reported favorably by the Judiciary Committee on April

26th.276

The report r epeats the analysis made in House Report 939 of the

previous Congress and added two new justifications. First, it supports

the addition of the "marketing agencies in common" provision with an

illustration of local grain elevators who cannot lawfully market on a

combined basis and thus serve only a gathering points for large

terminal elevator companies.

Second, it argues against adoption of the two amendments added

by the Senate in the last Congress, stating:

This bill directs the Secretary of Agricultur e to supervise

these associations. The reason for that is apparent when one
277 Id. At 3.

278 Id. Both platform planks are reprinted at 61 Cong. Rec. 1044 (1921).

110

considers the duties and the organization of the department.

The Secretary has for many years aided farmers in forming

such associations, and his department is thoroughly familiar

with the needs and the difficulties under which they always

have a struggle. There is in his department a Bureau of

Markets that is constantly engaged in studying marketing

conditions and prices of agricultural products both in this and

foreign countries. As a consequence he is especially well

equipped for the purpose of determining whether the prices

charged by any of these associations are excessive. That is

one of the duties that somebody must perform to safeguard

the public.

If it is safe not to place a limit upon the size of an

ordinary corpor ation, there certainly is no reason to fear

monopoly from farm associations. But in the event that any

such association should monopolize or restrain trade so as to

unduly enhance the price of any agricultural product ample

provision is made in the bill to protect the public. The

Secretary of Agriculture in a sundry fashion can grant relief,

and he, with his expert knowledge always at hand, can act

more expeditiously than could any other agency. In the

event an association fails to abide by his judgment it can not

only be hailed into court but a temporary injunction can at

once be issued against it.

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 prosecution that corporations

now enjoy so that they may be able to do business

successfully in competition with them.277

The report also noted that the 1920 national conventions of both

political parties adopted platform language endorsing the right of

farmers to form cooperatives to market their products. 278
279 61 Cong. Rec. 1033 (1921).

111

The bill was taken up by the House on May 4th. While extended

House debate occurred the previous year, discussion of H.R. 2373 was

limited to two hours. Chairman Volstead, in discussing his bill, said:

(This bill) aims to authorize cooperative associations

among farmers for the purpose of marketing their

products. .. .

The objection made to these organizations at present is

that they violate the Sherman Antitrust Act, and that is upon

the theory that each farmer is a separate business entity.

When he combines with his neighbor for the purpose of

securing better treatment in the disposal of his crops, he is

charged with a conspiracy or combination contrary to the

Sherman Antitrust Act. Businessmen can combine by putting

their money into corporations, but it is impractical for

farmers to combine their farms into similar corporate form.

The object of this bill is to modify the laws under which

business organizations are now formed, so that farmers may

take advantage of the form of organization that is used by

business concerns. It is objected in some quarters that this

repeals the Sherman Antitrust Act as to farmers. That is not

true any more than it is true that a combination of two or

three corporations violates the act. Such combinations may

or may not monopolize or restrain trade. Corporations today

have all sorts of subsidiary companies that operate together,

and no one claims they violate this act.279

After expanding on the local elevator example in the report,

Volstead carefully pointed out:

If these organizations should combine with corporations

not organized as provided in this bill to thus monopolize or

restrain trade, they will become subject to the Sherman

Antitrust Act just the same as any other combination or

corporation. We are merely seeking to give them a status

that will make it possible for them to organize and to
280 Id.

281 61 Cong. Rec. 1043 (1921). Rep. Hersey lived in Maine' s Aroostock

County and represented the potato growers whose activities led to the

unfavor able (for cooperatives) decisions in the United States v. King cases,

supra, pp. 83-85.

282 61 Cong. Rec. 1044 (1921).

283 61 Cong. Rec. 1046 (1921).

112

cooperate with other organizations similarly organized to the

extent that may be necessary to meet industrial conditions. 280

Rep. Ira Hersey (R-ME), also a Judiciary Committee member,

made perhaps the strongest statement in support of cooperation:

The value of such farm organizations to the producers of

agricultural products is beyond estimate. By such

organizations the farmers of this country can work and think

together. It creates a civic force in large farming

communities which protects the farmers, both for the present

and for the future. They can thereby operate together in

buying seed, fertilizer, farm machinery, and everything

needed for the conduct of the farm.

They can work and act together in marketing their

products, both in the local and in all markets of the world.

The small farmer is assisted in his efforts to hold or market

his crops. It does away with the middleman, the speculator,

and the importer; in brief, it enables the producers to act

together for their mutual interests in the planting, care, and

marketing of agricultur al products. 281

Just prior to passage of the bill by the House, Volstead pointed

out that while the effect of the bill was to remove the threat of criminal

prosecution of farmers' organizations, Section 2 provided a remedy

through the Secretary Agriculture, and that the farmers approved such

control. Rep. Hatton Sumners (D-TX) asked if the bill had any chance

of passing in the Senate without Section 2 and Volstead responded that

he did not think so and did not think it ought to.282 After some

parliamentary wrangling the bill was passed, 295-49. 283
284 61 Cong. Rec. 424 (1921).

285 61 Cong. Rec. 1058 (1921).

286 S. Rep. No. 236, 67th Cong. , 1st Sess. (1921), at 61 Cong. Rec. 4332

(1921). This was the only action taken on the bill until January 1922.

287 S. Rep. No. 236, 67th Cong. , 1st Sess. 1 (1921).

113

Senate Consideration, 67th Congress,

and Enactment

Senator Capper reintroduced his bill early in the 67th Congress

and succeeded in getting it referred to the Committee on Agriculture

and Forestry. 284 However, no action was taken on it as the House had

moved quickly on the Volstead bill.

After House passage on May 4, the Volstead bill was transmitted

to the Senate and referred to the Judiciary Committee.285 This became

the vehicle for Senate action.

The Judiciary Committee rewrote the bill and on July 27

favorably reported its substitute for the House language.286 The Senate

committee recommended two major changes in the House bill.

First, the committee renewed its attempt to prohibit producer

associations from establishing a monopoly position in a market. But

this time, rather than simply adding language to the end of the House

version of Section 2, the committee proposed to replace the House

language with a simple statement that:

Nothing herein contained shall be deemed to authorize the

creation of, or attempt to create, a monopoly, or to exempt

any association organized hereunder from any proceedings

instituted under the (Federal Trade Commission Act of 1914)

on account of unfair methods of competition in commerce. 287

In support of this change, the report states:

The foregoing is a reproduction of the House bill,

omitting therefrom section 2, and adding thereto the

provision to guard against the establishment of a monopoly,

in substance like the amendment proposed by this committee
288 Id., at 1-2.

114

and adopted by the Senate to a like bill which passed the

House at the last session....

The hearings conducted by the subcommittee have

confirmed the members thereof in the conviction that the

amendment insisted upon by the Senate at the last session is

essential for the protection of the consuming public and can

do no possible harm to the gr eat body of farmers in whose

interest the legislation is demanded.

Inasmuch as it is utterly impossible to establish a

monopoly of any of the ordinary farm products, cereals,

cotton, livestock, etc., and inhibition of monopoly must be

unobjectionable to the producers of such. Moreover, your

committee is entirely satisfied that they have no desire or

purpose to establish a monopoly. Why anyone should insist,

under these circumstances, on the enactment of a law which,

in terms, would authorize them to do so, your committee

finds it impossible to understand.

It is possible, however, to establish a monopoly with

respect to farm products which can be produced profitably

only in a very limited area, or in the case of highly

perishable products, like milk, which will not stand shipment

long distances. It would not be in the public interest, your

committee believes, to permit all producers of milk within

the area from which one of our great cities is supplied to

effect a single organization having thus a monopoly which

might or might not be utilized to exact extortionate prices of

consumers. Your committee sees no good reason why two,

three, a half dozen, or a dozen cooperative associations

might not properly be organized for the purpose of supplying

a city with its milk, nor why, in the case of raisins, for

instance, produced only within a limited area in the State of

California, a monopolistic organization should be permitted

and encouraged, rather than two or three cooperative

associations organized and operating on similar lines. 288
289 Id., at 1. Although not spelled out in the bill, it has always been

assumed that the "majority member business" rule would be applied on an

annual, a ccounting-year basis.

290 Id., at 3.

291 The bill was called to the floor on January 31, 1922 (62 Cong. Rec.

1978) and debate began February 2 (62 C ong. Rec. 2048).

115

Second, the committee inserted language authorizing associations

covered by the bill to market agricultural products of nonmembers,

provided the value of products handled for members exceeds that

handled for nonmembers. 289 In explaining this change, the report said:

The bill before us during the last session authorized the

organization of associations dealing in "products of their

members." The bill now under consideration authorizes

them to deal in the "products of persons so engaged."

Obviously, under the former the associations would be

restricted in their dealings to members; in the latter, though

they are restricted as to the character of the products in

which they may deal, it is clear that they may deal with any

person in such products, whether he be a member or not.

The bill has for its purpose the removal of obstacles, if

such there be in the Federal statutes, in the way of the

organization of cooperative farm marketing associations, a

purpose which the majority, at least, of your committee is in

full sympathy. It may be, and probably is, true that such

associations can not operate with the highest degree of

success... unless they are permitted to deal to some extent in

the products of nonmembers similar in character to those

handled for the members. But the protection of the statute

ought not be given to a small number of (producers) who

contribute from their own farms an inconsiderable quantity

of the products handled by the association.290

Senate debate commenced at the beginning of the Second Session

of the 67th Congr ess. 291 It was conducted under the general

assumption (an accurate one, it turned out) that the House version,

with minor amendments, would pass the Senate.
292 62 Cong. Rec. 2048-2049 (1922).

116

Senator Kellogg, in his role as floor leader, opened Senate

consideration of H.R. 2373 with a concise statement of the need for

greater public policy support for farmer cooperatives:

On account of the individualistic nature of the farmer's

occupation, and the inability to consolidate into great

aggregations of capital, the farmer finds himself at a

disadvantage, and also, I believe, the consuming public.

There is no doubt whatever that the difference between what

the farmer receives for his products and what the consuming

public pays is unreasonably great in the case of many if not

all of the products grown and marketed to-day, and I believe

that one of the means for the alleviation of this condition is

marketing associations among the farmers themselves. They

have, I think, already had considerable experience, and I

believe will develop the ability to handle their own products

properly and place them in the markets of the country and

the markets of the world.

. . .

The main object of the cooperative association is to get

reasonable prices for the farmer, principally through

lessening the cost of marketing and selling his products and

cutting down the differences between what the farmer

receives and what the public finally pays. 292

Kellogg detailed the legislative history of the similar bills in the

prior Congress which resulted in the disagreement between the two

chambers. He summarized the House bill and urged the Senate to

reject the substitute proposed by its Judiciary Committee and to adopt

the version passed by the House.

Kellogg engaged in a colloquy with Senator Cummins on the issue

of who might qualify for membership in an association covered by the

bill.

Mr. CUMMINS: Are the words " as farmers, planters,

ranchmen, dairymen, nut or fruit growers" used to exclude

all others who may be engaged in the production of
293 62 Cong. Rec. 2052 (1922).

117

agricultural products, or are those words merely descriptive

of the general subject?

Mr. KELLOGG: I think they are descriptive of the

general subject. I think "farmers" would have covered them

all.

Mr. CUMMINS: I think the Senator does not exactly

catch my point. Take the flouring mills of Minneapolis: they

are engaged, in a broad sense, in the production of an

agricultural product. The packers are engaged, in a broad

sense, in the production of an agricultural product. The

Senator does not intend by this bill to confer upon them the

privileges which the bill grants, I assume?

Mr. KELLOGG: Certainly not: and I do not think a

proper construction of the bill grants them any such

privileges. The bill covers farmers, people who produce

farm products of all kinds, and out of precaution the

descriptive words were added.293

This discussion clarifies the intent of the bill's sponsors as to

whom the legislation was to cover. First, the phrase "persons engaged

in the production of agricultural products" is to be construed broadly

to include all producers of agricultural products, not just those

specifically listed. Second, the phrase only encompasses people who

grow crops and r aise animals. The sponsors did not intend for

Capper-Volstead to protect processors who are not owned and

controlled by farmers.

Senator Kellogg also explained and defended Section 2 of the

House bill:

The first question which has arisen is why the Secretary

of Agriculture should be named as the officer to find whether

the association has unduly enhanced prices. I know of no

officer more competent to deal with the question than the

Secretary of Agriculture. He has in his department a Bureau

of Markets. He keeps track of the cost of production, the

cost of selling, and what the public is paying. He has the
294 62 Cong. Rec. 2049 (1922).

295 62 Cong. Rec. 2057 (1922).

118

statistics and he, through his Bureau of Markets, can

determine better than any other agency of the Government

whether such a cooperative marketing association is really

being operated in restraint of trade as a monopoly and is

unduly enhancing prices.

The Attorney General has the duty placed upon him to

take charge of the suit in the court to prosecute it, but the

Attorney General has not the machinery to study these

cooperative associations, to find out the cost of production,

the cost of selling, the reasonable prices to the consumers,

and various other elements which it is easy for the Secretary

of Agriculture to find out.

It may be said, therefore, that before such associations

can be prosecuted under the Sherman Act for any restraint of

trade or monopoly, whether it is a mere technical monopoly,

or not, the Secretary of Agriculture must investigate and

make a finding that the cooperative association is in restraint

of trade or is a monopoly and is unduly enhancing prices. 294

Senator Capper took the floor next and said:

Mr. President, the cooperative marketing bill as it was

offered in both the Senate and House seeks simply to make

definite the law relating to cooperative associations of

farmers and to establish a basis on which these organizations

may be legally formed. Its purpose is to give to the farmer

the same right to bargain collectively that is already enjoyed

by corporations. The bill is designed to make affirmative

and unquestioned the right which already is generally

admitted, but which, in view of the Sherman law, is subject

to nullifying interpretation by those whose interests are not

identical with those of the farmer, and who for one reason or

another may be in a position to obtain an interpretation

advantageous to themselves and embarrassing or detrimental

to the members of cooperative organizations. 295
296 62 Cong. Rec. 2059 (1922).

119

. . .

While it seems evident that Congress intends that the

farmer shall not be prosecuted for acting collectively in the

marketing of his product, yet the Federal law is such that

these prosecutions may be threatened or actually brought

against him. The farmer does not relish the possibility of

being prosecuted for an alleged violation of law, even though

he feels fairly certain that he would not be convicted."296

Capper attacked the Judiciary Committee substitute for Section 2

of the House bill, stating:

...this proviso nullifies the act, as no association can

efficiently operate that does not control and handle a

substantial part of a given commodity in the locality where

it operates. Middlemen allege that farmers in selling their

products individually are competitors with each other, and

that by combining into associations to market collectively

such competition is eliminated and the farmers thereby

undertake to form a monopoly. Though it is conceded that

the inevitable effect of cooperative marketing is to lessen

competition between farmers, it nevertheless remains that

farmers must market collectively or, in the most correct

sense, they can not market at all, but must usually turn over

their products to a noncompetitive buyer who operates the

only elevator or milk station accessible to the farmers in that

locality.

. . .

The bill as it passed the House, and which I hope will

have the approval of the Senate, gives to consumers a

protection which they do not now have as against

middlemen, in that if such farmers' marketing associations

unduly enhance prices a complete and adequate remedy is

provided in section 2. If such associations unduly enhance

prices, the Secretary of Agriculture may order them to cease

and desist from monopolizing and restraining trade and
297 62 Cong. Rec. 2058 (1922).

298 62 Cong. Rec. 2107-2120 (1922).

120

commerce. This provision of section 2 is taken from the

Federal Trade Commission Act, and the Secretary of

Agriculture can, as the Federal Trade Commission has

repeatedly done, issue orders to cease and desist from

specific acts. But if the bill is enacted into law in the form

reported by the committee it will be a trap for the farmers

and in no sense a measure of relief. 297

The remarks of Senators Kellogg and Capper took up the first

afternoon of debate. When debate r esumed the following afternoon,

most of the time was spent on extraneous discussion.298

As the time for the day to conclude approached, Senator Walsh

took the floor. While Senator Walsh may not have been a villain out

to sabotage cooperatives as some commentators have suggested, he

staunchly believed that it was bad public policy to empower

cooperatives to monopolize any segment of agricultural marketing. He

devoted considerable effort attempting to convince his colleagues to

replace Section 2 of the House bill with the Judiciary Committee

language forbidding "... the creation of, or attempt to create, a

monopoly.... "

Senator Walsh began his remarks with a conciliatory statement:

...I am profoundly convinced that the salvation of the

industry of this country depends in no small degree upon the

adoption and the extension of the principle of cooperative

marketing. The enormous spread which exists between the

price which the producer of the agricultural product gets

when he puts it on the market and that which the consumer

pays for it is little less than a national scandal, and anything

which can be done to take up that expense will be at the

same time a benefit to the producers of the agricultural

products on the one hand and the ultimate consumer on the

other. I am, as I said, a profound believer in the wisdom of
299 62 Cong. Rec. 2121 (1922).

300 62 Cong. Rec. 2122 (1922).

121

giving every encouragement possible to the extension of the

cooperative principle.299

But he also soon took up the issue of monopolization, saying:

...the only substantial difference now, the only real

subject of contention between the bill as it passed the House

and now before us, and the Senate substitute, (is) namely,

whether we should authorize, under the protection of this

act, the creation of or the attempt to create a monopoly in the

products of which the bill refers.

. . .

The Senate Committee insists that we shall not authorize

that to be done. I understand the position of Senators on the

other side to be that we shall, and that is a plain statement of

the issue between us. 300

The hour was late and, after Senator Walsh's opening remarks,

the Senate prepared to r ecess.

Senator Walsh continued when debate resumed on February 6th.

Soon Senator Walsh engaged in a colloquy with Senator Wesley Jones

(R-WA) on issues considered by Senator Kellogg--who is covered by

Section 1 and the extent of their conduct shielded from prosecution.

Mr. JONES: .. .I am very much interested in the

proposition whether, in the Senator's judgment, the Senate

bill or the House bill would permit a combination of the

creameries which are producing condensed milk?

Mr. WALSH: I have no doubt that it would; I have no

doubt that both bills would authorize the organization of

associations among farmers to make butter of their product

or to make cheese of their product or to make condensed

milk of their product, and to put the product on the market.

Mr. JONES: This is what I had in mind. For instance, in

the State of Washington we have condensed-milk
301 62 Cong. Rec. 2156 (1922).

122

creameries... .but they are not farmers' associations; they are

independent organizations; one might say they are

manufacturing establishments. Now, what I was wondering

was whether or not this proposed legislation would permit a

combination of that kind?

Mr. WALSH: I should say not. The Senator from

Washington will observe that under the provisions of both

bills the organization authorized must be an organization of

the producers themselves of the product of the farm. They

may engage in marketing that product or they may engage in

processing it for the purpose of putting it upon the market,

but the proposed legislation would exclude a combination of

producers of condensed milk who do not themselves produce

it. 301

Thus, it appears clear that the Senate believed the CapperVolstead Act authorized producers to engage in value-added processing

and forward marketing of goods manufactured from raw products they

produced. It is equally clear they believed the protections of the Act

were forfeited if nonproducer processors were involved in the

collective activity.

Senator Walsh went on:

There is a further provision in both bills to the effect that

the organization may deal not only in the products of their

members but also in the product by whomsoever it may be

produced. The Senator for Ohio [Mr. Pomerene] at the last

session of the Senate inquired very pertinently whether that

provision would not, for instance, permit Mr. Swift or Mr.

Armour, or Mr. Wilson, each of whom, I (will assume),

owns a farm and raises hogs, for instance, to organize under

this proposed act and deal in the products of their own

farms, and also to buy extensively from other producers. I

think that that could be accomplished under the House bill.

Recognizing that there is an evil there, and that the act might

easily be abused, the Senate bill provides that such
302 62 Cong. Rec. 2157 (1922).

303 Id.

123

organizations can not deal in products other than those

produced by their members to an amount greater than the

amount of the products which they get from their members.

So that if the three gentlemen to whom I refer should

organize an association under this proposed law, they could

throw the product of their own farms into the association and

could put just so much more into the business, but no

more. 302

Thus, Senator Walsh acknowledges that Capper-Volstead

protection is not limited to associations of small-scale farmers. He also

suggests that wealthy persons with close ties to corpor ate agribusiness

can jointly market on a cooperative basis, so long as the association

does not buy more product from outsiders than it handles for members.

Senator Walsh quickly returned to the subject of a possible

producer monopoly, noting at one point:

...the only people who came before the (Judiciary)

committee in relation to this bill, other than the

representatives of the farm organizations... , were

representative ofthe California Raisin Growers' Association,

a confessed monopoly, and the representatives of the milk

producers' associations, who frankly stated their purpose to

set up a monopoly of the supply of milk to the great cities of

the country under the provisions of this bill, if they shall be

permitted so to do.303

So when the Senate rejected the Judiciary Committee amendment

to replace Section 2 in the House bill with a statement barring

producer association monopolies, it was aware that producers might,

and in the case of raisins had, established a dominant position in the

marketplace. And it did not adopt proposed language forbidding the

accumulation of such market power.

Senate debate touched on another issue of continuing relevance.

Senator George Norris (R-NE) had pointed out that during Judiciary
304 62 Cong. Rec. 2165 (1922). Senator Norris had just assumed the

chairm anship of the Committee on Agriculture and Forestry, where he became

known as the father of the Tennessee Valley Authority. The first of that

project's dams was named Norris Dam.

305 Id.

124

Committee hearings general agreement existed that most farmer

organizations had not done anything, and did not plan to do anything,

to violate the law. However, he stated:

(Producer association leaders) want the law, however,

because.. .they are afraid. They say, "We will be

threatened.... The people in the business circulate

propaganda and write letters, and so forth, and the farmers

are afraid to come in." . .. as to the great bulk of the

producers I am of the opinion that it is more a matter of

psychology than anything else. I do not believe they violate

law now when they organize.304

Senator Pomerene then asked if cooperatives are rarely

prosecuted, what is the need for the legislation? Senator Walsh

responded:

Just simply as the Senator from Nebraska said, that those

who do not want the organization, the men who have the

business now, the middlemen who are standing between the

producer and the consumer and taking their toll, discourage

the organization of these corporations or associations by the

suggestion that they will be in violation of law.305

Senator Norris picked up on the point that opponents of

cooperatives could discourage their formation by simply suggesting

joint marketing was illegal, saying:

...as the Senator from Montana [Mr. Walsh] said the

other day, those who are interested in preventing his

organizing, in preventing a cooperative movement on his

part to do away with the middlemen, industriously circulate
306 62 Cong. Rec. 2259 (1922). Lack of understanding among farmers as

to their rights to organize continues to make them vulnerable to threats of

antitrust litigation by buyers of their pr oducts who want to avoid dealing with

a strong, unified grower association. Even inform ed growers can be

intimidated by the threat from a large, wealthy agribusiness firm to bring an

antitrust action. Although the growers may know they are on strong legal

ground, they lack the resour ces to survive a lengthy, expensive antitrust

litigation. So their attem pt at cooperation is stifled before it re ally begins.

307 62 Cong. Rec. 2166 (1922).

125

reports that this kind of organization would be in violation of

the Sherman antitrust law. The farmer is scattered all over

the country, timid, and does not have the fortune to back him

in fighting through the courts any lawsuit, whether it is justly

or unjustly begun, and natur ally he is afraid to go into a

cooperative organization for fear, not that he will be

convicted and sent to jail, but that he will be harassed, that

there will be litigation extending through all the courts and

through all the years. He is naturally timid and stays out of

it. 306

The discussion turned to Section 2 of the House bill. Confusion

developed over the action the Secretary of Agriculture was to take if

he found prices to be "unduly" enhanced. Some Senators apparently

thought the Secretary could, or should, set a fair price. Again Senator

Walsh provided a cogent explanation:

Take the case of a monopoly; if (a cooperative)

monopolizes to such an extent as that prices are unduly

enhanced, the Secretary of Agriculture directs that it refrain

"therefrom" ; that is, of course, r efrain from monopolizing;

not from enhancing prices, but from monopolizing.

Likewise, if he finds that it does not constitute a monopoly

but that there is an undue restr aint of trade, as a consequence

of which prices are enhanced, he is commanded to order that

it desist "therefrom"; that is to say, from restraining trade.307
308 62 Cong. Rec. 2223 (1922).

126

Debate continued the following day, February 7th. Much of the

discussion concerned various court cases dealing with producer

associations. However, Senator King did make one of the stronger

arguments against passage of the bill. He expressed grave concern

about the power of monopolies in general:

I believe that if we pass the pending bill, we are

indicating to the public that there will be no further effort to

destroy monopolies and combinations in restraint of trade;

that we will confess our impotency to deal with the subject.. .

I sympathize, as the Senator from Wisconsin (Senator

Lenroot) does, with the farmers. .. . This bill, however, in

my opinion, will be regarded by trusts and combinations, by

conspirators in restraint of trade, with glee and with

rejoicing; and I warn the Senators now that if this bill is

passed and becomes a law all of the illegal combinations in

the United States will take courage from its enactment, and

will continue their depredations without fear of the heavy

hand of the law being placed upon them. 308

Senator Lenroot retorted that if the Senate substitute barring

monopolization were adopted, it would abrogate the benefits conferred

under Section 1. He argued:

Whenever there is an association formed, a part of the

effect of the formation of that association is an undue

restraint of trade.

If a part of the purpose of that association be to eliminate

competition, can Senators say that a court may not hold that

that is an attempt to create a monopoly? That is the very

basis of any holding of an attempt to create a monopoly,

which is still made unlawful under the Senate amendment.

. . .

If the Senate Committee substitute shall be enacted, here

is an association of farmers, growers of agricultural

products, and, of course, one of the objects of that
309 62 Cong. Rec. 2225-2226 (1922).

310 62 Cong. Rec. 2227 (1922). Senator Phipps was one of the few

legislators at the time w ith a backgr ound in big busin ess, having risen from

clerk to first vice pr esident of the C arnegie Steel C o. before leaving

Pittsburgh for Colorado and a second car eer as an investor and politician.

311 62 Cong. Rec. 2256-2264 (1922).

312 62 Cong. Rec. 2264-2267 (1922).

127

association or one of the necessary results will be the

elimination of competition between themselves and to secure

better prices for their products. So I say the courts might

well hold that the purpose of such a combination or association was an attempt to monopolize and therefore within

the condemnation of the Senate committee substitute.

309

As the general debate wound to a close, the primary question

before the Senate remained as first expressed by Senator Walsh, would

Congress sanction associations with the potential to control an

unlimited share of the market in the product their members produced?

Senator Lawrence Phipps (R-CO) spoke on behalf of an

amendment he had filed the previous day. The Phipps amendment

provided that when farmers agreed to sell their products to a

processor, under a contract that made the price received by the farmers

dependent on the price received by the processor for the final product,

the processors could cooper ate in selling their products just as farmers

could under the bill. 310 No vote was taken at this time.

The remainder of the day's discussion centered on squabbling

over the rules for wrapping up the debate and voting on amendments

and the bill itself.

The final day of Senate debate, February 8th, began with several

lengthy statements in support of cooperatives. 311 This was followed by

a rehash by opponents of the dangers of permitting any monopoly and

the perceived weaknesses of administrative enforcement by the

Secretary of Agriculture. 312

Senator Walsh introduced two amendments to the House bill,

which was technically before the Senate as passed by the House. The

first provided "That any person engaged in the same industry shall be
313 62 Cong. Rec. 2267 (1922).

314 Id.

315 62 Cong. Rec. 2268 (1922).

316 62 Cong. Rec. 2267-2269 (1922).

128

admitted to membership in the association on equal terms with all

others. "

313

This amendment was probably a ploy to embarrass those Senators

who opposed Senator Walsh's amendment to forbid cooperative

monopolies by tying their opposition to the California Raisin Growers'

Association. Walsh declared the provision would not be necessary if

the anti-monopoly amendment were adopted. Then he postulated:

It is disclosed in the record that 93 per cent of the raisin

growers in California belong to that association. The other

7 per cent continue to sell their products to commission

merchants as they have in the past, but those commission

merchants must go out of business, because they can not get

enough of the product to enable them to operate profitably.

If they do go out of business, then the 7 per cent will be too

small a body to organize a separate association of their own

able to conduct the business successfully. Accordingly, they

will have no way of marketing their products unless they are

admitted to membership in the organization now effected.314

Senator Kellogg responded that cooperatives should be allowed to

determine who they will admit as members. Senator Lenroot

suggested it was somewhat inconsistent for Senator Walsh to be

promoting an amendment that would compel cooperatives to increase

market share or even become a monopoly. The amendment was

rejected without a recorded vote.315

Senator Walsh's second amendment, discussed earlier, provided

that an association could not "deal in the products of nonmembers to

an amount greater in value than such as are handled by it for

members." No one spoke against this provision and it was adopted

without a recorded vote.316
317 62 Cong. Rec. 2269-2273 (1922).

318 62 Cong. Rec. 2273-2275 (1922).

319 62 Cong. Rec. 2277 (1922).

320 62 Cong. Rec. 2279 (1922).

129

Next, a series of technical amendments were proposed, some

being adopted, others rejected, and one withdrawn.317

Senator Phipps then proposed his amendment concerning antitrust

protection for processors who paid farmers under a formula based on

what the processors received for finished products. During the debate

it was alleged that this amendment was aimed at improving the

profitability of sugar processors. The amendment was rejected without

a recorded vote. 318

Then the discussion returned to the key issue, the Judiciary

Committee proposal barring a cooperative monopoly. Senator King

argued for the amendment, Senator Hitchcock against. Senator King

asked whether Senator Hitchcock took the position that, under the bill,

organizations throughout a State, or among the various States, could

have a common representative sell their products, engage in joint

value-added processing, build warehouses, and withhold product from

the market until they obtained a suitable price. Hitchcock answered

that yes, they could. King then asked Hitchcock if he thought this was

a wise thing and Hitchcock responded that he did.319

As the debate concluded, the Senate first rejected without

recorded vote a last-minute amendment offered by Senator King to

have the Federal Trade Commission, not the Secretary of Agriculture,

be the enforcement agency under Section 2 of the bill.320

Next, it considered the Judiciary Committee amendment to

replace Section 2 with a ban on cooperative monopolies. Senator

Walsh made one last plea:

I wish it to be throughly understood, as we proceed to

vote, that to reject the Senate substitute and to adopt the

House text will be to remove the inhibition from setting up

any milk monopoly in any one of the great cities of the

country, and with no check upon anything they may do in

the way of exacting exorbitant prices from consumers,
321 Id.

322 62 Cong . Rec. 2281 (1922). A t this point Mr. Phipps reoff ered his

amendment to protect processors. The chair refused his request for a

recorded vote and the amendm ent was quickly rejected.

323 62 Cong. Rec. 2282 (1922).

324 62 Cong. Rec. 2453-2455 (1922).

325 62 Cong. Rec. 2523 (1922).

326 62 Cong. Rec. 2582 (1922).

327 62 Cong. Rec. 2715 (1922).

328 62 Cong. Rec. 3172 (1922).

130

except as provided in section (2) of the bill, the validity of

which is open to most serious question... .

321

Nonetheless, the amendment was rejected by recorded vote of 5 yeas,

56 nays, and 35 abstentions. 322

Finally, the House bill as amended by the Senate passed by a

recorded vote of 58 yeas, 1 nay, and 37 abstentions. 323

The remainder of the legislative history of the Capper-Volstead

Act is uneventful. On February 11th, three days after Senate passage,

the legislation was again taken up on the floor of the House. Rep.

Volstead repeated some of his earlier points justifying the legislation.

Then the House voted to approve the bill as amended by the Senate.324

The following week it was signed by the Speaker of the House, 325

signed by the Vice President in his role as President of the Senate,326

forwarded to the President for his approval, 327 and signed into law by

President Harding on February 18, 1922. 328

One thing that stands out in this review of legislative history is the

widespread, bipartisan support enjoyed by cooper atives during this

period. Section 6 of the Clayton Act was passed by a heavily

Democratic Congress elected during Woodrow Wilson's landslide

victory in 1912. Capper-Volstead was approved by an even more

dominantly Republican Congress that swept to power on the coattails

of Warren G. Harding in 1920. The generally positive image of

cooperatives on Capitol Hill has been very valuable to their farmer

members through the years.
329 7 U. S.C . § 291.

330 64 Cong. Rec. 15 21 (1923). During the brief debate that followed,

Senator Henry C abot Lodge (R-MA ) became confused and asked why

Congr ess should permit combinations of companies that sell goods to the

navy. Sen. Harrison was permitted to modify his amendment to read "or

producers of rosin and turpentine. " 64 Cong. Rec. 1522 (1923).

131

CHAPTER 5. OTHER ANTITRUST LAWS

Before exploring how the core antitrust laws have been interpreted

and applied to cooperatives, it's useful to cover subsequent Federal and

State statutes that support cooperative marketing by farmers. While

none has the overall impact of Capper-Volstead, each provides public

policy support for cooper atives in certain circumstances.

NAVAL STORES AMENDMENTS FAIL

As enacted in 1922, Section 1 of the Capper-Volstead Act

provides that the law covers ". .. persons engaged in the production of

agricultur al products, as farmers, planters, ranchmen, dairymen, nut

or fruit growers.. .. "

329

In early 1923, during the waning days of the 67th Congress,

Senator "Pat" Harrison (D-MS) made two attempts to insert a specific

reference to producers of naval stores after "nut or fruit growers" in

Section 1 of Capper-Volstead. While neither was successful, they set

the stage for a heated debate during consideration of the Cooperative

Marketing Act of 1926.

"Naval stores" is a trade term covering products produced from

the sap of yellow pine trees along a band of Southern states stretching

from Georgia and Florida west to Texas. The finished products are

turpentine and rosin.

On January 10, 1923, the Senate was debating an appropriations

bill for USDA. Senator Harrison offered an amendment to insert "or

producers of naval stores" after "nut or fruit growers" in Section 1 of

Capper-Volstead.330 Harrison argued that the naval stores industry had

been severely depressed for 15 years and his amendment would do

nothing more than "place the producers of rosin and turpentine upon
331 64 Cong. Rec. 1522 (1923).

332 Id.

333 64 Cong. Rec. 1563 (1923). On January 18, H. R. 4324 was reported

out by the Committee on Agriculture and Forestry. 64 Cong. Rec. 1921

(1923). 

334 64 Cong. Rec. 3064 (1923).

335 Id.

336 64 Cong. Rec. 3137 (1923).

337 64 Cong. Rec. 4584 (1923).

132

the same basis as to organization of marketing associations as the

producers of fruits, nuts, and vegetables. "

331

Harrison acknowledged that he was adding a legislative

amendment to an appropriations bill and asked his colleagues not to

raise a point of order. However, Senator Charles McNary (R-OR),

while expressing support for the Harrison amendment, did object and

the point of order was sustained, killing this amendment.332

The following day, Harrison introduced a new bill (S. 4324) to

insert "or producers of turpentine and rosin" after "nut and fruit

growers" in Section 1 of Capper-Volstead.333

The Senate took up Senator Harrison's new bill on February 5th.

During another brief debate, Harrison asserted that the rosin and

turpentine "... crops are owned by small farmers. In thousands and

thousands of instances, where they have, say, 40 trees, they will box

them, and this is to allow them to organize and sell their product. "

334

No Senator objected to the bill and it was passed.335

The legislation was sent to the House on February 6th and

referred to the Judiciary Committee.336 The bill was reported out of

committee on February 24th. 337 A week later, on March 4, 1923, the

67th Congress adjourned without the House taking up Senator

Harrison's bill.

While this ended the attempt to directly amend Capper-Volstead

by adding a reference to producers of naval stores, it only served as an

introductory skirmish over the issue of how producers of naval stores

should be treated under the antitrust laws. The subsequent debates

over including a reference to naval stores in the Cooperative

Marketing Act of 1926 would focus attention for the first time on an
338 Chap. 725, 44 Stat. 802 (1926), codified at 7 U.S. C. §§ 451-455.

339 Section 1-4 of the Act, 7 U. S.C . §§ 451-454.

340 Section 5 of the Act, 7 U. S.C . § 455.

341 Over the years, the unit has been reorganized and renamed several

times. Today it is the Cooper ative Services gro up within the Rural Business133

issue still unresolved--the limits, if any, on the size and scope of an

entity seeking to qualify as a "producer" for antitrust exemption

purposes.

COOPERATIVE MARKETING ACT OF 1926

Now that farmers had been granted limited antitrust protection for

their cooperative ventures, public policy focus shifted to assisting the

establishment of effective associations. The result was a statute, the

Cooperative Marketing Act of 1926,338 that lends support in two ways:

 ! It establishes a permanent unit within USDA to gather and

disseminate information on, conduct studies about, and provide

technical assistance to farmer cooperatives. 339

 ! It reinforces congressional intent to facilitate the development of

strong cooperative associations by specifically authorizing them

to "acquire, exchange, interpret, and disseminate past, present,

and prospective crop, market, statistical, economic, and other

similar information by direct exchange between such persons,

and/of such associations or federations thereof, and/or by and

through a common agent created or selected by them. "

340

An important element of Section 5 is that it authorizes the

exchange of information not only among producers, but also between

producers and their cooperative associations, between various

associations including members of the same federated system, and

between cooperatives and a common marketing agent they have

created or retained to assist them in their collective marketing activity.

On July 1, 1922, USDA established a Division of Agricultural

Cooperation within its Bureau of Agricultural Economics. 341 The
Cooperative Service agency, par t of USDA' s Rural Development mission

area. It facilitates the development of new agricultur al and rural co operatives,

offers technical assistance to existing cooperatives, conducts research and

gathers statistics on cooperative business activity, and prepares and

disseminates educational materials that promote understanding of how business

in conducted on a cooper ative basis.

342 L. S. H ulbert, Legal Phases of Cooperative Associations, USDA

Department Bulletin No. 1106 (1922).

343 Id. at 35-46.

344 Senator McN ary was just beginning a long Senate car eer that w ould

be highlighted by his role as minority leader from 1933 until his death in

1944. Having been appo inted to his seat before the Republican lan dslide in

1920, he was rising quickly in sen iority on the Agriculture Committee. He

became chairman during the 69th Congress w hen Senator Geor ge Nor ris

resigned that slot to become chair of the Judiciary Comm ittee.

345 Rep. Haugen was a veteran congressman, having served since 1899,

and chair of the Committee on Agriculture. Like Rep. Volstead, he had

attended college in Decorah, Iowa, home of the hog marketing cooperatives

whose use of liquidated damages was held to be an illegal restraint of trade.

Reeves v. D ecorah Far mers' Co-operative Society, 140 N .W . 844 (Iowa

1913), n. 145.

134

unit's first publication was L. S. Hulbert's Legal Phases of

Cooperative Associations.

342

Legal Phases includes a concise summary of the background

leading to enactment of Capper-Volstead and a common sense

explanation of its provisions. 343 In 1923 and 1924 the Division

published several case studies of successful cooperatives, conducted its

first survey of cooperative business activity, and launched a

mimeographed newsletter entitled American Cooperation. The group

also began providing technical assistance upon the request of

cooperatives and working with income tax officials to clear up

misunderstandings about the tax tr eatment of cooper atives.

These fledgling efforts on cooperation wer e doing little to

alleviate the continuing and worsening depression in agriculture during

a period of general post-war prosperity. Farm-state legislators were

calling for more drastic steps. The most prominent was the so-called

McNary-Haugen bill. The bill was named after its sponsors, Senator

Charles McNary (R-OR)344 and Rep. Gilbert Haugen (R-IA). 345 Their
346 Much of the background material on the Cooperative Marketing Act

of 1926 is based on Wayne Rasmussen, Farmers, Cooperative, and USDA,

USDA Agricultural Information Bulletin 621 (1991), pp. 79-92.

347 The skids were greased, so to apeak, in the House. E ven considering

the unique chr onology som etimes em ployed in the Cong ressional R ecord, this

135

plan was to mandate a two-price system for farm products,

guaranteeing a "fair exchange price" for products for domestic

consumption and selling surplus agricultural products at world prices.

McNary-Haugen was strongly opposed by President Calvin

Coolidge, Secretary of Agriculture William Jardine, and Secretary of

Commerce Herbert Hoover. All three were staunch supporters of

cooperatives, at least in part because cooperatives were seen as a

viable alternative to direct government intervention in the economic

affairs of farmers proposed in McNary-Haugen. At the same time,

many cooperative leaders supported McNary-Haugen. The emerging

force in agricultural policy, the American Farm Bureau Federation,

supported both cooperatives and McNary-Haugen.346

While USDA was developing a cooperative program,

cooperatives themselves were recognizing the need for better channels

of communication within the movement. In February 1924, at the

bequest of the Milk Producers Federation, representatives of USDA

and various farm and cooperative groups met in Washington, DC.

They agreed to establish a national educational body to conduct

programs on cooperation. In January 1925, the American Institute of

Cooperation (AIC) was incorporated as an educational institution under

the laws of the District of Columbia.

AIC's first conference was a four-week program that summer at

the University of Pennsylvania in Philadelphia. The conference was

both an educational and a public relations success. It also showcased

the expertise at USDA on cooperatives and established good feelings

between the Department and cooperative leaders.

Following the AIC meeting, cooperative leaders and Agriculture

Secretary Jardine agreed to support an initiative to encourage the

acquisition and dissemination of information pertaining to cooperatives, both within USDA and among the cooperatives themselves.

Jardine's staff drafted legislation, and after 33 leaders of cooperative

associations endorsed the bill, it was forwarded to Congr ess. 347
is probably one of the few instances where the bill was mentioned as being

reported favorably by the responsible committee (Committee on Agriculture,

67 Cong. Rec. 2338, first column) before it was reported as having been

introduced (H.R. 7893, introduced by Rep. H augen on January 18, 1926, 67

Cong. Rec. 2338, second column).

348 H.R. Rep. N o. 116, 69th Cong., 1st Sess. (1926).

349 Id. at 1.

350 Id. at 2.

136

The House Agriculture Committee Report348 briefly summarizes

the bill's intent and includes statements of endorsement from

cooperative leaders. The report notes first that the bill proposed a

permanent division of cooperative marketing in USDA' s Bureau of

Agricultural Economics, "...which.. .through research, educational,

and service work, would render assistance to cooperative

associations. "

349

Second, it states the bill also provided for:

...the acquisition and dissemination, by associations of

farmers, of crop and market information. It is highly

important that associations should be allowed to keep their

members fully informed in regard to all of the factors

affecting the demand for their products. It is generally

known that farmers, due to the large number of them and to

their widely scattered geographical situation, proceed in

many respects unintelligently in regard to the production and

marketing of their products. The provision in question

would tend to alleviate this condition.350

The full House took up the bill of January 26, 1926. During floor

debate, Rep. Henry Barbour (R-CA), who represented the Fresno

area, offered this cogent justification for the bill:

I live in a country where cooperative marketing has

probably reached its highest state of development, and we

have found there that one of the problems of the cooperative

marketing association is the same as the problem of the

farmers who are not organized, and that is overproduction.
351 67 Cong. Rec. 2775 (1926).

352 Even the Congressional Record suggests the representatives were

doubled over in laughter when Rep. Ole Juulson Kvale, an ordained Lutheran

minister and a Farm er-Labor P arty member from M innesota, who could

undoubtedly speak with a strong Scandinavian brogue, said, among other

things:

If a bill were introduced here giving the farmer the right to use

the multiplication table or gra nting him the privilege of m aking use

of God' s rain and sunshine, I suppose I w ould vote for such a bill.

And it would do as much for the farmer as the bill under

consideration. Oh, this innocent thing, this spineless, sapless,

lifeless, jellyfish substance, this milk-and-water, insipid, tasteless,

odorless, colorless, harmless concoction! [Laughter.] Another

137

There has been no way in which information could be

gathered successfully and disseminated among the members

of an association in a way that would prevent the

overproduction of the farm products which these association

handle and market.

This legislation will give to the bureau of cooperative

marketing and to the members of the various organizations

the right to gather such information and to disseminate it

among organizations and among themselves without being

liable criminally for such acts. It will, in my opinion, tend

to do away with this great problem that has confronted us

and now confronts us, namely, the problem of

overproduction,.. .

351

Rep. Barbour may have been unduly optimistic in thinking that

providing farmers information on potential overproduction would

prompt them to reduce plantings. But his argument helped protect

legislative reenforcement of the public policy support for cooperative

marketing by farmers embodied in Section 6 of the Clayton Act and

the Capper-Volstead Act.

No significant opposition materialized. Floor debate was limited

to 2 hours. Even some of that time was spent on tangential issues such

as the unfair impact of tariffs on farmers. A few congressmen

suggested the bill was an insufficient response to the dire needs of

farmers. 352
Coolidge pink pill for pale farmers! {Laughter and applause. ] 67

Cong. Rec. 2781 (1926).

Rep. Kvale, like Rep. Volstead and Rep. Haugen, had close ties to

Decorah, Iowa. Kvale was born and raised near Decor ah and graduated from

Luther College in Decor ah. 

353 67 Cong. Rec. 2768-2769 (1926).

354 67 Cong. Rec. 2767 (1926).

355 Id.

138

Two important issues arose during the debate. First, some

congressmen were concerned that the bill provided some special status

to large, investor-owned packers and food processors. This view was

answered by Representative James McLaughlin (R-MI), who

responded:

This bill, in the assistance it would give, the

encouragement it would give, and the protection it would

give, is limited to the original producers who are farmers,

planters, ranchmen, dairymen, or nut or fruit growers. Men

engaged in those productions can organize a company. They

could organize a packing plant. They could operate a series

of tanneries or manufactories of clothing or anything of that

kind; but the organizations which are to receive the benefit

and protection of this act must be composed of these original

producers who are described in section 5.353

Second, the Jardine bill, as it was called, contained a different

description of covered activity than Section 1 of Capper-Volstead.

Under section 1 of this bill, agricultural products were defined as

"agricultural, horticultural, viticultural, and dairy products, livestock

and the products thereof, the products of poultry and bee raising, the

edible products of forestry, and any and all products raised or

produced on farms and processed or manufactured products

thereof... "

354

Representative John McDuffie (D-AL) offered an amendment to

insert "and naval stores" after "edible." 355 Several southern

congressmen spoke in favor of the amendment as a way to help small
356 67 Cong. Rec. 2769 (1926).

357 67 Cong. Rec. 2770 (1926).

358 67 Cong. Rec. 2783 (1926).

359 67 Cong. Rec. 2825 (1926).

360 To Promote Cooperative Marketing: Hearings on S. 1910 and H.R.

7893 Before the Senate Committee on Agriculture and Forestry, 69th cong , 1st

Sess. (1926).

361 Id. at 154-155.

139

farmers. Representative Haugen, chairman of the Agriculture

Committee, said that he had no objection to the "naval stores"

amendment, which he saw as a modest broadening of the definition of

agricultural product. 356

The "naval stores" amendment was adopted357 and the bill was

passed overwhelmingly by the House. 358 The following day, it was

referred to the Senate and assigned to the Committee on Agriculture

and Forestry. 359

Contention over the inclusion of a specific reference to naval

stores in the bill arose during a series of hearings held on the

legislation by the Senate Agriculture Committee.360 Paint and varnish

manufacturers, paper manufacturers, and soap producers objected to

the language. They argued that the reference wasn' t intended to assist

limited resource farmers, but rather a small number of large,

integrated companies that owned vast forests and manufactured

substantial quantities of turpentine and rosins. The turpentine and

rosin producers association countered that most producers were small;

that the products were developed naturally, not by a manufacturing

process; and USDA's Forest Service routinely treated treed land that

produced naval stores as turpentine orchards or forests.

While most farm group representatives limited their remarks to

support of greater assistance to cooperatives, Chester Gray of the

American Farm Bureau Federation spoke forcefully against the

inclusion of the naval stores language. Gray asserted the bill would be

subverted if it included products that are not strictly agricultural in

nature and are produced primarily by lumber companies and

corpor ations rather than individuals. 361
362 Id. at 177. Representative Sweet was probably chosen to deliver the

message because he was the president of the Sweet Paper M anufacturing Co. ,

a company in one of the industries supporting the naval stores provision.

363 Id. at 186-187.

364 S. Rep. No. 664, 69th Cong. , 1st Sess. (1926).

365 Letter from W. M. Jardine, Secretary of Agriculture, to the Hon.

George W. Norris, chairman of the Senate Com mittee on Agriculture and

Forestry (Jan. 8, 1926), reprinted in S. Rep. No. 664, 69th C ong., 1st Sess.,

at 2-3 (1926).

140

On the last day of Senate hearings, the first witness,

Representative Thaddeus Sweet (R-NY), announced he had been

dispatched to inform the Senate that House Agriculture Committee

Chairman Haugen had changed his position and now opposed

including the reference to naval stores in the bill. 362 The hearings

ended with a statement in support of the naval stores language from

Senator Harrison, who had introduced the amendments to add "naval

stores" to Capper-Volstead. 363

H.R. 7893, with the "naval stores" language in tact, was reported

favorably by the Senate committee on April 24, 1926.364 The Senate

report paraphrased the House report. While it made no mention of

Section 5, it included a letter from Secretary Jardine, which stated:

With respect to the provisions of section 5 of the bill,

relative to the acquisition and dissemination of crop and

market information by cooperative associations, attention is

called to the high importance of allowing such associations

to keep their members fully informed in regard to all of the

factors affecting the demand for their products. The more

information producers have with respect to the demand for

their products the more intelligent should be their action with

respect to the production of them. 365

Thus, Secretary Jardine seemed to share Rep. Barbour's view that

if farmers had sufficient information, they would limit production in

times of impending surpluses.

After several false starts, Senate debate on the bill started June 3,

1926. Senate floor debate attributed to the bill was exhaustive, but
366 67 Cong. Rec. 11, 449 (1926).

367 See, e. g. , statements by Senator Willis (67 Cong. Rec. 11,450) and

Senator Simeon Fess (R-OH ) (67 Cong. Rec. 11, 618).

Senator Willis inserted a letter in the record from Secr etary of

Agriculture Jardine advising Congress to delete the reference to "nanal stores"

from the bill (67 Cong. Rec. 11,450). Secretary Jardine said cooperatives

wanted the language de leted, but didn' t provide a ny reaso ns for their position.

368 See, e. g., statements by Senator James Heflin (D-AL) (67 Cong. Rec.

11532 and 11618) and Senator Pat Harr ison (D-MS) (67 Cong. Rec. 11616).

369 Passed by a recorded vote of 46 yeas, 32 neys, and 18 abstentions, 67

Cong. Rec. 11, 620 (1926).

141

primarily on an unrelated matter. An attempt was made to attach the

McNary-Haugen plan to this otherwise innocuous bill and that led to

voluminous debate over McNary-Haugen. This effort proved unsuccessful.

Several hours of Senate debate dealt with an amendment, offered

by Senator Frank Willis (R-OH), to strike the reference to "naval

stores. "

366 The arguments on the Senate floor were the same ones

raised during the hearings. Those Senators opposed to including naval

stores in the bill's coverage argued that turpentine and resin were

manufactured products, made and marketed by large industrial firms

who were members of a "trust" seeking an exemption from the

antitrust laws. 367

Senate supporters of keeping naval stores in the legislation

asserted they were naturally occurring products from the sap of pine

trees grown on small plots of land owned by thousands of small

farmers. They questioned the logic of having the bill cover the

products of maple tree sap (syrup and sugar), but not pine tree sap.

They argued that the bill did not grant an exemption from antitrust

law, but only authorized producers of naval stores to share market

information and tap expertise within USDA. They also suggested the

attack on naval stores was being engineered by "trusts" of the large

firms in industries that use turpentine and resin (paper, paint, varnish,

and soap). 368

When the time for debate on the amendment expired, the motion

to delete the mention of "naval stores" from the bill was approved.369

Language similar to the bill approved by the House Agriculture
370 67 Cong. Rec. 12, 228 (1926).

371 67 Cong. Rec. 12, 456 (1926).

372 67 Cong. Rec. 13, 092 (1926).

373 Chap. 742, 48 Stat. 1213 (1934), codified at 15 U.S. C. §§ 521-522.

142

Committee (without the reference to naval stores) passed the Senate on

June 29th.370 The House promptly concurred in the Senate version.371

The bill was signed into law by President Coolidge on July 2, 1926.372

Throughout the debate over the naval stores reference, the

legislators avoided addressing the issue of whether they considered a

large, integrated company that both owned extensive "turpentine

orchards" and processed and sold naval stores to be a "producer" of

agricultural products. Supporters of the language talked about the

small producers in the industry, and opponents focused on the

processing operations of the large firms also in the industry. Thus the

exercise sheds little light on the question of how big and how diverse

an entity can be and still be a producer for the purpose of applying the

producer association exemptions from antitrust law.

As enacted, the Cooperative Marketing Act of 1926 reinforces the

public policy support for cooperative marketing by agricultural

producers in Section 6 of the Clayton Act and the Capper-Volstead

Act. It establishes a positive role for USDA in assisting farmers to

organize and operate cooperatives, without authorizing any undue

intrusion or regulation by the Department. And it recognizes that

information sharing is an important part of any initiative by farmers to

work together to solve their production and marketing challenges.

FISHERMAN'S COLLECTIVE MARKETING ACT

As the general business depression spread in the early 1930s,

market conditions for fishermen became as difficult as for farmers. In

1934, the Fisherman' s Collective Marketing Act was enacted.373 It

provides commercial producers of aquatic products with the same

protections from antitrust prosecution given farmers under CapperVolstead.

The Fisherman's Act has two differences from Capper-Volstead.

First, rather than applying to agricultural producers, it covers "Persons
374 Sec. 1 of the Act, 15 U. S.C . § 521.

375 Sec. 2 of the Act, 15 U. S.C . § 522.

376 H.R. 9233, 73rd Cong. , 2d Sess. (1934), at 78 Cong. Rec. 69 74

(1934). Rep. Bland was a lifelong resident of the Chesapeake Bay region who

represented that area in Congress for mor e than 30 years, m any as chair of the

Merchant Marine and Fisheries Committee.

377 H.R. Rep. N o. 1504, 73rd C ong., 2d Sess. (1934), at 78 Cong. Rec.

8261 (1934).

378 S. 3589, 73rd Cong. , 2d Sess. (1934), at 78 Cong. Rec. 8562 (1934).

379 S. Rep. No. 1045, 73rd C ong., 2d Sess. (1934), at 78 Cong. Re c.

8982 (1934).

143

engaged in the fishery industry, as fishermen, catching, collecting, or

cultivating aquatic products, or as planters of aquatic products in

public or private beds.. .(acting together)... in collectively catching,

producing, preparing for market, processing, handling, and

marketing.. .such products.. .. "

374

Second, enforcement authority is vested in the Secretary of

Commerce rather than the Secretary of Agriculture. 375

This law is important to the antitrust status of farmer cooperatives

for at least two reasons. First, it extends the same protection to

another segment of the food production industry, commercial

fishermen and aquaculturists. Second, because the two laws are

virtually identical in their treatment of the individuals covered, court

decisions and administrative rulings issued about this law are of some

precedential value in interpreting and applying the Capper-Volstead

Act.

Legislation in this area (H.R. 9233) was introduced in the House

on April 19, 1934, by Rep. Schuyler Bland (D-VA), chair of the

Committee on Merchant Marine and Fisheries. 376 The bill was

referred to the Merchant Marine and Fisheries Committee and reported

favorably on May 7th.377

An almost identical bill (S. 3589) was introduced in the Senate on

May 11th by Senator Hubert Stephens (D-MS), chair of the Committee

on Commerce. 378 This bill was referred to the Commerce Committee

and reported favorably on May 17th. 379
380 The deb ate takes little more than a column in the Congressional Record

at 78 Cong. Rec. 9175 (1934). Rep. Truax, a freshman congressman, had

only a high school education. But, he had served for several years as editor

of Swine W orld and for 16 years as director of agric ulture for the State of

Ohio before b eing elected to Congr ess.

144

The only Congressional debate on the bills took place in the

House on May 21st. Chairman Bland called the bill up hoping to pass

it under a unanimous consent agreement. Rep. Charles Truax (D-OH)

quickly challenged the bill. 380 Truax had no apparent problem with the

bill, but rather wanted to vent his frustration that the Capper-Volstead

Act had not been an effective cure for the continuing depression in

agriculture. Reps. Bland and Truax engaged in an interesting

discussion.

Mr. BLAND: .. .this bill provides for the same relief for

the fishermen that has already been given to the farmers.

There is no change in the law except it is made applicable to

fishermen. Their desperate condition throughout the

country, as well as their desire to organize in order to better

themselves, is the basis for the legislation.

Mr. TRUAX: Does this bill apply mainly to deep-sea

fishermen or to fresh-water fishermen as well?

Mr. BLAND: It applies to all classes of fishermen.

Mr. TRUAX: And I presume the gentleman is referring

to commercial fishing?

Mr. BLAND: Yes; all classes of commercial fishing.

Mr. TRUAX: And the bill provides they may organize

cooperative marketing associations?

Mr. BLAND: Just as the farmers may do now.

Mr. TRUAX: If the cooperative associations that the

gentleman proposes to form under this bill are no more

successful in obtaining higher prices for the industry than the

farmer cooperatives have been in securing higher prices for

farm products, I shall not withdraw my reservation of

objection.

Mr. BLAND: We just want an opportunity to try it, that

is all.
381 78 Cong. Rec. 9175 (1934).

382 Id.

383 Id.

384 78 Cong. Rec. 10, 745-10,746 (1934).

385 78 Cong. Rec. 11, 322 (1934).

386 78 Cong. Rec. 12, 421 (1934).

387 78 Cong. Rec. 12, 454 (1934).

388 Chap. 592, 49 Stat. 1526 (1936), codified prim arily at 15 U.S.C. §

13.

145

Mr. TRUAX: yes; but we have tried this for 15 years and

the prices are getting lower day by day.381

When Rep. Truax wondered whether impetus for the bill was

coming from fishermen or the Bureau of Fisheries in the Commerce

Department, Rep. Fr ancis Maloney (D-CT) responded that ".. .the

request comes largely from the fishermen themselves. I have had

letters from outstanding fishermen along the New England coast,

including oyster growers and people engaged in all branches of deepsea fishing, urging the passage of this bill." 382

Rep. Mahoney's comment in noteworthy for its refer ence to

oyster growers, indicating Congress intended the bill to cover all

aquaculturists, not just "fishermen. " Rep. Thomas Blanton (D-TX)

also commented favorably on the bill. 383

Final house consideration of H.R. 9233 was delayed until June

7th, when it passed by acclamation.384 On June 13th the Senate passed

its version, also by acclamation.385 Five days later, the Senate

acquiesced to the House bill. 386 The Fisherman's Collective Marketing

Act was signed into law by President Roosevelt on June 25, 1934. 387

ROBINSON PATMAN ACT

In 1936, Congress passed the final antitrust law of importance to

farmer cooperatives, the so-called Robinson Patman Act. 388 This Act

is a series of amendments to the Clayton Act aimed at preventing

buyers with market power from obtaining goods on more favorable
389 Sec. 1 of the Robinson-Patman Act, amending § 2 of the Clayton Act,

15 U. S.C . § 13.

390 Sec. 4 of the Robinson-Patman A ct, 15 U. S.C . § 13b.

391 Bergjans Farm Dairy v. Sanitary Milk Producers, 241 F . Supp. 476,

486-488 (E.D . M o. 1965), aff' d, 368 F .2d 679, 691-692 (8th Cir. 1966).

392 Waters v. N ational Farmers Organization, 328 F. Supp. 1229, 1245

(S.D . Ind. 1971).

393 Bell v. Fur Bree ders Agricultural Cooper ative, 3 F. Supp. 2d 1941 (D.

Utah 1998).

146

terms than others in the same market. It attempts to achieve this result

by making it unlawful for sellers to discriminate in price between

different purchasers when the result may be to substantially reduce

competition. Differentials are permitted that are based on the cost of

manufacture, sale, or delivery, or to respond to competition.389

Robinson-Patman specifically providesthat patronage refunds paid

by cooperatives to members and other patrons are not

discriminatory. 390 Interpretation of Robinson-Patman is a complex

subject beyond the scope of this report.

Cooperatives need to be aware of the Act, because transactions by

cooperatives with third parties are covered. For example, a dairy

cooperative was found to have violated the Robinson-Patman Act when

it paid secret rebates to some customers but not others. 391

In another instance, a producer association negotiated contracts

with processors providing the processors would withhold 5 percent of

the funds due association members for product delivered and pay those

funds to the association. Unhappy members sued the association to

have their marketing agreements voided on several grounds, including

the assertion that withholding these funds from their payments for

product violated the Robinson-Patman Act. The court held these

payments didn't violate the law or render the association's membership

agreements illegal. 392

Another case illustrates how Robinson-Patman can catch

cooperatives off guard. 393 A cooperative supplied specialized feeds to

its members, breeders of fur-bearing animals. The cooperative

delivered the feed free in areas with a high concentration of members.

Other members were required to pick up their feed at the cooperative's

facility.
147

Two members, who lived approximately 80 miles from the nearest

delivery route, sued the cooperative. They asked for an injunction

requiring their cooperative to deliver feed free to them, claiming that

the policy of delivering feed free of charge to other members

constituted price discrimination in violation of Robinson-Patman.

They also asked for triple damages based on lost profits, litigation

costs, and attorney's fees under Section 4 of the Clayton Act.

The cooperative asked the court to dismiss the litigation on the

grounds that the plaintiffs' claims, even if true, didn't allege anything

illegal. A U.S. District Court judge in Utah denied the cooperative's

motion to dismiss. He held the delivery policy could be shown to be

an unlawful indirect price discrimination resulting in competitive injury

to plaintiffs and a violation of antitrust law entitling plaintiffs to treble

damages.

STATE BARRIERS ELIMINATED

The cooperative model of the Farmers Alliance--the one that

eschewed equity capital, conducted each transaction on an "at-cost"

basis, and refused nonmember business--sounded good. Around the

time the Clayton Act was passed, sever al states enacted laws

authorizing cooperatives that followed these tenets. Unfortunately, the

model simply didn' t work. Such associations were unable to

accumulate sufficient capital to finance needed investments or even

enough cash to carry themselves through an inevitable business

downturn.

The need for a more pragmatic approach was most evident in

California, where numerous new producer groups were being formed.

Aaron Sapiro, a sharp and enthusiastic San Francisco attorney, who

represented many of the California marketing associations, drafted a

model state law. Then he traveled around the country to market his

draft legislation. Between 1921 and 1928, 46 states and Puerto Rico

enacted new state cooper ative statutes based on the Sapiro model.

Among its features, the Sapiro model:

1. Is strictly an agricultural cooperative law. Membership in an

authorized cooperative is limited to agricultural producers and

other associations of agricultural producers.
394 The influe nce of the non stock advoca tes reached its peak just as

Congr ess was debating legislation that became the Clayton Antitrust Act of

1914, which m ay explain in pa rt why S ec. 6 of that act only applies to

nonstock cooper atives. The Sapir o model w as sweep ing the country just as

Congress was debating whether to strengthen the protection fr om antitrust

liability for farmers marketing on a cooperative basis. The Capper-Volstead

Act is consistent with the Sapiro m odel in that it covers any marketing

cooperative (stock and nonstock) which limits membership to agricultural

producers, either lim its each member to one vote or limits the return on stock

to 8 percent per year, and perm its business with nonmembers, provided it is

less than business conducted each year with or for m embers.

395 James R. Baarda, State Incorporation Statutes for Farmer

Cooperatives, ACS Cooperative Information Report 30 (USDA 1982), pp.

127-128.

148

2. Authorizes both stock and nonstock cooper atives. It also

facilitates the accumulation of capital by authorizing nonvoting

stock which can be sold to nonmembers.

3. Permits limited business with and for nonmembers.

4. Includes a one-member one-vote provision. Some states,

including California, were sensitive to the dissatisfaction of

large producers with this rule and did not include it in their

law. This opened the way for limited weighted voting based

on patronage, at the discretion of the members of each

cooperative.

5. Specifically provides for long-term marketing contracts with

members and remedies for member breaches of these

contracts.

6. States that any association organized thereunder is not a

conspiracy or combination in restraint of trade or an illegal

monopoly.394

Most of these State statutes provide that the formation of a

cooperative incorporated under the statute is not a violation of the

state's antitrust laws. 395 When the states enacted these laws en masse,
396 See, e. g., Kansa s Wheat Grow ers' Ass' n v. Schulte, 216 P. 311 (Kan.

1923); Rifle Potato Growers' Co-op Ass' n v. Smith, 240 P. 937 (C olo. 1925);

Northern Wisconsin Co-op Tobacco Pool v. Bekkedal, 182 W is. 571, 197

N.W. 936 (1925); L ist v. Burley Tobacco Growers' Co-op Ass'n, 151 N.E.

471 (Ohio 1926).

397 See, e. g., W arre n v. Alabama Far m Bureau Cotton Ass' n, 104 So.

264 (Ala. 1925); Colma Vegetable Ass'n v. Bonetti, 267 P. 172 (Cal. 1928);

Dark Tobacco Growers' Co-op Ass' n v. Rober tson, 150 N. E. 106 (Ind.

1926); Kansas Wheat Grow ers' Ass' n v. Schulte, 216 P. 311 (Kan. 1923);

Potter v. Dark Tobacco Growers' Co-op Ass' n, 257 S. W. 33 (Ky. 1923);

Nebraska Wheat Grow ers' Ass' n v. Or rquest, 204 N .W . 798 (Neb. 1925);

List v. Burley Tobacco Growers' Co-op Ass' n, 151 N .E . 471 (Ohio 1926);

Oregon Gr owers' Co-op Ass' n v. Lentz, 212 P. 811 (O r. 1923).

398 Rifle Potato Growers' Co-op Association v. Smith, 240 P. 937 (C olo.

1925); Northern W isconsin Co-op Tobacco Pool v. Bekkedal, 197 N. W. 936

(Wis. 1925); Clear L ake Co-op Live Stock Shippers' Association v. Weir,

206 N. W. 297 (Iowa 1925).

149

it convinced the state courts to change their negative attitude toward

the antitrust status of farmer cooperatives. The State courts also

recognized that enactment of Section 6 of the Clayton Act in 1914 and

the Capper-Volstead Act in 1922 reflected a strong national policy

acceptance of agricultural cooperatives as outside the sphere of

undesirable restraints of trade.

The basis for the conclusion of the court in each instance, that the

association involved was not a restraint of trade, varies. But all the

cases hold that the statutory public policy of the State had changed.

Associations were rendered legal which, under old standards, might

have been regarded as illegal. 396

Many State courts held that when their State enacted a cooperative

incorporation statute authorizing such associations to contract with

their members to handle and market their produce, the cooperative law

took precedence over a prior statute of the State outlawing trusts and

restraints of trade. 397 Some courts reasoned that the later statute (the

cooperative law) is an expression of the legislature of the state of equal

rank with the earlier antitrust law and the fact that it is of later date

causes it to modify the earlier statute against restraint of trade. 398

In other instances, the courts attached some significance to the

fact that the association was formed under a cooperative statute that
399 Lee v. Clearw ater Gr owers' Ass' n, 93 F la. 214, 111 So. 722 (1927),

followed in Jellesma v. Tampa Better Milk Producers' Co-operative, 147 So.

463 (Fla. 1933); T obacco Gr owers' Co-op Ass' n v. Jones, 117 S.E. 174

(N.C. 1923); Dar k Tobacco Grow ers' Co-op Ass' n v. D unn, 266 S. W. 308

(Tenn. 1924).

400 Brown v. Staple Cotton Co-op Ass' n, 96 So. 849 (Miss. 1923). The

Mississippi constitution forbid restraints of trade that were " inimical to the

public welfare." The court found cooperative marketing by farmers was

reasona ble and thus not the type of restraint that fell within the constitution's

language. See also, M innesota W heat Growers' Co-op Marketing Ass' n v.

Huggins, 203 N .W . 420 (M inn. 1925).

401 Potter v. Dark Tobacco Gr owers' Co-op Ass' n, 257 S. W. 33 (Ky.

1923) (Supra, note 397).

402 Liberty W arehouse Co. v. Burley Tobacco Growers' Co-op Ass' n, 271

S.W . 695, 697 (Ky. 1925).

403 Liberty War ehouse Co. v. Burley Tobacco Grow ers' Co-op Mar keting

Ass' n, 276 U .S. 71 (1928), aff' g, 271 S. W. 695 (Ky. 1925).

150

contained a provision in effect expressly exempting associations

formed thereunder from the antitrust laws of the state.399

When the State antitrust prohibitions were contained in its

constitution, it was necessary for the court to find that the association

was not, in fact, within the scope of this provision of the

constitution.400

Eventually the U. S. Supreme Court also adjusted to the change

in public policy concerning cooperatives. In 1923, Liberty Warehouse

bought tobacco from a producer it knew had signed an exclusive

marketing agreement with a cooperative. This was a violation of the

newly enacted Co-operative Marketing Act of Kentucky.

The cooperative sued to collect damages and secure an injunction

against the warehouse. The warehouse raised numerous constitutional

defenses, including an allegation that the law was class legislation

invalid under the equal protection clause of the 14th Amendment.

The Court of Appeals of Kentucky, relying heavily on its decision

in Potter,

401 rejected the warehouse's arguments and decided the case

in favor of the cooperative.402

The U. S. Supreme Court affirmed the State court opinion and

upheld the statute.403 First, the Court found that as the statute
404 184 U. S. 540 (1902).

405 Liberty War ehouse Co. v. Burley Tobacco G rowers' Co-op Mar keting

Ass' n, 276 U .S. at 91.

406 Id. at 92.

407 Id. at 92-93.

408 Id. at 93-95.

151

penalizes anyone who induces an association member to break his

marketing contract, no basis exists to invoke the equal protection

clause. The Court distinguished Connolly v. Union Sewer Pipe Co.404

on the basis that under the facts in that case farmers were given

preferred status over sellers of pipe. 405

Second, the Court acknowledged that the law does prohibit buyers

from simply signing up growers as they had done before its enactment.

But it expressed little sympathy for the warehouse, noting:

...this is done to protect certain contracts which the

legislature deemed of great importance to the public and

peculiarly subject to invasion. We need not determine

whether the liberty protected by the Constitution includes the

right to induce a breach of contract between others for the

aggrandizement of the intermeddler--to violate the nice sense

of right which honorable traders ought to observe.406

Third, the Court noted that congressional passage of Section 6 of

the Clayton Act, the Capper-Volstead Act, and the Cooperative

Marketing Act of 1926 reflect strong legislative support for the concept

of cooperative marketing by agricultural producers. 407

And fourth, the Court discussed the near-unanimous string of

State court cases upholding the new State cooperative laws against a

variety of challenges. 408

Finally, in 1940, the U. S. Supreme Court overruled Connolly.

The vehicle was a case of similar facts. A Mr. Tigner had been

indicted for conspiring to fix the retail price of beer in violation of the

Texas antitrust law. The Texas statute contained an exemption for

agricultural products and livestock in the hands of farmers or ranchers

almost identical to the one in the Illinois law that caused the Court to
409 Ex parte Tigner, 132 S.W .2d 885, 889 (Texas 1939).

410 Id. at 896-897.

411 Tigner v. Texas, 310 U .S. 141, 149 (1940).

152

strike down the entire law in Connolly. Tigner raised the defense,

successful in Connolly, that the Texas law violated the equal protection

clause of the 14th Amendment.

The Court of Criminal Appeals of Texas recognized that it should

follow Connolly and rule for Tigner. But, instead, it noted that

Connolly had been decided over 30 years ago and stated ".. .the

question should receive fresh consideration." 409

The court took judicial notice of the economic vulnerability of

individual farmers and ranchers compared to that of the entities that

buy their produce. It said states had an interest in protecting

agricultural producers and noted that almost every State had passed a

law authorizing the formation of cooperatives. It concluded that the

State had a valid reason to exclude farmers and ranchers from an

antitrust law aimed at merchants, traders, manufacturers, and others

in the urban commercial environment. The court refused to invalidate

the indictment. 410

On appeal, the U.S. Supreme Court essentially adopted the

reasoning of the Texas court. It found that a State could legitimately

believe that combinations of farmers and stockmen restraining trade in

their agricultur al products did not pose a threat to the community, or,

at least, a much lesser threat than combinations of industrialists and

middlemen. The Court specifically overruled the Connolly case and

concluded,"We find no constitutional bar against excluding farmers

and stockmen from the criminal statute against combination and

monopoly." 411

The Tigner decision removed any doubt as to the right of a State

to exclude farmers and ranchers from their antitrust laws for the

purpose of marketing their products on a cooperative basis. This

removed a major potential legal barrier to the growth of farmer

cooperative marketing.
412 Supra, pp. 28-30.

413 7 U. S.C . § 291.

153

Chapter 6: Application of Antitrust Law

to Farmer Cooperatives

The basic rules concerning exposure under the Sherman Act were

covered earlier in this report. 412 This chapter focuses on the limited

protection provided by the Capper-Volstead Act.413 Relevant cases and

ruling involving other statutes, such as Sec. 6 of the Clayton Act and

the Fisherman's Act, are included.

Decisions are grouped and discussed in a somewhat arbitrary

mixture of subject matter and chronological order. It would be

preferable to approach the issues strictly by subject matter, but many

antitrust cases deal with several important issues. Also, earlier

decisions can influence even unrelated later ones. Furthermore, some

complex litigation took as long as 20 years to reach a conclusion,

leaving ample time for important legal principles to change while the

case was being argued and decided.

A general overview of the Capper-Volstead Act is provided at the

beginning of chapter 4. In summary, Section 1 allows farmers to

market products they produce on a cooperative basis, if they comply

with a few relatively objective standards set out in the law. Section 2

directs the Secretary of Agriculture to make sure producers don' t

abuse this privilege by unduly enhancing the prices they charge. But

as is often true in law, the devil is in the details.

Capper-Volstead is written in broad language and without any

definitions of the terms used. As a result, the courts have been asked

to make several key determinations about the extent of the shield

against antitrust liability provided.

1. Who can participate in a Capper-Volstead association.

2. What types of producer conduct are protected.

3. What types of producer conduct are not protected.

4. May cooper atives approach, or achieve, monopoly status.

5. How extensive is the Secretary of Agriculture's authority.
414 The De partment of Justice has taken the position that some form of

formal "association" is required to qualify for the limited antitrust protection.

In the Com petitive Imp act Statement accompanying a consent decree in an

action against crab fishermen, Justice stated that when the fishermen simply

agreed among themselves on prices they would accept and to refrain from

fishing while negotiating with buyers, they wer e engaged in a conspir acy to

restra in trade in violation of Section 1 of the Sherman A ct. Howe ver, it said

that if the fishermen formed a fishermen's marketing association, such

conduct would be protected under the Fisherm an' s Collective Marketing Act.

Oregon v. M ulkey, 1997-1 Trade Cases (CCH) ¶ 71,859 at 80,042 (D. Ore.

1997).

415 United States v. National Board of Fur Farm Organizations, 395 F .

Supp. 56 (E. D. Wis. 1975).

154

This chapter begins with detailed coverage of two early cases that

lay out general ground rules for interpreting Capper-Volstead. It then

discusses each of the five issues listed above in detail.

A few points should be kept in mind while reviewing this

material. First, in the 80 years since its enactment, the CapperVolstead Act has never been amended. So all of the legislative and

judicial history pertaining to the Act is still relevant.

Second, while the Capper-Volstead Act is often called the magna

charta of cooperative marketing, the word "cooperative" does not

appear in the statute. Congress recognized that cooperatives were a

means to an end--enhanced and stabilized income levels for

agricultural producers without harm to ultimate consumers--and not an

end in themselves. Thus, the protection is available to producers using

any form of association, a concept somewhat broader than most

traditional academic or legal definitions of a cooperative.414

Third, Capper-Volstead needs to be argued as an affirmative

defense to charges of illegal anticompetitive conduct. The accusing

party does not need to prove facts that destroy the immunity. The

cooperative must establish that it meets both the organizational and

operational parameters for protection. 415

EARLY COURT INTERPRETATION

In the 15 years following enactment of Capper-Volstead, no

reported decisions were issued interpreting it. But two cases involving
416 United States v. Borden, 308 U .S. 188 (1939), rev'g 28 F. Supp. 177

(N. D. Ill, E. D. 1939).

417 308 U. S. at 191.

155

Federal antitrust enforcement actions against dairy cooperatives, on in

the late 1930s and the other in the late 1940s, established several broad

parameters that are still followed in applying the act to specific

situations and issues.

United States v. Borden

The first Supreme Court opinion to consider the Capper-Volstead

Act is United States v. Borden. 416 The decision came nearly two

decades after Capper-Volstead was enacted, and for another two

decades it was the only Supreme Court opinion dealing with the Act.

Chief Justice Charles Evan Hughes' opinion, for a unanimous Court,

lays out clear and concise rules that still control major issues about

anticompetitive conduct by agricultural producers.

In November 1938, the Department of Justice charged numerous

participants in the Chicago fluid milk market with engaging in an

unlawful combination and conspiracy in restraint of interstate

commerce in violation of Sec. 1 of the Sherman Act. The Government

divided the defendants into five groups:

 ! Bottlers and distributors, and various entities controlled by them

 ! Pure Milk Association (PMA), a producer cooperative

 ! The Milk Wagon Drivers Union

 ! Chicago municipal officials

 ! Arbitrators who settled disputes between the major distributors

and PMA over the amount the distributors pay to PMA members

for their milk417

The indictment contained 4 counts of conspiracy:

 ! To fix prices paid to farmers

 ! To fix prices charged by distributors

 ! To prevent independent distributors from serving Chicago

 ! To control the supply of fluid milk brought into Chicago
418 A "demurrer" is a motion to dismiss the indictment on the grounds that

even if all of the facts alleged by the Government are true, it still hasn' t

established a basis for the court to find that any illegal activ ity has occurred.

419 United State s v. Bor den, 28 F. Supp. 177 (N. D. Ill., D.D . 1939 ),

rev'd, 308 U. S. 188 (1939). While parts of bo th opinions dealt w ith

procedural issues such as jurisdiction, this review will be limited to the

substantive issues in the case.

420 28 F. Supp. at 183.

156

All of the defendants based their defense on a general demurrer 418

to the complaint. This avoided a trial on the facts and permitted a

timely and focused consideration of the law.

The trial court judge sustained the demurrers and dismissed all of

the indictments. 419 He observed that in the nearly 50 years since the

Sherman Act became law, sweeping changes in the Nation's social and

economic problems had led to a new approach of the law toward

restraints of trade. He asserted that while "...the Sherman Act

embodies the philosophy of individualism and unrestrained

competition... later legislation has embodied the philosophy of

collectivism and control of harmful competition."420

The trial court judge offered this general explanation of the

Capper-Volstead Act:

This Act legalizes price fixing for those within its

purview. To that extent it modifies the Sherman Act. It

removes from the Sherman Act those organizations,

cooperative in their nature, which come within the purview

of the Capper-Volstead Act. Prior to the Capper-Volstead

Act farmers were treated no differently than others under the

antitrust laws, so far as price fixing was concerned.

...

The Capper-Volstead Act does not condemn any kind of

monopoly or restraint of trade, or any price fixing, unless

such monopoly or price fixing unduly enhances the price of

an agricultural product. The Act then, by section 2 thereof,

commits to an officer of the executive department, the

Secretary of Agriculture, the power of regulation and

visitation.
421 28 F. Supp. at 183-184.

422 See, 308 U .S. at 191.

423 Ch. 296, 50 Stat. 246, 7 U. S.C . § 601 et seq.

424 An "orde r" is a regulation covering processors, producers and

producer associations, and others engaged in the handling of covered

agricultural pr oducts.

157

...

This is the first statute, to which the attention of the court

has been called which, with reference to farmers'

cooperatives, embodies the theory of executive regulation

and control of price and profit. The theory and philosophy

of unrestrained competition is departed from and in its stead

is substituted the theory of governmental regulation of

combinations and prices.. ..The court deduces from the

Capper-Volstead Act that the Secretary of Agriculture has

exclusive jurisdiction to determine and order, in the first

instance, whether or not farmer cooperatives, in their

operation, monopolize and restrain interstate trade and

commerce "to such an extent that the price of any

agricultural product is unduly enhanced." Until the

Secretary of Agriculture acts, the judicial power cannot be

invoked.421

Although not mentioned in this opinion, the U.S. Supreme Court

opinion reports that the district Court judge held that PMA, as an

agricultural cooperative, its officers and agents, were shielded from

prosecution under Section 1 of the Sherman Act by the CapperVolstead Act. 422

In the published opinion, the judge placed his main focus on the

Agricultural Marketing Agreement Act of 1937.423 He read the Act of

1937 to require the Secretary of Agriculture to issue a marketing

"order" to stabilize transactions in covered agricultural commodities,

including milk, unless the Secretary finds that an order would not tend

to raise prices to farmers without unduly harming consumers. 424 He

then reasons that the Act of 1937, since it was enacted after the

Sherman Act, is a Congressional commitment to vest in the Secretary

of Agriculture "full, complete and plenary power over the production
425 28 F. Supp. at 187.

426 Id.

427 United States v. Borden, 308 U. S. 188, 198 (1939), rev’g 28 F. Supp.

177 (1939).

158

and marketing, in interstate commerce, of agricultur al products,

including milk."425

The judge concluded that since the regulation and control of milk

marketing is vested exclusively in the Secretary of Agriculture, "The

marketing of the agricultural products, including milk, covered by the

Agricultural Marketing Agreement Act (of 1937), is removed from the

purview of the Sherman Act. In other words, so far as the marketing

of agricultural commodities, including milk, is concerned, no

indictment will lie under section 1 of the Sherman Act."

426

The Justice Department appealed directly to the U.S. Supreme

Court. The Supreme Court held the district court had erroneously

interpreted both the Agricultural Marketing Agreement Act of 1937

and the Capper-Volstead Act.

First, the Supreme Court found the district court’s ruling that the

1937 Act removed the marketing of all covered agricultural products

from the operation of Section 1 of the Sherman Act to be simply

wrong. The Court acknowledged that when the Secretary of

Agriculture issues a marketing agreement or marketing order, the

regulatory scheme is shielded from antitrust law. However, in the

absence of a properly prepared regulation, the Court found nothing in

the Act of 1937 suggesting ".. .commerce in agricultural commodities

is stripped of the safeguards set up by the Anti-Trust Act and is left

open to the restraints, however unreasonable, which conspiring

producers, distributors and their allies may see fit to impose." 427

After discussing legislative construction, the Court summarized:

Farmers and others are not permitted to resort to their

own devices and to make any agreements or arrangements

they desire, regardless of the restraints which may be

inflicted upon commerce. The statutory program to be

followed under the Agricultur al Act requires the participation

of the Secretary of Agriculture who is to hold hearings and

make findings. The obvious intention is to provide for what
428 308 U. S. at 199-200.

429 308 U. S. at 201-202.

430 308 U. S. at 203.

431 See footnote 421.

432 308 U. S. at 204.

159

may be found to be reasonable arrangements in particular

instances and in the light of the circumstances

disclosed... .To give validity to marketing agreements the

Secretary must be an actual party to the agreements. .. .As to

agreements and arrangements not thus agreed upon or

directed by the Secretary, the Agricultural Act in no way

impinges upon the prohibitions and penalties of the Sherman

Act, and its condemnation of private action in entering into

combinations and conspiracies which impose the prohibited

restraint upon interstate commerce remains untouched.428

...

An agreement made with the Secretary as a party, or an

order made by him, or an arbitration award or agreement

approved by him, pursuant to the authority conferred by the

Agricultural Act and within the terms of the described

immunity, would of course be a defense to a prosecution

under the Sherman Act to the extent that a prosecution

sought to penalize what was thus validly agreed upon or

directed by the Secretary. Further than that the Agricultural

Act does not go.429

Then the Court discussed whether the lower court had corr ectly

held that ".. .the Capper-Volstead Act had modified the Sherman Act

so as to exempt the Pure Milk Association, a cooperative agricultural

organization, and it officers and agents, from prosecution under these

counts. "

430

After citing the district court comments quoted above,431 the Court

offered the overall assessment that "We are unable to accept that view.

We cannot find in the Capper-Volstead Act, any more than in the

Agricultural Act, an intention to declare immunity for the

combinations and conspiracies charged in the present indictment."

432
433 308 U. S. at 204-205.

434 308 U. S. at 206.

160

First, the Court examined the scope of the exemption provided

agricultural producers under Section 1 of Capper-Volstead. After

listing the privileges given farmers to collectively market their

products, the Court said:

The rights of these agricultural producers thus to unite in

preparing for market and in marketing their products, and to

make the contracts which are necessary for that

collaboration, cannot be deemed to authorize any

combination or conspiracy with other persons in restraint of

trade that these producers may see fit to devise. In this

instance, the conspiracy charged is not that of merely

forming a collective association of producers to market their

products but a conspiracy, or conspiracies, with major

distributors and their allied groups, with labor officials,

municipal officials, and others, in order to maintain artificial

and non-competitive prices to be paid to all producers for all

fluid milk produced in Illinois and neighboring States and

marketed in the Chicago area... .Such a combined attempt of

all the defendants, producers, distributors and their allies, to

control the market finds no justification if § 1 of the CapperVolstead Act. 433

Turning to Section 2 of Capper-Volstead, the Supreme Court

rejected the district court's conclusion that Section 2 vests exclusive

jurisdiction over charges of illegal conduct involving producer

associations in the Secretary of Agriculture.

The Court noted that Section 2 cr eates a special procedure to be

followed when the Secretary believes an agricultural cooper ative with

the power to restrain trade has unduly enhanced prices. However, it

found "... no ground for saying that this limited procedure is a

substitute for the provisions of the Sherman Act, or has the result of

permitting the sort of combinations and conspiracies here charged

unless and until the Secretary of Agriculture takes action."434
435 Id.

436 Detailed coverage of the Agricultural Marketing Agr eement Act of

1937 is beyond the scope of this report. Specific issues of particular

importance to cooperatives will be covered as they arise. 

161

In conclusion, the Court said:

...the procedure under § 2 of the Capper-Volstead Act is

auxiliary and was intended merely as a qualification of the

authorization given to cooperative agricultural producers by

§ 1, so that if the collective action of such producers, as

there permitted, results in the opinion of the Secretary in

monopolization or unduly enhanced prices, he may intervene

and seek to control the action thus taken under § 1. But as

§ 1 cannot be regarded as authorizing the sort of conspiracies

between producers and others that are charged in this

indictment, the qualifying procedure for which § 2 provides

is not to be deemed to be designed to take the place of, or to

postpone or prevent, prosecution under § 1 of the Sherman

Act for the pur pose of punishing such conspiracies. 435

The Borden opinion established several ground rules for applying

the antitrust laws to farmer cooperatives, which remain valid today.

 ! Collective activity authorized by marketing orders and marketing

agreements issued in compliance with the requirements of the

Agricultural Marketing Agreement Act of 1937 is shielded from attack

under the antitrust laws. However, the <37 Act offers no protection for

anti-competitive conduct not covered by a valid marketing order or

agreement. Nor does it require prior action by the Secretary of

Agriculture before antitrust enforcement activity can begin against

private combinations and conspiracies that restrain trade in the

marketing of agricultur al products. 436

 ! Section 1 of Capper-Volstead permits agricultural producers to

market their products on a cooperative basis and to enter into contracts

necessary for that collaboration. However, it does not protect them

from antitrust liability when they engage in anti-competitive conduct
437 Likewise, the mere fact that the Secretary of Commerce has not acted

under the provisions of the Fisheries Cooperative Marketing Act does not

mean that an illegal restraint of trade has not occurred. Manaka v. M onterey

Sardine Industries, Inc. , 41 F . Supp. 531, 534 (N. D. Cal. 1941).

438 Under the se contracts, the purch asers ag reed to buy all of the milk they

needed from the association and association agr eed to attempt to provide that

162

with non-producers such as processors and distributors.

 ! Section 2 of Capper-Volstead authorizes the Secretary of

Agriculture to act against an agricultural marketing cooperative that

uses market power attained under the shield of Section 1 to unduly

enhance the prices it charges. However, it does not give the Secretary

exclusive jurisdiction over anti-competitive conduct involving

agricultural producers. Section 2 is no barrier to antitrust enforcement

agencies (and private parties) suing producers and their cooperatives

for engaging in conduct not covered by Section 1.437

Maryland & Virginia Milk Producers Ass'n

In the years immediately following the Borden decision the need

to produce adequate food and fiber to support our involvement in

World War II muted concerns about possible anti-competitive conduct

by farmers. However, after the war, the Government once again

challenged a cooperative marketing scheme in the dairy industry.

Maryland & Virginia Milk Producers Ass'n was formed by dairy

farmers in the Mid-Atlantic states in 1920. Around 1930, the

association negotiated full supply contracts with most of the

distributors who purchased member milk, processed it, and sold their

products to grocery stores. For some unexplained reason, in 1938, the

full supply contracts were cancelled with several distributors, including

the two largest firms that jointly purchased about 70 percent of the

milk marketed through the association. Throughout the period up to

and including the litigation, these two buyers and several smaller

customers purchased from the association on a day-to-day basis

without any written contract. At least four smaller distributors

continued to do business with the association under written full-supply

contracts. 438
milk as requested. If the association was unable to meet a distributor's needs,

it was then free to purchase milk from other sources. One bit of historical

evidence undoubtedly helped the association in the eyes of the courts. Fr om

1942 through the end of the war, the m assive needs for milk for people

engaged in the war effort in and around Washington would sometimes exceed

the production of association m embers. During these times the association not

only waived its full sup ply contra cts but also aggr essively sought to find other

suppliers for its customers. Even afte r the wa r, the association w orked w ith

its customers to find them milk elsew here w hen they nee ded it.

163

In 1940, the association and the distributors entered into a milk

marketing agreement under the Agricultural Marketing Act of 1937.

As part of this regulated marketing system, a tiered pricing scheme for

milk sales was implemented. Distributors paid more to the association

for milk sold to consumers in fluid form than for milk converted into

processed products. In late 1946, the association became dissatisfied

with USDA's method to establish prices it received under the

marketing order. It exercised its option to let the marketing agreement

expire on March 31, 1947.

However, the association and the distributors continued to operate

in roughly the same manner as they had under the marketing order.

The continuing full supply contracts were modified to incorporate the

tiered pricing scheme. Only now, instead of USDA setting the prices

for the different classes of milk, the association did so. When it

wanted to change the applicable prices, it called a meeting of all its

customers and announced the new prices.

At this time the association had about 1,500 members and

supplied roughly 80 percent of the milk consumed in the Washington,

DC, area. It sold to seven distributors who accounted for about 85

percent of the milk and cream sold in the same market.

In March, 1948, the association and its seven distributorcustomers were indicted for conspiring to restrain trade. The

indictment alleged numerous misdeeds by the defendants during the

past 18 years. However, the heart of the Government's case was that

the full-supply arrangements (written and unwritten) between the

parties, combined with the rigid pricing scheme accepted by all parties,

violated the Sherman Act.

The defendants' first tactic was to move to dismiss the indictment

on the grounds that the facts stated did not constitute an antitrust
439 United State s v. M aryland & Vir ginia Milk Producers A ss' n, 179 F. 2d

426 (D.C. 1949), cert. denied, 338 U .S. 831 (1949).

440 United States v. M aryland & Virginia Milk Producers Ass'n, 90 F.

Supp. 681 (D.C . D .C . 1950), rev'd , M aryland & Virgini a Milk Producers

Ass' n v. U nited States, 193 F. 2d 907 (D.C . 1951).

441 90 F. Supp. at 685-686.

442 90 F. Supp. 686.

164

violation. In an unreported opinion, a Federal district judge agreed

and dismissed the indictment. On appeal, the U.S. Court of Appeals

for the District of Columbia reversed the dismissal. 439 The court

reasoned that price fixing agreements are illegal per se. While

Capper-Volstead protects collusive activity among producers, it does

not protect anti-competitive conduct in collusion with distributors.

And, while fixed prices are also sheltered when established under a

marketing order, the cancellation of that order also removes the shield.

Thus the government was entitled to attempt to prove the association

and its distributors were engaged in illegal activity.

The defendants waived their right to a jury trial and, at the close

of the Government's case, moved for a directed verdict of acquittal.

The judge granted the motion for the three defendant distributors who

were buying milk on a day-to-day basis, but not for the association and

the four distributors still buying under a full supply contract. 440

The judge acknowledged the Borden decision and noted that

farmers may combine with impunity to fix prices and restrain trade and

commerce. However, the immunity ends when they act in restraint of

trade with others who are not farmers. 441

Next he addressed the Government's contention that the

defendants should be held to have fixed prices because the buyers all

paid the same price for milk. The Government argued that illegal

collusion was shown by the fact that the price was announced at a

meeting attended by all of the buyers. The judge rejected this line of

reasoning. He found that the price was determined solely by the

cooperative and imposed on all of the buyers. The fact that the price

was announced at a meeting attended by all of the distributors, instead

of to each distributor separately, did not constitute evidence of

collusion.442
443 Id.

444 Id. H e did indicate, in dicta, that were this a case where the

government sought merely a civil injunction, rather than a criminal

conviction, he might have looked at this issue more closely.

445 90 F. Supp. 688-689.

446 Mar yland & V irginia Milk Producers Ass' n v. U nited States, 193 F. 2d

907 (D.C. 1951), rev' g, U nited States v. Mar yland & V irginia M ilk

Producers A ss' n, 90 F . Supp. 681 (D.C . D .C . 1950).

165

The judge also rejected the Government's contention that the

defendants were fixing the price of milk sold to consumers. He found

that the association had no role in setting prices for milk sold by the

distributors. He noted that on one occasion the association had

lowered the price for a distributor faced with a price-cutting move by

a competitor. He said that cutting the price to that one buyer to enable

it to remain competitive in its market fell well short of participation in

a conspiracy to fix prices. 443

He also found that while the distributors often charged the same

prices for their various products, this did not support an inference that

the prices were set in concert. 444

Finally, the judge dealt with the interplay of the full-supply

contracts and the tiered pricing scheme based on the marketing order

program. He reasoned that by canceling the marketing agreement with

USDA while retaining its pricing structure, the association wanted the

benefits of the Government program without the burdens. He concluded that it could not legally do this. He found that while none of

the defendants acted in bad faith or with a malevolent intent, the

combination of the full-supply contracts and the tiered pricing scheme

constituted a per se illegal agreement to fix prices. The motion to

acquit was granted as to the distributors not under full-supply contracts

for at least the last three years, but not as to the association and the

other distributors who were parties to full supply contracts. 445

The remaining defendants appealed this last finding by the district

court. The U. S. Court of Appeals for the District of Columbia

reversed the trial court on this point and granted the remaining motions

for acquittal. 446

After a lengthy review of the Borden decision and several

statements of support for much of the trial court's opinion, the
447 193 F. 2d 915.

448 193 F. 2d 916.

449 193 F. 2d 916-917. Of passing interest is the fact that the distributors

entered into a plea bargain before the final appeal was argued. Thus only the

association was fully exonerated by this opinion.

166

appellate court turned to the full-supply contracts. It said that fullsupply contracts are illegal when made to eliminate or suppress

competition. However, it found that the record contained no evidence

of such an intent. Rather, it suggested that neither wholesale or resale

prices wer e fixed by joint action of the alleged conspir ators. 447

The court also rejected the trial judge's logic that removing the

Secretary of Agriculture's presence from a classified pricing scheme

automatically made its use illegal per se. It concluded:

Full supply contracts embodying the classified use pricing

scheme are not in themselves illegal unless they are made for

the purpose of eliminating and suppressing competition or

unless they tend to have that effect. A full supply contract

containing the classification plan for arriving at the price of

milk is, in a sense, an agreement to fix the price of milk; but

only in the same sense that a sales contract for a flat price is

an agreement to fix prices. For such a contract to be illegal

per se it must be demonstrable that it gives to the contracting

parties power which may be wielded to the disadvantage and

detriment of the public and which may become oppressive as

against competitors and tyrannical as against consumers. 448

The court noted that if Congress wanted to forbid the use of a

classified pricing scheme except under a marketing order, it could have

done so. And while the Government's theory that full-supply tieredpricing contracts constitute illegal price fixing is interesting economic

analysis, absent some proof that they restrained trade in this instance,

the theory falls far short of proving guilt beyond a reasonable doubt. 449

Maryland & Virginia clarified producer association status under

Borden, r emoving any doubt that:
450 In accord, L one Star M ilk Producers v. D airy Far mers o f America,

2001-2 Trade Cases (C CH) ¶ 73,509 (E. D. Tex. 2001).

451 7 U. S.C . § 291. The cour ts have tended to group the six descriptive

terms in the first sentence of § 1 of Capper-Volstead--farme rs, planters,

ranchers, dairymen, nut or fruit growers--and refer to them by the generic

167

 ! Farmers may agree among themselves on the price or prices

they will receive for their products and to use their collective

economic power to impose those prices on purchasers of their

products.

 ! Producer associations may use tools such as full-supply

contracts to establish and protect markets for member products,

but not to eliminate or suppress competition.450

And Maryland & Virginia is consistent with Borden in holding

that producers and their associations cannot collude with their

customers in setting prices or participate in any agreement among

purchasers as to the prices they will charge consumers or other

customers.

WHO CAN PARTICIPATE IN A CAPPERVOLSTEAD COOPERATIVE?

One of the major ambiguities in Section 1 of Capper-Volstead is

the use of three terms to describe who can participate in a protected

association--"person," "member, " and "producer"--without defining

any of them. This has opened avenues of assault for parties

challenging the protected status of various associations and forced the

courts to consider the parameters of each term as used in the statute.

Person

Section 1 begins with a statement as to who may form an

association eligible for antitrust protection: "Persons engaged in the

production of agricultural products as farmers, planters, ranchmen,

dairymen, nut or fruit growers." 451
term " producers."

452 United States v. Mar yland & Virginia Milk Producers Ass'n, 167 F.

Supp. 45 (D.D.C. 1958); aff'd in part and rev' d in part on other grounds,

United States v. Maryland & Virginia M ilk Producers Ass' n, 362 U .S. 458

(1960).

168

At the time Capper-Volstead was enacted, Congress was focusing

on traditional family farms that operated as sole proprietorships and

limited their activity to growing crops and raising animals. But, in the

years since 1922, the structure of farming and of agribusiness in

general have undergone significant changes. The courts have been

asked to interpret the term "person" in light of this evolution.

The review has focused on two questions. First, is the term

"person" broad enough to encompass all forms of legal entities, or

does it mean only natural persons? Second, do the descriptive terms

such as "farmers" and "dairymen" limit the Act's coverage to

"persons" who actually till the soil or raise animals and derive most of

their income from farming?

The Government raised both issues in a second major antitrust suit

against Maryland & Virginia Milk Producers Association.452 While

most Maryland & Virginia members were natural persons, some were

partnerships and some were corporations. In addition, while some of

the members were full-time dairy farmers, others were engaged

principally in other occupations and had employees operate their

farms.

Maryland & Virginia raised Capper-Volstead as a defense to the

substantive allegations of illegal anticompetitive conduct. The

Government argued Capper-Volstead did not apply because the words

"dairymen" and "farmers" should be r ead to mean natural persons who

personally work on farms and derive the major portion of their income

from farming. The court rejected the Government's position, stating

it:

...sees no basis for such a restricted definition. The

owner or oper ator of a dairy (farm) is a dairyman, whether

he personally works on his dairy or has the work done by

employees. So, too, the owner of a farm may be regarded

as a farmer even though he devotes the major portion of his

activities to other pursuits. When Congress desired to put a
453 167 F. Supp. at 49.

454 The r emaining 15 perc ent of the mem berships w ere held by private

packing houses operated for profit. The impact of these members on Sunkist' s

Capper-Volstead status is discussed in a detailed summary of this case in the

next section of this r eport.

455 Case-Swayne Co. v. Sunkist Grow ers, Inc. , 369 F .2d 449, 461 (9th

Cir. 1966), rev'd on other grounds, C ase-Swayne C o. v. Sunkist Grow ers,

389 U. S. 384 (1967). The Supreme C ourt noted, without comm ent, the

presence of corpo rate membe rs in Sunkist and addressed itself, instead, to the

antitrust consequences of membership in the association of non-grower

packing houses. 389 U. S. at 387.

169

more circumscribed definition on the term "farmer " it did so

expressly, as is true in the Bankruptcy Act, 11 U.S.C.A. §

1 et seq. The Court, therefore, is of the opinion it is

immaterial whether every member of the association

personally works on his farm or whether every member of

the association is a natural person or a corporation. 453

The status of "incorporated" farms was also questioned in a case

brought by investor-owned citrus juice processors against Sunkist

Growers. At the time, Sunkist was a mixed-membership cooperative.

Roughly 80 percent of the member were local associations of citrus

growers, each of which operated a packing house that prepared fruit

grown by their farmer-members for market. However, about 5

percent of the memberships were held by corporate growers with

sufficient production of citrus fruit to justify installing their own

packing house facilities. 454 The Ninth Circuit Court of Appeals cited

Maryland & Virginia Milk Producers and concurred that nothing in the

context of the Capper-Volstead Act indicates that a corporation can not

be considered a "person" within the meaning of Capper-Volstead.455

It appears settled that both individual producers and partnerships

and corpor ations are encompassed within the term "person" under

Capper-Volstead. It is reasonable to assume that, if asked, courts

would reach the same conclusion concerning limited liability

companies. Thus, the legal form of entities holding memberships in

a producer association should not be a basis for challenging that

association's access to Capper-Volstead protection.
456 See, e.g., United States v. Maryland & Virginia Milk Producers

Ass'n, 167 F. Supp. 45, 48 (D.D.C. 1958), where the court said that "m ilk

producers" are "p ersons owning or operating dairy farms at whi ch milk is

produced, .. .. " (emphasis added).

457 Agritronics Corp. v. National Dairy Herd Ass' n, 1994-2 Trade Cases

(CCH) ¶ 70, 758 (N.D. N.Y. 1994); also, 914 F. Supp. 814 (N.D. N.Y.

1996).

170

Likewise, an absentee owner of a farm is also a "producer"

eligible to hold a membership in an association claiming protected

status under Capper-Volstead.456

Member

The next two sections of this report discuss some older, major

cases that establish the rule that all members of a cooperative must be

producers and define the concept of "producer." However, it wasn't

until the mid-1990s that a court directly confronted the issue of how

you determine whether someone is a "member" of a cooperative.457

Defendants in the case were several state dairy herd improvement

associations (DHIAs) and their national association. The DHIAs are

owned and controlled by dairy farmers. The DHIAs gather and report

information on the history and characteristics of the dairy animals

owned by each member-dairyman as well as the milk produced by the

animals. The records are referred to as "official" and are used by

farmers in their herd management decisions and to value animals sold

from one producer to another.

Plaintiffs were two private, for-profit firms that entered the dairy

records business in competition with the DHIAs. The DHIAs refused

to share information with them or to let them join the national DHIA

association so they could issue "official" records. Plaintiffs sued

alleging the DHIAs were violating Sections 1 and 2 of the Sherman

Act. The DHIAs raised Capper-Volstead as an affirmative defense

authorizing the challenged behavior and moved for summary

judgment. The private firms challenged the DHIAs' right to CapperVolstead protection on the grounds that one of the "members" of the

Pennsylvania DHIA, a Penn State extension specialist, was an

ineligible nonproducer.
458 Maryland & Virginia Milk Producers v. U nited States, 362 U. S. 458,

466 (1960); Case-Swayne v. Sunkist Grow ers, 389 U .S. 384, 395-396 (1967).

459 1994-2 Trade Cases (C CH) ¶ 70,758 at 73, 197.

460 Id.

171

The DHIAs admitted that the extension specialist was not a

producer, that he was called an " associate member " in their bylaws,

and that he attended association member and director meetings.

However, they also presented uncontroverted evidence that the

extension specialist had no vote and no other role or control of the

policy making within the organization. Thus, they argued, the label

placed on this person by the bylaws should not determine his status but

rather the court should look at his actual authority to determine if he

is indeed a "member."

The court said this was a difficult issue to handle because no

substantive standard existed for determining what constitutes a

membership for Capper-Volstead purposes. Next it reviewed the

language in Capper-Volstead and in two Supreme Court decisions that

referred to members setting organization policy as a characteristic of

a cooperative. 458 It then said, ".. .since the purpose of the Act is to

give the individual members an opportunity to participate in the affairs

of the association...(they) must have the means...to do so. Voting or

some equivalent form of power would be such a mean."459

The court noted the unchallenged evidence that the extension

agent attended association membership and board meetings only to

provide educational services and act as a liaison between Penn State

and the Pennsylvania DHIA. He had no vote or other control over the

association, so the court disregarded his title of "associate member"

and decided he was not a "member" as he didn' t "... possess the

substantive rights of a member, nor does he have the required amount

of input into the affairs of the association as would be expected of a

member."460

When the same judge subsequently ruled on a second round of

motions for summary judgment, the private firms attempted to

resurrect this issue. The court retorted, "Simply put, associate

members with no control over an agricultural cooperative are not true
461 Agritronics v. N ational Dairy Herd A ss' n, 914 F . Supp. 814, 824

(N. D. N. Y. 1996).

462 Sunkist Growers, Inc. v. Winckler & Smith Citrus Products, 370 U. S.

19 (1962).

172

statutory "members" and do not strip the cooper ative of its exempt

status."

461

Thus, whatever a person affiliated with a producer association is

called, whether that person is a "member" turns on whether he has the

right to vote in or otherwise control the policy making undertaken by

that association. Nonetheless, the case should serve notice to

cooperatives to avoid calling anyone a "member" who is not a

producer. As the next section explains, all members of a CapperVolstead protected association must be agricultural producers. Using

the term "member " to include nonproducers may confuse people and

spur controversy where the use of another term would avoid these

undesirable results.

Members Must be Producers

Differentiating a producer from a nonproducer wouldn' t be so

important in Capper-Volstead cases were it not for the requirement that

all members of a protected cooperative must be agricultur al producers.

The courts first addressed this issue in the early 1950s. Investorowned citrus juice processors in California embarked on a lengthy

campaign to dislodge Sunkist Growers from its dominant position in

the California citrus industry. Their initial suit unsuccessfully tried to

establish a conspiracy to restrain trade in violation of Section 1 of the

Sherman Act between Sunkist Growers and its wholly owned

processing subsidiaries. 462

One processor, Case-Swayne Co., launched a new attack. This

case alleged that the Sunkist organization was a conspiracy among

grower associations and nonproducer members forbidden by Section

1 of the Sherman Act and outside the protection of Capper-Volstead.

Case-Swayne also charged that Sunkist illegally obtained and misused

monopoly power in violation of Section 2 of Sherman.

The Section 2 part of the case focused on the fact-intensive issues

of relevant product, geographic markets, and possible abuse of market
463 Case-Swayne v. Sunkist Growers, 369 F. 2d 449, 461-462, (9th Cir.

1966), rev'd , 389 U .S. 384 (1967).

173

power. However, the Section 1 part concerned the legal issue of the

proper role, if any, of nonproducer members in a Capper-Volstead

protected association.

As mentioned above, the courts brushed aside the processor

argument that partnerships and corporations could not hold

memberships in a Capper-Volstead association. However, CaseSwayne successfully challenged the memberships held by private, forprofit packing houses.

At the time of the litigation, roughly 15 per cent of Sunkist’s

members were so-called "agency associations. " These were private

corporations and partnerships that packed fruit produced by local

growers under an agency contract with the growers and then marketed

that fruit through Sunkist.

The agency associations were paid fixed fees by their growers to

cover their costs. Agency associations also received patronage refunds

from Sunkist on the same basis as other members. But the agency

associations did not keep these patronage r efunds. Each passed its

allocated share of the gains and losses realized on Sunkist marketing

operations through to the growers it served on the basis of the amount

of fruit provided by each grower.

At the U. S. District Court trial, the judge granted Sunkist's

motion for a directed verdict at the close of Case-Swayne's case.

Case-Swayne appealed.

As to the allegations of conspir acy among Sunkist and the agency

associations in violation of Section 1 of Sherman, the U. S. Court of

Appeals for the 9th Circuit agreed with the trial court' s conclusion that

Sunkist was protected by the Capper-Volstead Act. The court r elied

on the language in Capper-Volstead providing producers and their

associations may enter into contracts necessary to effectively market

their production. It concluded that Sunkist could have entered into

arms-length contracts with these packing houses to prepare grower

fruit for market. The fact that these entities were considered a class of

membership was not, in the court's opinion, such a serious offense to

the intent of Capper-Volstead that the growers could not be considered

one association qualified for its protection.463
464 369 F. 2d at 463.

465 Case-Swayne v. Sunkist Growers, 387 U. S. 903 (1967).

466 Case-Swayne v. Sunkist Growers, 389 U. S. 384 (1967), rev' g, 369

F. 2d 449 (9th Cir. 1966).

467 389 U. S. at 395-396.

174

Two others elements of this decision are worth noting. First,

Judge Ely dissented from this part of the court's opinion. Ely argued

that the clear language of Capper-Volstead required that a protected

association "must be composed solely of agricultur al producers. "

464

(court' s emphasis)

Second, a unanimous court held the trial judge had incorrectly

determined the relevant product and geographic markets. The

judgment was reversed and the case remanded for a new trial on

whether Sunkist had wrongfully exercised its monopoly power in the

redefined markets.

Both parties petitioned the U.S. Supreme Court for writs of

certiorari. The Court granted Case-Swayne's request for review on

the issue of whether all members of an association had to be

agricultural producers for it to qualify for Capper-Volstead

protection.465 In a series of opinions, the Court held that all members

did have to be producers. 466

Justice Marshall, writing for a 5-judge majority, adopted a literallanguage approach to the issue. He provided a detailed description of

Sunkist's structure and quoted passages from the legislative history

suggesting only producers could be members of a Capper-Volstead

association. He concluded that Capper-Volstead, as an exception to a

general law, must be narrowly construed. Since the act specifically

authorizes agricultural producers to act together, any non-producer

participation in the control and policy making of an association strips

the entire association of Capper-Volstead protection. 467 The 9th

Circuit judgment was reversed and the case remanded for further

proceedings consistent with the majority opinion to determine if

Sunkist and the agency associations had engaged in any conspiracy,

combination, or contract in violation of Section 1 of the Sherman Act.
468 389 U. S. at 400-403.

469 389 U. S. at 402.

470 389 U. S. at 403.

471 389 U. S. at 396-400.

472 389 U. S. at 403.

175

Justices White and Stewart concurred in the result remanding the

case for further consideration. 468 However, they suggested that the

penalty, exposing Sunkist to ".. .antitrust liability for a great many

transactions which are wholly between growers or between their

cooperative organizations, transactions which Congress intended to

exempt from the antitrust laws,"

469 was too harsh for the indiscretion

involved. They asked that the case be remanded but potential damages

limited to the consequences of ".. .the forbidden relationship between

an exempt and a nonexempt entity." 470

Justice Harlan argued that any exposure for Sunkist be prospective

only. He noted that agency associations had been members of Sunkist

for at least 40 years and the system had gone unchallenged until this

case. Also, the record failed to show any predatory intent by anyone.

The only motive for including the agency associations as members,

according to the evidence, was to provide more packing facility

options for growers wishing to market through the Sunkist system.

Justice Harlan wanted the decision to serve as notice to Sunkist

and all other agricultural marketing cooperatives that from now on a

strict prohibition on even benign nonproducer membership would not

be tolerated. He asked that the case be remanded and damages limited

to those caused by the agency associations acting in their own interest

rather than that of the growers. 471

Justice Douglas opined that the positions espoused in the

concurring opinions had not been argued and should be reserved for

consideration in a subsequent case.472

Following this decision, Sunkist restructured to eliminate any

membership role for the for-profit packing houses. Individual growers

who used these houses were offered two options to affiliate with

Sunkist. They could join a local association that packs fruit and holds

a membership in the district exchanges that market the fruit under the

Sunkist umbrella. Or, they could be direct members of the district
473 Case-Swayne v. Sunkist Growers, 355 F. Supp. 408, 415 (C. D. Cal.

1971).

176

exchanges and either pack their own fruit or contract with a local

association or for-profit packing house to do the packing for them.

In 1971, the court overseeing implementation of earlier remands

in this long-continuing litigation found that under this reorganization

"no one can be a member of Sunkist at any level who is not a grower

of citrus fruit or a cooperative association of such growers. "

473

Therefore, Sunkist was now in compliance with the requirements to

qualify for antitrust protection under the Capper-Volstead Act.

Producer

The Supreme Court decision in Case-Swayne v. Sunkist Growers

makes it clear that only bone fide producers of agricultur al products

can be members of associations seeking the limited antitrust protection

accorded by the Capper-Volstead Act. But it opened a pandora's box

of problems for cooper atives and for antitrust enforcement officials in

determining just who is and is not an agricultural producer.

No one disputes that a person, whose primary occupation involves

tilling the soil and/or raising animals, is a producer. But things are

less clear when a person is engaged in other aspects of bringing food

to market, particularly processing agricultural commodities into other

products. While the courts have dealt with the issue, as of this writing

the line between producer and non-producer remains vague and subject

to interpretation.

National Broiler Marketing Association

Vertical integration in the poultry industry began in the late

1940s. Until that time, poultry was raised mainly by many small

independent growers. Facilities producing various components of the

production to market cycle--breeding, hatching, feed, processing, and

marketing--were separately owned. The growers owned their birds

and sold them to processors who marketed the product.

After World War II, feed manufacturers and food processors

developed a system that allowed farmers to produce more poultry

without new large investments. Single companies began acquiring all
474 Department of Justice Business Review Letter 69-11 (Nov. 29, 1969).

475 Department of Justice Business Review Letter 71-13 (Nov. 17, 1971).

177

aspects of the production cycle--including hatcheries, birds, feed and

medicine--except those needed to actually raise and tend the birds.

These emerging integrators contracted with the formerly independent

farmers to have them raise the chicks to slaughter weight (or, in the

case of breeder or laying hens, to care for the birds and gather the

eggs). Since the farmer no longer owned the birds, he or she was only

required to provide the production facility and necessary labor.

Once vertical integration began, the poultry industry changed

rapidly. The broiler industry was 90 percent integrated by 1955.

While the egg industry was only 15 percent integrated in 1955, the

degree of integration grew to 44 percent by 1965 and more than 90

percent by 1978.

The Case Swayne decision caused considerable uncertainty among

integrated firms. In 1969, the National Egg Company, a cooperative

of integrated egg producers, asked the Justice Department if it would

object to Ralston Purina becoming a member. In response, Justice

issued a business review letter advising National Egg that it interpreted

the term "producer " as used in the Capper-Volstead Act to include

integrated producers of eggs using contract growers, and it would not

object to Ralston Purina becoming a member.474

In 1970, integrated broiler producers, who also used contract

growers, formed their own cooperative, the National Broiler

Marketing Association (NBMA). However, in November 1971, more

than a year after NBMA was formed, the Justice Department reversed

it stance and issued three contemporaneous review letters announcing

its new position that integrated egg and broiler firms were not

"producers" for Capper-Volstead purposes.

The first responded to a second inquiry from National Egg and

Ralston Purina. It asked whether it was proper for National Egg to

count eggs produced by growers under contract to Ralston as eggs

produced by Ralston for purposes of the Capper-Volstead requirement

that a majority of products marketed must have been produced by

members. 475 The second addressed a request from Central Soya

(which produced only 10 percent of the eggs it marketed on its own

farms) and National Egg to approve Central Soya's membership in
476 Department of Justice Business Review Letter 71-14 (Nov. 17, 1971).

477 Department of Justice Business Review Letter 71-15 (Nov. 17, 1971).

478 One can probab ly assume Ju stice felt it was m ore likely to p revail in

urban Atlanta than rural North Carolina. Justice then convinced th e court in

North Carolina to dism iss the integrator's suit, arguing all the issues would be

resolved in its case.

NBMA also took steps to better position itself for the ensuing battle.

NBMA was originally organized as a stock cooperative under Georgia law.

In December, 1973, it converted to a non-profit membership cooperative

association not having stock. This not only permitted it to portray itself as

less of an agribusiness entity but also brought it within the scope of § 6 of the

Clayton A ct.

178

National Egg. 476 The third addressed a request from Holly Farms

(which produced only 3 percent of the broilers it marketed) for

permission to join NBMA. 477 In each instance, the Justice refused to

say it would not challenge the proposed conduct under the antitrust

laws.

NBMA seized the litigation initiative, filing a declaratory

judgment action in the Western District of North Carolina, opposing

Justice'sinterpretation of Capper-Volstead and seeking an authoritative

decision on the issue.

Justice responded by filing a civil action against NBMA and its

members in U.S. District Court in Atlanta, alleging they conspired to

fix the prices of broiler chickens in violation of Section 1 of the

Sherman Act. The complaint asked for an injunction barring such

restraints of trade. 478

Both parties agreed to a statement of the facts. NBMA members

exchanged information about broiler prices, set a minimum price for

member sales of broilers, withheld product from the market until

buyers would pay the agreed to price, and sold surplus broilers to

customers in for eign countries.

NBMA didn't contest that its members engaged in these activities,

but rather countered that this conduct was protected by Section 6 of

the Clayton Act, the Capper-Volstead Act, and Section 5 of the

Agricultural Marketing Act of 1926. Justice responded that these laws

were not applicable because NBMA's members were not "producers"

entitled to the protection of these laws. It argued that the only
479 United States v. National Broiler Mar keting Association, 1975-2 Trade

Cases (CC H) ¶ 60, 509 (N. D. Ga., September 29, 1975).

480 Geor gia is now pa rt of the 11th Circ uit.

481 National Labor Relations Board v. Strain Poultry Farm s, 405 F. 2d

1025 (5th Cir. 1969). The district court cited a similar Eighth Circuit case

holding an integra ted egg pr oducer was a far mer under th e Fair Labor

Standards Act, W irtz v. Tyson' s Poultry, 355 F .2d 255 (8th Cir. 1966). The

Ninth Circuit had reached a similar conclusion in National Labor Relations

Board v. Ryckebosch, 471 F. 2d 20 (9th Cir. 1972).

179

producers in the broiler industry were the contract growers. Justice

did not challenge the association on any other grounds, so the sole

issue to be litigated was whether NBMA's members wer e "producers"

covered by the cooperative exemptions from antitrust liability.

Much was written and argued during the course of the case about

the amount of involvement and risk of the integrators in broiler

production. However, in view of the basis for the U.S. Supreme

Court' s ultimate resolution of the central issue, these arguments will

be touched on only in passing.

The facts weren' t in dispute, so both sides filed motions for partial

summary judgment. After almost 2 years of legal jockeying, the U. S.

District Court judge granted NBMA’s motion and denied the

Government's motion.479

The district court judge based his decision primarily on two

factors. The first was an opinion of the U.S. Court of Appeals for the

5th Circuit, which included Georgia at the time.480 That case held that

an integrated poultry firm was engaged in "farming" and its truck

drivers who picked up and hauled mature chickens raised by contract

growers to the company processing facilities were "agricultural

laborers" within an exemption from coverage under the National Labor

Relations Act and the Fair Labor Standards Act. 481 The judge noted

that while the NBMA case involved antitrust rather than labor law, the

earlier labor law cases had looked at the overall operation of an

integrator and found it to be a "farmer."

Second, the court relied on the risks of physical loss of the birds

and market price fluctuations borne by the integrators to hold they

were producers qualified to form a cooperative protected by CapperVolstead.
482 1976-1 Trade Cases (C CH) ¶ 60,801 (N. D. Ga., March 16, 1976).

483 National Labor Relations Board v. Bayside Enterprises, 527 F. 2d 436

(1st Cir. 1975), aff' d, 429 U .S. 298 (1977).

484 425 U. S. 970 (1976).

485 429 U. S. 298 (1977).

180

The Government conceded all points not covered by the order of

partial summary judgment and NBMA agreed to the court's issuing a

final decree in its favor, clearing the way for a prompt appeal by the

Government to the 5th Circuit. 482

Unfortunately for NBMA, while its case was pending before the

5th Circuit, one of the linchpins of its defense came undone. Just

weeks after the district court decision in its case, the U.S. Court of

Appeals for the 1st Circuit sustained a National labor Relations Board

(NLRB) determination that under Federal labor law, a fully integrated

poultry firm was engaged in farming in its chick hatchery and breeding

farm operations, but not its feed mill and poultry processing

operations. The court endorsed the NLRB position that truck drivers

delivering feed from the firm's feed mill to contract growers weren’t

working for a farmer or supporting the firm' s farming oper ations.

Thus, the drivers were "employees" and not "agricultural laborers"

exempt from protection under the National Labor Relations Act. 483

The U.S. Supreme Court accepted this labor law case on a writ

of certiorari to resolve any apparent conflict among the various

circuits. 484 Justice Stevens, writing for a unanimous Court, noted that

while good arguments existed to support resolving the issue in favor

of the integrated processor, the issue was close and the Court felt

compelled to defer to the NLRB’s judgment. The Court affirmed the

1st Circuit position that integrator poultry firms were not "farmers" for

labor law purposes when engaged in feed mill and poultry processing

operations. 485 Thus, when the 5th Circuit was ready to decide

NBMA's case, one of its most important precedents had been

overturned.

The 5th Circuit summarized the arguments of both sides and noted

both had a logical appeal. However, it found the Government' s

position to be more in line with the language and purpose of the

Capper-Volstead Act. The court reasoned:
486 Unites States v. National Broiler Mar keting Association, 550 F.2d

1380, 1386 (5th Cir. 1977), rev'g , 1975-2 Tr ade Cases (CC H) ¶ 60, 509

(N. D. Ga., September 29, 1975).

487 550 F. 2d at 1389-1390.

488 434 U. S. 888 (1977).

489 National Broiler Marketing Assn. v. United States, 436 U.S. 816

(1978), aff' g, 550 F .2d 1380.

181

We cannot conceive that the ordinary, popular sense of

the word "farmers" would fit broiler integrator companies....

. . .

NBMA cautions us against a romantic view of agriculture

and points out that agriculture has changed greatly from the

Jeffersonian conception of the self-sufficient yeoman. We

agree that agriculture has changed. But the ordinary,

popular meaning of the word "farmer" has not. When the

common run of people wish to speak of the broader spectrum

of modern agriculture, the word generally used is

"agribusiness. " "Farmer" still means what it meant in 1922-

-one who owns or operates a farm. 486

The 5th Circuit sort of glossed over the fact that until the Supreme

Court' s opinion in Bayside Enterprises only 3 months earlier, its

position had been that the word "farmer" fit broiler integrator

companies, but did note that its opinion in Strain Poultry Farms was

no longer good law. 487

The U.S. Supreme Court, impressed with the importance of the

issue to the agricultural community and for the administration of the

antitrust laws, granted NBMA's request to hear the case.488 Then the

Court majority proceeded, as it often does, to decide the case in the

least intrusive manner possible. Unfortunately, this resulted in a series

of opinions that do not provide clearcut guidance on the issue of what

constitutes a "producer" for Capper-Volstead purposes.

Justice Blackmun wrote a majority opinion signed by six justices

that affirmed the 5th Circuit but on much narrower grounds than the

Government had hoped.489 The majority made several statements that

supported the Government's position that all integrators were outside
490 ". .. not all persons engaged in the production of agricultur al produc ts

are entitled to join together and to obtain and enjoy the (Capper-Volstead)

Act' s benefits... . 436 U .S. at 823.

"The congressional debates demonstrate that the (Capper-Volstead) Act

was meant to aid not the full spectrum of the agricultural sector but, instead,

to aid only those w hose economic positio n rendered them compar atively

helpless." 436 U .S. at 826.

"Clearly, Congress did not intend to extend the benefits of the Act to the

processors and packers to w hom the farm ers sold their goods, even when the

relationship was such that the processor and packer bore a part of the risk."

436 U. S. at 826-827.

491 436 U. S. at 822.

492 436 U. S. at 827.

493 436 U. S. at 822, Case-Swayne v. Sunkist Growers, 389 U. S. 384

(1967). The majority cited Bayside Enterprises even earlier, after the second

182

the scope of agricultural "producers" entitled to protection from

antitrust liability. 490

However, in justifying its affirmation of the 5th Circuit, the

majority latched onto a fact neither litigant had emphasized because it

naturally led to a ruling that did not produce the outcome either

desired. In its introductory summary of the facts of the case, the

majority noted that a small number of NBMA members:

...do not own or control any breeder flock whose

offspring are raised as broilers, and do not own or control

any hatchery where the broiler chicks are hatched... and also

do not maintain any grow-out facility. These members, who

buy chicks already hatched and then place them with

growers, enter the production line only at its later processing

stages. "

491

Rather than attempt to resolve the intricate issue of whether fully

integrated poultry firms were producers, the majority simply said that

members who did not maintain a breeder flock, a hatchery, or a growout facility "were not among those Congress intended to protect by the

Capper-Volstead Act. "

492

The Court had previously cited Case Swayne493 to emphasize that
word of its opinion (436 U.S. at 817). The distinction between operating

hatcheries and breeding flocks (farming) and running a feed mill and

processing plant (not farming) made in that decision seemed to pla y a role in

how the court decided NBMA. But the Court never r eferred to Bayside

Enterprises in the analysis portion of its opinion.

494 436 U.S. at 828-829. In a note, the Court ackno wledges tha t it is

leaving undecided such issues as whether the fully integrated processor that

grows its own br oilers or the integrator that grow s out some b irds wh ile

contracting with independent grow ers to r aise most of the birds pr ocessed in

its facility are producers under Capper-Volstead. 436 U. S. at 828, n. 21.

495 436 U. S. at 840.

496 436 U. S. at 843.

183

all members had to be producers for the association to qualify for

Capper-Volstead protection. Now it concluded that these few NBMA

members "... are not <farmers' as that term is used in the Act, and that

a cooperative organization that includes them--or even one of them--as

members is not entitled to the limited protection of the CapperVolstead Act." 494

In a dissenting opinion, Justice White supported the holding of the

district court that the integrated firms came within the term "producer"

as used in Capper-Volstead.495 He reasoned that integrators are not

mere processors who buy product only when it is ready for

manufacturing. He said that broiler chickens are agricultural products,

integrators own them and support their development with feed and

medicine from when they are chicks until they become dr essed for

retail sale, and thus integrators produce them. 496

Justice White also found public policy support for a limited

antitrust exemption for the integrators. He agreed with the majority

that Congress, in 1922, was focused primarily on the weak market

power of small independent farmers forced to sell to a relatively few

large and powerful buyers. However, he argued that the nature of

agriculture had changed significantly over the years. Now, integrated

poultry firms faced a similar buyers' market. Their product, fresh

poultry, had to be sold within four days of slaughter into a market

dominated by a few large supermarket chains. White accused the ma-
497 436 U. S. at 843-844.

498 436 U. S. at 829.

499 436 U. S. at 832.

500 436 U. S. at 839.

184

jority of failing to interpret Capper-Volstead in light of the changes in

industry organization.497

Justice Brennan agreed with the majority that the case could be

decided on the narrow basis that some NBMA members had no actual

farming operations. However, he felt compelled to write a concurring

opinion in response to the dissent. 498

Justice Brennan endorsed the 5th Circuit decision holding that

integrators were as a class outside the scope of Capper-Volstead. He

agreed with Justice White that agriculture had evolved, but contested

White's conclusion that Capper-Volstead was subject to interpretation

in light of that change. Brennan cited the Senate' s rejection of the

Phipps amendment--to specifically include processors who paid

growers on a formula based on the price the processor received for the

finished product--within the concept of "producer" under the Act. He

said that Congressional intent was ".. .to permit only individual

economic units working at the farm level to form cooperatives... "

covered by the Act. 499

Brennan also asserted that it would be an anomaly to allow

processors to use Capper-Volstead ".. .to disadvantage the contract

grower <producers' who today continue to fall within the conception of

<farmers' Congress envisioned in 1922."500

Thus, National Broiler Marketing Association clears the air at

both ends of the spectrum. Persons who till the soil and raise animals

are "producers" entitled to form marketing cooperatives protected by

Capper-Volstead and other laws designed to limit their exposure to

antitrust liability. And firms who only enter the farm-to-consumer

cycle at the processing stage are not "producers" and are not entitled

to be members of protected associations. But the status of entities in

the large area in the middle of the spectrum--those who engage in some

elements of both production and processing--remains unclear.
501 Alexander v. National Farm ers Organi zation, 687 F. 2d 1173, 1185-

1187 (8th Cir. 1982), cert. denied, 461 U .S. 937 (1983).

502 The trial court opinion is unclear as to the exact rights and privileges

of these nonproducer "members. " NF O asserted that its bylaws prevented

these persons from exer cising any vestiges of membership, but introduced no

evidence it actually enforced the bylaw. On the other hand, no evidence was

produced linking these nonproducer members to the establishment of NFO

policy. First, the judge said he didn't have to decide the issue. Then he went

on to say that if he had ruled, he w ould feel compelled by National Broiler

Marketing Association to hold that NFO was not a producer association

entitled to Capper-Volstead protection. In Re Midwest M ilk Monopolization

Litigation, 510 F. Supp. 381, 425-426 (W.D . M o. 1981).

503 687 F. 2d at 1186.

185

De Minimis Rule for Ancillary Members

When presented with a different set of facts, the 8th Circuit Court

of Appeals carved a modest exception to the rule developed through

Case Swayne and NBMA that even one nonproducer member deprives

a producer association of Capper-Volstead protection.501

The case involved private antitrust claims against a dairy

marketing association that had a small number of nonfarmer members

during the period in dispute. They were not processors or corporate

middlemen, but rather local business people--car dealer, fertilizer

salesman, television salesman, etc.--who were sympathetic to the

problems facing farmers in their community and were signed up by

overzealous association employees. Many considered the $25 dues

assessment to be a donation to help the association succeed.502

The court noted that these nonproducers had no direct inter est in

the association, marketed no milk, and did not assert access to any

antitrust protection. It reasoned that while "no middlemen are to be

permitted to <infiltrate' otherwise exempt cooperatives....(t)he <not

even one' language in National Broiler cannot be divorced from that

Court' s emphasis on the economic role of such middlemen and on the

intent of Congress not to permit such middlemen to participate in

price-fixing." 503

The court said that "the receipt of twenty-five dollars in <dues'

from a handful of individuals is hardly the same as shielding
504 Id.

505 687 F. 2d at 1187.

506 687 F. 2d at 1185. Consider ing how lax many co operative s are in

policing their membership role s to make sure all current members are

producers, this interpretation has probably saved some from an embarr assing

and possibly debilitating c hallenge to their Cappe r-Volstead status. However,

outside of the 8th Circ uit, the issue of harmless non produc er members is still

uncertain.

186

middlemen from price-fixing liability." 504 After attempting to justify

its audacity in carving out an exception to a Supreme Court rule by

saying the facts in the case predated the National Broiler decision, the

court stated that "... NFO's entry into milk marketing exclusively on

behalf of dairy farmers is precisely the kind of cooperative endeavor

that Congress intended not to be subject to antitrust attack." 505 The

court refused to strip NFO of its antitrust protection because it had a

few local supporters as non-producer members resulting from

"ignorance or sloppiness on the part of NFO in policing its

membership roles" 506 rather than a deliber ate attempt to shield

middlemen and processors from antitrust liability.

Is Big Necessarily Bad?

The position is sometimes stated that the Capper-Volstead Act and

the other cooperative exemptions were enacted to protect small,

struggling producers who till the land and not large marketing

corpor ations. This was clearly the viewpoint, for example, of an FTC

administrative law judge. He held members of a cooperative

marketing association who limited their anticompetitive activity to

agreeing on prices were not protected from per se antitrust liability.

Obviously frustrated with the judicial acceptance of corporate

memberships in Case Swayne v. Sunkist, he wrote:

In sum, perhaps Congress should be told that the major

assumptions underlying the (Capper-Volstead) exemption,

itself, are now open to serious question because (1) the

exemption is being claimed by giant agribusinesses, like

United Brands in this case, which have the resources that are
507 Initial decision, administrative law judge, in the Matter of Central

Califor nia Lettuce Producers Cooperative, Federal Trade Commission Docket

No. 8970 (March 13, 1975), at 42; order vacated and complaint dismissed,

Order of the F ederal Trade C ommission, (July 25, 1977).

508 Northern C alifornia Su perm arkets v. Central California Lettuce

Producers Cooperative, 413 F. Supp. 984, 993-994, n. 11 (N. D. Cal. 1976),

aff'd per curiam, 580 F. 2d 369 (1978), cert. denied, 439 U .S. 1090 (1979).

509 Department of Justice Business Review Letter 88-3 (March 17, 1988).

187

far different from those of the small family farmers who

were Congress' concern in 1922;... 507

But this comment was rebuffed by a Federal district court judge

who ruled in a private litigation, based on the same facts, that

producers who only engage in setting prices are protected by CapperVolstead. In a note strongly criticizing the administrative law judge's

opinion on several fronts, the Federal judge commented:

He also expressed the opinion that the statute was

intended to protect small farmers, and it should not be

allowed to shield the activities of giant agribusiness from the

antitrust laws. However, neither section 6 nor CapperVolstead contain restrictions on the size of growers who are

exempted under the Acts. 508

Integrated Entities

Two subsequent rulings have dealt with the issue of whether firms

with both production and processing operations qualify as producers

under Capper-Volstead. Both cast a limited amount of light onto the

overall issue.

In 1988, the Department of Justice issued a favorable business

review letter to an attorney representing fruit and vegetable growers

interested in forming a new producer marketing association, to be

known as the Texas Produce Marketing Cooperative. 509 The facts, as

reported in the letter, provide that membership in the cooperative

would be limited to producers of fruits and vegetables. However, the

letter continued:
510 Id., at page 2.

511 United States v. Hinote, 823 F. Supp. 1350 (S.D. Miss. 1993). The

judge describe d ConA gra and Hormel as " large co nglomer ates with m ulti188

Some members also will maintain facilities for handling,

packing and storing the products, and these members may

assist other members in the handling and marketing of their

products... .At the same time, these members will not be

precluded from acting as agents for the handling and

marketing of products grown by nonmembers of the

Cooperative. 510

The letter then cites the Capper-Volstead Act and states that

Justice had no current intention to challenge the proposed activities of

the association. Thus, at least in this instance, the Department of

Justice was willing to accept an unspecified amount of vertical

integration by producers who wished to qualify their association under

Capper-Volstead.

Sometime in the early 1990s, the Department of Justice brought

criminal antitrust charges against Samuel Hinote, the president of Delta

Pride Catfish, a catfish processing and marketing association owned

entirely by catfish producers. Hinote was charged with conspiring

with other catfish processors and marketers to illegally fix wholesale

prices for catfish. Hinote moved to dismiss the indictment on the

grounds that all of the alleged conspirators were catfish producers and

therefore any collusion that did occur was shielded by the CapperVolstead Act and the Fisherman' s Collective Marketing Act.

Hinote's motion to dismiss asserted that all of the unindicted

coconspirators owned and operated their own catfish production ponds

as well as processing plants and marketing functions. It also stated that

most of the firms involved in any price setting activity were entirely

owned by catfish producers. However, two of the alleged conspirators

were subsidiaries of ConAgra and Hormel, which Hinote admitted

were not owned exclusively by farmers but, he asserted, are

themselves farmers and fishermen under the applicable statutes.

The trial court judge did not agree with Hinote that ConAgra and

Hormel qualified as producers under Capper-Volstead or the

Fisherman's Act. 511 The judge noted that while these firms leased
billion dollar annual sales in the production of a wide variety of food

products." Note 6 at 1353.

512 436 U. S. 816, 829 (1978).

513 823 F. Supp. at 1358-1359.

514 823 F. Supp. at 1360.

515 Ripplemeyer v. National Grape Cooper ative Ass' n, 807 F. Supp. 1439

(W. D. Ark. 1992).

189

ponds and grow substantial quantities of catfish, they also obtained

significant catfish for their processing operations from contract

growers and by purchases from independent producers on the open

market.

He quoted extensively from Justice Brennan's dissent in National

Broiler Marketing Association512 to the effect that fully integrated firms

should not be considered producers for antitrust exemption purposes.

He said that since these two firms did not engage in any collective

handling or processing, but rather acted as " traditional <middlemen,'

the very group which Congress viewed as exploiting the true farmers

it sought to protect under the Capper-Volstead Act. "

513

The judge concluded that since Hinote couldn't establish that

"...'all' of his alleged co-conspirators were privileged to act

collectively under the Capper-Volstead Act, his challenge to the

indictment must fail." 514 (court' s emphasis)

The court conducted a jury trial. Hinote was acquitted, so no

appeals were taken concerning the opinion denying the motion to

dismiss. So, at least one Federal court opinion holds that whomever

Capper-Volstead is intended to protect, it is not fully integrated firms

with independent handling and marketing operations and multi-billion

dollars sales each year.

Processing Subsidiaries

Another element of confusion concerning who is a producer

protected by Capper-Volstead was introduced by dicta in a decision

granting summary judgment to a cooperative charged with illegally

conspiring with its wholly owned processing subsidiary.515 Producer

members of National Grape Cooperative provide concord grapes to the

cooperative which sells them to its wholly owned subsidiary, Welch
516 807 F. Supp. at 1457.

517 Id.

518 389 U. S. 384 (1967).

190

Foods, for processing into grape juice and other consumer pr oducts.

Welch is organized as a cooperative with National Grape as its only

member.

In 1990, National Grape terminated its members in Arkansas and

Missouri because production in that area had decreased to a level that

made it impractical for the cooperative to continue to serve them. The

terminated growers sued National Gr ape on many grounds, including

an allegation that National Grape and Welch conspired to restrain trade

in violation of Section 1 of Sherman. Before addressing the issue,

which the court decided for the cooperative on the basis of general

business law, it discussed the applicability of Capper-Volstead to the

Section 1 charge of conspiracy between National Grape and Welch.

The court began by citing National Broiler Marketing Ass' n and

Case-Swayne for the proposition that "...' middlemen', if infiltrated

into an otherwise exempt cooperative, are not to receive benefit of the

Capper-Volstead exemption in antitrust litigation."516

The court then summized:

In this case, there is no dispute that Welch, a wholly

owned non-stock "cooperative" of National, is a non-farmer

processor. The Court has made clear that when agricultural

industries vertically integrate, including non-farmer

middlemen such as processors, the economic role of these

middlemen exceeds the conduct Congress intended to permit

through the Capper-Volstead exemption. Thus, the court

finds that while the exemption provides a limited immunity

to farm cooperatives from antitrust litigation, the uncontested

nature and relationship of National and Welch foreclose

application of the Capper-Volstead exemption.517

The court is saying that Welch, while a wholly-owned subsidiary

of a Capper-Volstead cooper ative, is a separate nonfarmer processor

not eligible for protection as a Capper-Volstead cooperative. In the

process, the court cited Case-Swayne v. Sunkist518 for the proposition
519 370 U. S. 19, 29 (1962).

520 7 U. S.C . § 291.

191

that a cooperative loses its Capper-Volstead protection if it admits nonproducers as members. Yet it ignored Sunkist v. Winkler & Smith,

which holds a cooperative and its subsidiaries are a single entity for

Capper-Volstead purposes. 519 Also, the court never explained how

National and Welch can be a single entity under general business and

antitrust law, but not under Capper-Volstead.

Nonetheless, the decision casts a cloud over the ability of

subsidiaries of Capper-Volstead cooperatives to enter into joint

marketing agreements with unrelated Capper-Volstead associations.

As further consolidation and integration takes place in the food

industry, including forward integration by traditional farmers, more

questions are likely about whether specific entities qualify as

"producers" for purposes of the Capper-Volstead Act. How future

courts resolve these cases will be a matter of great interest to many

segments of agriculture.

PROTECTED PRODUCER CONDUCT

Determining who is eligible for membership in a Capper-Volstead

protected cooperative is only the first step in interpreting its value to

producers. The second step is defining what conduct is protected from

antitrust liability. The next three sections look at this issue. This

section looks at permitted conduct, the next at conduct outside the

scope of the Act. The third examines the special issue of the extent to

which producers can use their cooperative to gain monopoly power

over a market.

Any Business Structure Permissible

Section 6 of the Clayton Act only applies to agricultural organizations that do not issue capital stock. Section 1 of Capper-Volstead

provides producers may "act together in associations, corporate or

otherwise, with or without capital stock."520
521 Oregon v. Mulkey, 1997-1 Trade Cases (C CH) ¶ 71,859 ( D. Ore.

1997). As frequently happens in antitrust dispu tes involving the G overnm ent,

the parties had negotiated a settlement before the lawsuit was filed. The

published documents are useful, however, in ascertaining the attitude of the

antitrust enforcement officials concerning the conduct under review.

192

Most producer associations claiming Capper-Volstead status are

organized as corpor ations, either with or without capital stock, under

a State cooperative corporation law. A few are organized under a

State general business corporation law and establish their cooperative

characteristics in their articles of incorpor ation and bylaws. Producers

associated as members of the newest form of business entity, a limited

liability company, should also be covered.

The Department of Justice takes the position that producers must

be members of a formal "producer association" before they can agree

on prices and to whom they will sell their production. In early 1997,

Justice and the States of Oregon, California, and Washington entered

into a consent decree agreement with 10 commercial crab fishermen

on the West coast. The defendants were the leaders of fishermen who

had simply reached a mutual understanding not to sell crabs until all

purchasers on the West coast agreed to pay the minimum price set by

the fishermen.

In its competitive impact statement, Justice asserted that this

conduct amounted to price fixing and a horizontal boycott in violation

of Section 1 of the Sherman Act. To be protected from liability, the

fisherman had to be members of a fishermen's marketing association

entitled to the exemption provided by the Fishermen's Collective

Marketing Act of 1934. Under the consent decree, the fishermen were

permitted to continue to set prices and withhold product from the

market to get their price, provided they formed and joined a properly

structured producer association. 521

Joint Marketing

Capper-Volstead authorizes producers to act together " in

collectively processing, preparing for market, handling, and
522 7 U. S.C . § 29 1. T he courts tend to focus on the term "marketing" as

encompassing all of these activities.

523 United Sta tes v. H inote, 823 F . Supp. 1350, 13 54 n. 8 (S. D. Miss.

1993) (Motion to dismiss indictment denied because of possible cons piracy to

restrain trade involving non-producers engaged in processing).

193

marketing" their production.

522 While four steps in the value-added

process are listed in the law, judicial review has focused on the scope

of the term "market."

Some producers have integrated forward to the point of putting

their processed consumer products right on the grocery store shelf--

Land O' Lakes butter, Ocean Spray cranberries, Welch's grape

products, Blue Diamond almonds, etc. Other producers have limited

their group action to negotiating price and other terms of sale for their

raw produce with buyers, or merely agr eeing on the price they will

accept for their product and then arranging their own sales, or only

providing selected services to their members. The courts have

responded with a series of decisions giving the term "marketing" as it

is used in Capper-Volstead a sufficiently broad interpretation to include

each of these associations.

Associations which take title to and process member product into

value-added products for resale have always been treated by the courts

as engaged in processing and marketing protected under CapperVolstead. As the judge in United States v. Hinote noted:

The farmers formed Delta Pride to process and sell their

fish, and thus enable them to receive a larger portion of the

profit realized on the eventual sale of their catfish. If this

case concerned nothing more than the collective actions of

Delta Pride's shareholders/farmers in processing and

marketing their own fish, the court would be compelled to

find their activities exempt from antitrust liability under the

Capper-Volstead Act. 523

Other producer associations--that limit their joint activity to

negotiating contracts covering the terms of sale of member product to

buyers, or who merely agree on a sales price and let the members sell

to whomever they please--hold a unique place in cooperative antitrust
524 Two books are available about the history and operation of agricultural

bargain ing associations. The first is Ralph B. Bunje, Cooperative Farm

Bargaining and Price Negotiations, USDA Cooperative Information Report

26 (1961). The second is Ge rald D. Mar cus, Farm Bargaining Cooperatives:

Group A ction, Greater G ain, U SDA AC S Research Report 130 (1994).

525 Treasure V alley Potato Bargaining Ass'n v. Ore-Ida Foods, Inc. ,

1973-1 Trade Cases (CCH) ¶ 74,315 (D.C. Id. 1971), aff' d, 497 F .2d 203,

214 (9th Cir. 1974), cert. denied, 419 U .S. 999 (1974). 

194

law, and perhaps antitrust law in general. They are probably among

the few organizations to be attacked by both buyers and Government

antitrust enforcers as not engaging in enough anti-competitive conduct

to be protected from antitrust liability. Yet it is in this context that the

court decisions interpret what it means to "market" under CapperVolstead.

Bargaining and Price Setting

Bargaining associations are producer cooperatives that limit their

activity to negotiating transfer prices and other terms of sale (quality

standards, delivery terms, etc.) with buyers of their members'

production. They may either take title to the members' products and

resell them, or serve as an agent with title passing directly from the

producer to the buyer.524

Treasure Valley. The landmark case concerning the CapperVolstead status of cooperative bargaining associations involved western

potato growers. 525 It started as an ill-conceived reaction by the

growers to a serious deterioration in their market. It ended as a major

judicial endorsement of group action by producers.

For some time leading up to the mid-1960s, potato growers in

Malheur County, in southeastern Oregon, initiated pre-season sales

contracts through the Malheur Potato Bargaining Association.

Southwestern Idaho growers negotiated similar contracts through the

Treasure Valley Potato Bargaining Association. The two associations

bargained with two major potato processors, Ore-Ida Foods and the

J.R. Simplot Co., over the price and terms of sale for potatoes deli-
526 1973-1 Trade Cases (C CH) at 93, 465-93,466.

195

vered to their plants at, r espectively, Ontario, Oregon and Caldwell,

Idaho.

The plants were less than 30 miles apart along Interstate 84 where

it crosses the Oregon-Idaho border. Malheur would bargain first with

Ore-Ida at Ontario and when an agreement was reached, Treasure

Valley would ask for and receive essentially the same terms from

Simplot at Caldwell. Malheur would authorize its members to sell to

Simplot according to the Treasure Valley contract and Treasure Valley

would likewise endorse Malheur's contract with Ore-Ida. Growers

were free to sell to whichever processor they preferred and some

growers provided potatoes to both. Both processors were permitted to

buy additional potatoes from nonmember growers.

Officers and members of Malheur and Treasure Valley met

regularly to discuss prices and terms of sale each would seek. In fact,

the entire negotiation process was unusually public. Growers and

processor employees talked openly about the negotiations and

proposals were regularly r eported in the local press.

This process seemed to work fine for an undisclosed length of

time. The district court noted that the processors benefitted by having

an assured supply of product without being subjected to the risks of

open market supply and price at harvest and delivery. Likewise, the

growers had a home for their production and also escaped the vagaries

of open market pricing at harvest. Also, no growers in the country

received higher prices pursuant to pre-season contracts than members

of these two associations. 526

From 1963 through 1966, several factors combined to throw the

supply-demand balance for potatoes grown in the area out of kilter.

The facts are reported in some detail as an example of how changes in

market conditions can disrupt established cooperative marketing

patterns and lead to costly and time consuming litigation.

The most important change was the development of new

technology that permitted water to be taken from the Snake River and

used to irrigate thousands of acres of previously barren land. In 1963,

about 5,500 acres under production in the area. That number jumped

by 57 percent in 1964.
527 1973-1 Trade Cases (C CH) at 93, 470.

196

Any immediate impact on supply was mitigated, however, by

frost and other severe weather conditions in 1964 resulted in a poor

crop that year. Similar production problems developed throughout the

country and in the Spring of 1965, open market prices jumped

appreciably. The cost of seed potatoes for the 1965 crop was also high

and the associations negotiated high pr e-season contract prices.

These high prices and the new availability of water attracted

further increases in production--fostered by large corporate growers

entering the market--of 134 percent in 1965 and 169 percent in 1966.

The product shortfall of 1964 became a surplus in 1965. With the

prospect of huge production surpluses in 1966, previously harmonious

negotiations turned acrimonious. The associations balked at signing

contracts at the prices offered by the processors. By the time contracts

were signed, the processors had met a large portion of their needs

through individual contracts with nonmembers of the associations.

The associations, probably under intense pressure from members

facing low prices and the prospect of product without a home, sued the

processors for conspiring to restrain trade and attempting to

monopolize trade under Sections 1 and 2 of the Sherman Act. The

processors counter-sued the growers on the same gr ounds.

After 4 years of pretrial proceedings, the case was tried without

a jury. First, the judge concluded that the processors had not violated

antitrust law. He found the associations had failed to establish any

concerted action by the two buyers to fix prices or refuse to deal with

their members. He noted that any similarity in the contracts offered

by the two processors was largely in response to demands by the

associations that their members be treated alike.

Second, the judge--with little discussion and analysis--held that the

joint bargaining activity of the associations was immunized from

liability by Section 6 of the Clayton Act.527

Both sides appealed. The U.S. Court of Appeals for the 9th

Circuit affirmed the district court ruling that no illegal conduct had

occurred.

As for the grower claims against the processors, the Court of

Appeals determined that the findings of the trial court were not clearly

erroneous. The growers asserted that the fact that the contracts offered
528 497 F. 2d at 208.

529 497 F. 2d at 215.

197

by the processors were nearly identical established per se a conspiracy

and attempt to monopolize. But the court declined to apply per se

analysis.

The court noted that officials of both firms had rebutted grower

circumstantial evidence of collusion with unequivocal denials. It also

held that the admission of the associations that they "... actively strived

to obtain similar contracts supports the finding that the activity of the

bargaining associations, not of Simplot and Ore-Ida, was the

controlling reason for the similarity of price and contract terms. "

528

Thus, bargaining associations that strive to establish uniform

prices and terms of sale from buyers are on notice that this activity is

a two-edged sword. The courts will likely expect clear and convincing

evidence of buyer anticompetitive behavior aimed at the association

before holding the buyers liable under the antitrust laws.

When assessing the processors' counterclaims against the

growers, the Court of Appeals relied more on the Capper-Volstead Act

than Section 6 of the Clayton Act. The processors' argued that since

the associations did not actually sell the members’ potatoes, they did

not qualify as protected organizations because they did not engage in

any of the functions enumerated in the law (processing, preparing for

market, handling and marketing).

The Court acknowledged that "the associations did not collectively

process, prepare for market, handle or actually sell potatoes (court' s

emphasis)." 529 However, it went on to say:

The activities of the two associations came within the

word marketing.

...

We think the term marketing is broader than the word

sell....The associations here were engaged in bargaining for

the sales to be made by their individual members. This

necessarily requires supplying market information and

performing other acts that are part of the aggregate of

functions involved in the transferring of title to the potatoes.

The associationswerethus performing "marketing" functions
530 Id.

531 15 U. S.C . § 15.

532 Norther n California Supe rmar kets v. Central California Lettuce

Producers Coope rative, 413 F. Supp. 984 (N. D. Cal. 1976), aff'd per

curium, 580 F .2d 369 (1978), cert. denied, 439 U .S. 1090 (1979).

198

within the plain meaning of the term. We see no reason to

give that word a special meaning within the context of the

Capper-Volstead Act. 530

Thus, the court established that producers, who limit their joint

activity to negotiating farm gate prices with potential buyers, are

entitled to the same protection under the Capper-Volstead Act as those

that take title to the product for resale in raw form or for

manufacturing into various value-added items.

Central California Lettuce. On June 10, 1974, two months after

the 9th Circuit opinion in Treasure Valley, the Feder al Trade

Commission (FTC) issued an administrative complaint alleging the

Central California Lettuce Producers Cooperative (Central) and its

grower-shipper members engaged in "unfair methods of competition"

in violation of Section 5 of the Federal Trade Commission Act. 531 But

a private suit by a small chain of retail grocery stores, alleging the

same parties illegally conspired to fix prices for lettuce shipped from

the Salinas Valley in violation of Section 1 of the Sherman Act,

reached final judgment first. The decision established the principle

that producers, who only agreed to a price range for the sale of their

production, are also entitled to Capper-Volstead protection.532

The facts were not disputed in either the FTC proceeding or the

private litigation. Centr al was formed in 1972 as a nonstock

cooperative corporation. It became operational in May, 1973, when

each of its 22 lettuce grower-shipper members had signed marketing

agreements. Under these contracts, members agreed to share

information regarding the actual and expected status of their crops, sell

lettuce within the limits of ceiling and floor prices established through

Central, and report delinquent accounts and chronic complainers to

Central.
533 In the matte r of Central C alifornia Lettuce Producers Cooperative, et

al., F. T.C. Docket No. 8970 (March 13, 1975).

199

An executive committee composed of a representative from each

member met at least once a week and determined the pricing policy the

members would follow for a specified period of time. Central never

shipped, harvested, handled, nor sold any lettuce. Nor did Central

negotiate directly with buyers on behalf of its members. Central had

no employees and no payroll.

Each member of Central conducted its own individual sales

program. Members negotiated and sold lettuce directly to buyers and

payment for the lettuce was billed and collected by each member.

No one disputed that Central's primary function was to set prices

or ranges of prices to which members agreed to adhere in the sale of

their lettuce. In addition, Central members exchanged information on

crop conditions and problems with buyers. They also sponsored some

advertising of lettuce and other special programs to increase lettuce

sales. Members of Central shipped close to 70 percent of the lettuce

produced in the Salinas-Watsonville-King City growing area in

southern California.

The legal arguments in the lettuce cases were similar to those

raised in Treasure Valley. The complaints charged that the growers'

price-fixing activity constituted a combination or conspiracy to

restrained trade, a per se violation of antitrust law. The association

raised Section 6 of the Clayton Act, the Capper-Volstead Act, and

Section 5 of the Cooperative Marketing Act of 1926 as affirmative

defenses. The FTC staff and the supermarket chain responded that

price fixing, with a few minor embellishments, did not constitute

"marketing" of agricultur al products protected by these laws.

The first ruling issued was an initial decision by an administrative

law judge at the FTC.533 The judge held that the members of Central,

when they agreed on a pricing policy and then went their separate

ways to sell their production, were not engaged in "collectively

marketing" their lettuce as required to qualify for protection under

Section 6 of the Clayton Act and Section 1 of Capper-Volstead. He

dismissed the Cooperative Marketing Act defense on the basis that this

language covers the sharing of market information but does not

authorize any setting of prices.
534 Northern C alifornia Supermarkets v. Central California Lettuce

Producers Cooperative, 413 F. Supp. 984 (N. D. Cal. 1976), aff'd p er

curiam, 580 F .2d 369 (1978), cert. denied, 439 U .S. 1090 (1979).

535 413 F. Supp. at 991.

536 413 F. Supp. at 992.

537 Id.

200

The judge noted that the law appears to approve of more

restrictive cooperative arrangements, such as a single person

negotiating the sale of all the members' production, rather than having

22 separate entities selling separately. Nonetheless, he held that

Central was not protected as presently constituted and its price-fixing

activity violated Section 5 of the Federal Trade Commission Act. He

ordered Central dissolved and the members to cease and desist from

price setting.

While Central appealing this decision to the full FTC, a Federal

judge for the Northern District of California issued his decision in the

private litigation brought by the supermarket chain that had purchased

lettuce from members of Central. 534 After a detailed recitation of the

facts and the history of the statutes raised as defenses by Central, this

judge determined that this dispute was controlled by the 9th Circuit

opinion in Treasure Valley.

535 He dismissed the buyer's attempt to

distinguish Treasure Valley on the basis that the potato growers

engaged in collective bargaining while the lettuce growers only set

prices and did their own contract negotiation as "a distinction without

a difference." 536 He went on to say,

...even if Central engaged in no other collective

marketing activities, mere price-fixing is clearly within the

ambit of the statutory protection. It would be ironic and

anomalous to expose producers, who meet in a cooperative

to set prices, to antitrust liability, knowing full well that if

the same producers engage in even more anticompetitive

practices, such as collective marketing or bargaining, they

would clearly be entitled to an exemption.537

The judge granted Central's motion for summary judgment and denied

the supermarket' s motion for summary judgment.
538

 Order of the Federal Trade Commission, In the matter of Central

Califor nia Lettuce Producers C ooperative, et al. , F .T .C . D ocket No. 8970

(July 25, 1977).

539 580 F. 2d 369 (1978).

540 Fairdale Farms v. Yankee Milk, 1980-1 T rade Cases (CC H) ¶ 63,029,

at 77,112 (D. Vt. 1979).

541 1980-1 Trade Cases (C CH) ¶ 63,029 at 77, 115.

201

Although the briefs in the administrative appeals had been filed

before the District Court opinion was issued, the FTC waited another

18 months before issuing its decision. The Commission eventually

acquiesced to the logic and conclusions of the district court, vacated

the order of its administrative law judge, and dismissed the

complaint. 538

The following year, the U.S. Court of Appeals for the 9th Circuit,

in a one-paragraph per curiam opinion that cites the full FTC decision,

affirmed the district court ".. .for the reasons stated by the trial

judge.. .. "

539

Other courts quickly adopted these decisions. In the Yankee Milk

case, plaintiff Fairdale Farms conceded that Yankee Milk could fix the

price its members charged for their milk. However, Fairdale Farms

argued the Regional Cooperative Mar keting Association (RCMA), a

federated cooperative association organized for the sole purpose of

fixing prices charged its member cooper atives, is not entitled to

Capper-Volstead protection. The district court held that RCMA was

entitled to Capper-Volstead status as either an "association" or a

"marketing agen[t] in common." 540

Citing Treasure Valley and Central California Lettuce, the court

granted Yankee's motion for summary judgment on the price fixing

charge, stating, "The reasoning of these cases is highly persuasive; we

hold that section 1 of the Capper-Volstead Act exempts from the

constraints of section 1 of the Sherman Act a qualified agricultural

organization that does nothing but fix prices. "

541

On appeal, the U. S. Court of Appeals for the 2nd Circuit affirmed

the district court on the price fixing issue regarding both Yankee Milk

and RCMA, stating, "It would be strange indeed if participation in this

portion of the marketing process, standing alone, would subject a
542 Fairdale Farms v. Yankee Milk, 635 F. 2d 1037, 1040 (2nd Cir. 1980).

543 United States v. Dairym en, Inc., 660 F. 2d 192, 194, (6th Cir. 1981).

544 Northern C alifornia Su perm arkets v. Central California Lettuce

Producers C ooperative, 413 F . Supp. 984, 993. (N. D. Cal. 1976).

545 Agritronics Corp. v. National Dairy Herd Ass' n, 1994-2 Trade Cases

(CCH ) ¶ 70,758 at 73, 198 (N. D. N. Y. 1994).

202

cooperative to antitrust liability, when the exercise of the full range of

activities covered by Capper-Volstead would not." 542

The 6th Circuit accepted these rulings in a Government case

against Dairymen, Inc. It said that Capper-Volstead ".. .permits an

agricultural association to be formed solely to fix the price at which its

members products are sold." 543

Thus, it is established that producers who limit their collective

marketing activity to negotiating on a group basis, or who even do as

little as agreeing on the prices they will accept for their products, are

protected from antitrust liability for price fixing.544

Marketing Service Associations

At least one court has held that producer associations that only

provide services that facilitate member marketing of their products

engage in "marketing" member product. The associations under

attack, Dairy Herd Improvement Associations, (DHIAs) test the

physical and production characteristics of member dairy cattle and

prepare reports of the test results. These reports are used by members

to manage the makeup of their herds and to help establish value when

an animal is sold by one producer to another. After quoting the

"marketing is broad" language of the Ninth Circuit in Treasure Valley,

the court concluded that an association that tests milk and provides

milk production records to dairy farmers ". .. has clearly demonstrated

that it is performing a <marketing' function within the meaning of the

(Capper-Volstead Act). "

545

In a later decision, the same judge dismissed evidence submitted

by plaintiffs that the managers of the defendant DHIAs didn't think

they were engaged in marketing. The court stated, "Plaintiffs rely on

the opinions of lay witnesses for what essentially are legal conclusions.
546 Agritonics Corp. v. N ational Dairy Herd A ss' n, 914 F . Supp. 814,

824-825 (N.D . N .Y. 1996).

547 Id. at 825.

548 7 U. S.C . § 291.

203

While the general managers and CEOs of the cooperatives may not

believe that they <market' produce under their definitions of the word,

most courts would beg to differ."546

The court then r epeated its earlier reference to Treasure Valley

and again concluded the associations were "marketing" as the term is

used in Capper-Volstead.547

Association Collaboration

The Capper-Volstead Act not only permits producers to act

together in cooperative marketing "associations" but also provides that

"Such associations may have marketing agencies in common.. .. "

548

Like other key terms, neither " association" nor "marketing agency

in common" is defined in the Act. This has led to litigation alleging

both complex internal structures of a cooperative and agreements

between separate cooperatives are outside the protection of CapperVolstead.

Complex Cooperative Structures

The classic textbook description of a cooperative is a group of

producers who form a corpor ation to operate on a cooperative basis.

Each producer is a member-owner and the cooperative provides

services to the membership. Many cooperatives are organized along

this simple owner-entity model. They are referred to as centralized

cooperatives. No matter how large or diverse a centralized

cooperative may become, it still maintains the two-level structure of a

group of members directly owning a single cooperative.

Other producers have developed more complex organizational

structures. They formed smaller, locally owned and controlled

centralized cooperatives. Then these cooperatives formed another

cooperative venture, pooling their resources to enter lines of business

beyond the ability of a single local cooperative. This "co-op of coops" is often referred to as a federated cooperative. Several layers of
549 Sunkist Growers, Inc. v. W inckler & Smith Citrus Pr oducts Co., 284

F. 2d 1 (9th Cir. 1960), rev'd , 370 U .S. 19 (1962). See pages 169, 172-176

for discussion of the Sunkist "producer" issue.

204

organization can develop when these "federateds" form other "co-ops

of co-ops" such as CF Industries and CoBank.

Still more complexity can enter the picture when either a

centralized or federated cooperative forms one or more subsidiaries or

other affiliated entities. A single group of producers may own and

control the entire organization under a legal structure far more intricate

than the simple centralized model.

Complex structures are not necessarily a recent development.

Sunkist, the well known marketer of oranges and other citrus fruit,

had such a structure in the early 1900s before Capper-Volstead was

even enacted. A major antitrust case that reached the U. S. Supreme

Court considered the impact of Sunkist' s structure on its memberproducer' s antitrust status under Capper-Volstead. 549

Sunkist was born out of a severe depression from 1890-1893 in

the California citrus industry. Overproduction and a marketing system

incapable of moving fruit to markets on the east coast at a profit led

growers to convene and organize a system of local packing facilities

and a centralized marketing arm owned and controlled by the packing

"sheds". Thus, from its inception more than 100 years ago, Sunkist

operated as a federated cooperative.

In 1915, several Sunkist members that handled lemons decided to

develop and market processed products from lemons that weren't

suitable for the fresh market. This was a new and risky venture and

not all Sunkist members were interested in participating. So, a

separate cooperative, Exchange Lemon, was formed. The following

year a second new cooperative, Exchange Orange, was formed by a

different mix of Sunkist members to develop and market processed

products from oranges also unfit for the fresh market.

In 1931, the Sunkist board of decided to make the processing

facilities of Exchange Orange available to all its members by

purchasing it and operating it as a wholly owned subsidiary. The

products of Exchange Lemon (an affiliated cooperative) and Exchange

Orange (a wholly owned subsidiary) were marketed by a products divi-
550 370 U. S. at 21-22.

205

sion established within Sunkist (a federated cooperative) and overseen

by directors of Exchange Lemon and Exchange Orange.550

Shortly after World War II, the Sunkist family and four

independent companies--TreeSweet, Silzle, Winckler & Smith, and

Case-Swayne--produced and marketed citrus byproducts, including

canned orange juice. Sunkist members produced about 70 percent of

the oranges grown in California during this period. The other firms

were primarily dependent on Sunkist for their supply of by-product

oranges.

Sunkist's legal problems began with the bankruptcy of one of

these firms, Winckler & Smith. It began operating in 1946, when it

had purchased much of it by-product orange needs from Sunkist.

Purchases from Sunkist declined over the next few years.

The 1951 harvest produced a record tonnage of byproduct quality

oranges. Sunkist sold a modest amount of this product to outside

purchasers for use in orange concentr ate and turned the rest over to

Exchange Orange. The fruit delivered exceeded Exchange Orange's

manufacturing capacity. It turned some of the excess over to

Exchange Lemon at cost for processing into orange juice. The

remainder was sold to two of the four independent processors,

TreeSweet and Silzle, for processing into orange juice. The fruit sales

were at distress prices which virtually guaranteed a profit would be

realized by TreeSweet and Silzle.

Apparently Case-Swayne decided to meet its needs from sources

outside of Sunkist. Winkler & Smith also attempted to meets its needs

through an independent broker. However, the fruit supplied was not

suitable for processing into the product Winckler & Smith wanted to

produce, single strength Valencia orange juice. Sometime into the

marketing year Winckler & Smith asked Sunkist to provide it with

byproduct oranges. Sunkist, which by now had a "home" for all of its

members' fruit, refused. Winckler & Smith was unable to produce

single strength orange juice in 1951 and subsequently filed for

bankruptcy.

The trustee in bankruptcy brought an antitrust complaint seeking

treble damages from Sunkist and Exchange Orange as defendants and
551 362 U. S. 458 (1960).

206

Exchange Lemon, TreeSweet and Silzle as co-conspirators. The

complaint raised three ar guments:

1. Sunkist and Exchange Orange' s refusal to sell to Winckler &

Smith was designed to eliminate Winckler & Smith as a competitor and

therefore constituted a conspiracy to restrain trade in violation of

Section 1 of the Sherman Act

2. Sunkist and Exchange Orange's agreement to sell product to

the coconspirators but not to Winckler & Smith was also a conspiracy

to restrain trade designed to eliminate Winckler & Smith as a

competitor and a violation of Section 1 of the Sherman Act.

3. Sunkist and Exchange Orange monopolized the relevant

market, single strength Valencia orange juice, and used their monopoly

power to eliminate Winckler and Smith as a competitor in violation of

Section 2 of the Sherman Act.

Sunkist attempted to establish two justifications for its refusal to

deal with Winckler & Smith. The trial judge permitted it to introduce

evidence that it didn't need to do business with Winckler & Smith

because TreeSweet and Silzle were willing and able to process all of

the product Exchange Orange sent them. The judge refused, however,

to allow evidence that Sunkist didn' t want to deal with Winckler &

Smith because it had good reason to believe the firm was selling

adulterated and watered down product and therefore hurting the overall

market for members' orange-based products. Sunkist and Exchange

Orange also denied that they had a monopoly in the single-strength

orange juice market.

The judge sent the case to the jury with a complex set of

instructions that permitted the jury to deliver a general verdict for

Winckler & Smith without specifying exactly how it determined

Sunkist violated the Sherman Act. The jury awarded Winckler &

Smith damages of $500,000, which were trebled to $1,5 million.

Sunkist challenged various rulings and jury instructions to the

U.S. Court of Appeals for the Ninth Circuit. That court held the case

until the U.S. Supreme Court had ruled in Maryland & Virginia Milk

Producers v. United States.

551 In a lengthy opinion that primarily

recites the facts and allegations of the case and discusses various ques-
552 Sunkist Growers v. Winckler & Sm ith Citrus Products, 284 F. 2d 1

(9th Cir. 1960).

553 284 F. 2d at 7-9.

554 284 F. 2d at 15.

555 284 F. 2d at 17.

556 Id., citing Klor' s v. Broadway-H ale Stores, 359 U. S. 207 (1959).

557 284 F. 2d at 22.

207

tions of the admissibility of evidence, the appellate court affirmed the

trial judge's decision to send the case to the jury. 552

First, the court focused on Sunkist's defense that it was shielded

from antitrust liability by Sec. 6 of the Clayton Act and Sec. 1 of the

Capper-Volstead Act. The court noted that Maryland & Virginia Milk

Producers made it clear that neither act provides a "blanket"

exemption for a cooperative to either monopolize or r estrain

competition. Thus it was proper for the jury to consider whether an

antitrust violation had occurred. 553

On the issue of Sunkist's refusal to deal with Winckler & Smith,

the court acknowledged that as a general rule a business has the right

to choose whom it will buy from and sell to without interference from

the courts, citing United States v. Colgate, 250 U. S. 300 (1919). But

the court also said this "right. .. cannot be taken as an absolute." 554 It

must be exercised to achieve " lawful marketing objectives. "

555

The court said that the case involved allegations of a concerted

refusal to deal by some members of an industry with other members

of the industry. This can involve a "group boycott" long held to be

illegal under the law. 556 The court thus found that whether the refusal

to deal violated the Sherman Act had also been properly left to the

jury.

Sunkist challenged certain instructions that permitted the jury to

find an illegal conspiracy between itself and only Exchange Orange or

Exchange Lemon. The court upheld the instructions on the basis that

different cooperatives could just as easily conspire illegally among

themselves as could different individuals. For support, the court

quoted language from Maryland & Virginia that the cooperative

exemptions cover a "group of farmers acting together as a single

entity...."557 (court' s emphasis)
558 284 F. 2d at 27-30.

559 284 F. 2d at 34.

560 Sunkist Gr owers v. W inckler & Smith Citrus Products, 368 U. S. 813

(1961).

208

Sunkist also challenged the trial judge's ruling on the admissibility

of evidence that Winckler & Smith's juice was watered down and

adulterated. The court found it should have been admitted on the issue

of damages, but not on the issue of liability.558 In conclusion, the court

affirmed the jury's verdict on the issue of liability, and reversed and

remanded on the issue of the amount of damages. 559

The U.S. Supreme Court granted certiorari on the issue of

whether dealings among the three cooperatives were insulated from

antitrust liability.560 After summarizing the facts and arguments, the

Court reached a conclusion favorable to the producers and their

cooperatives. The Court said:

We are squarely presented, then, with the question of

whether Sunkist, Exchange Orange, and Exchange Lemon--

the three legal entities formed by those 12,000 growers--can

be considered independent parties for the purposes of the

conspiracy provisions of §§ 1 and 2 of the Sherman Act.

We conclude not.

...

There can be no doubt that under these statutes the

12,000 California-Arizona citrus growers ultimately involved

could join together into one organization (court's emphasis)

for the collective processing and marketing of their fruit and

fruit products without the business decisions of their officers

being held combinations and conspiracies. The language of

the Capper-Volstead Act is specific in permitting concerted

efforts by farmers in the processing, preparing for market,

and marketing of their products. And the legislative history

of the Act reveals several references to the Sunkist

organization.... Although we cannot draw from these

references a knowing approval of the tripartite legal

organization of the 11,000 growers (in 1922), they do indi-
561 Sunkist Growers v. Winckler & Smith Citrus Products, 370 U. S. 19,

27-29 (1962).

562 370 U. S. at 30.

209

cate that a cooperative of such size and general activities was

contemplated by the Act.

...

...the 12,000 growers here involved are in practical effect

and in the contemplation of the statutes one "organization"

or "association" even though they have formally organized

themselves into three separate legal entities.. ..That the

packing is done by local associations, the advertising, sales,

and traffic by divisions of the area association, and the

processing by separate organizations does not in our opinion

preclude these growers from being considered one

organization or association for purposes of the Clayton and

Capper-Volstead Acts. 561

The Court then said that a general verdict prevents a reviewing

court from determining which theory was the basis for the jury's

decision. The verdict in this case may have rested on a legally

erroneous finding of unlawful conspiracy among the three

cooperatives, so it must be reversed. The Court held that this ruling

made it unnecessary to explore other issues in the case, such as

whether the relationship among the cooperatives, TreeSweet, and

Silzle amounted to an illegal conspiracy to restrain trade. It

concluded,".. .our decision in no way detracts from earlier cases

holding agricultural cooper atives liable for conspiracies with outside

groups" (citing Borden and Maryland & Virginia Milk Producers). 562

The ability of individual cooperatives to form a federated

cooperative was affirmed in a subsequent case involving the egg

industry. United Egg Producers, a federation of five regional egg

marketing cooperatives, sought a preliminary injunction against Bauer

International Corporation, an import-export business. United Egg

alleged Bauer issued knowingly false and misleading reports that it was

to import a significant shipment of eggs with the intent of driving down

the price of eggs in interstate commerce, a violation of the Commodity
563 7 U. S.C . § 1 et seq.

564 United Egg Produce rs v. Bauer International Corporation, 311 F.

Supp. 1375, 1385 (S.D. N. Y. 1970).

565 United Egg Produce rs v. Bauer International Corporation, 312 F.

Supp. 319, 320 (S.D. N. Y. 1970).

566 Hudson' s Bay Co. v. American L egend Cooperative, 651 F. Supp.

819, 839 (D. N .J. 1986) (mink marketing association); Ripplemeyer v.

National Grape Coope rative Association, 807 F. Supp. 1439, 1459 (W.D.

Ark. 1992) (grape marketing association).

210

Exchange Act. 563 Bauer counterclaimed that the members of United

Egg were not entitled to equitable relief because they did not come to

court with "clean hands." Bauer alleged the egg cooperatives were

trying to manipulate the market upward through a variety of schemes

that violated the antitr ust laws.

In the first of two opinions, the U.S. District Court for the

Southern District of New York granted United Egg's request for an

injunction barring Bauer from issuing misleading reports. The judge

found that possible antitrust violations by plaintiffs wer e no defense

against the granting of a preliminary injunction that would clearly

protect the public from unscrupulous conduct. 564

In the second opinion, issued little more than a month later, the

court granted United Egg's request for summary judgment on the

antitrust allegations. The court found all evidence indicated the five

members of United Egg were associations of producers entitled to

protection under the Capper-Volstead Act. Although United Egg

controlled nearly 55 percent of the eggs marketed in the United States,

its members' agreements on prices and marketing strategies were

immune from attack under the Sherman Act. 565

Subsequent decisions have also held that a marketing cooperative

and its wholly owned subsidiary are a single entity for purposes on

analyzing whether a conspiracy exists in violation of Section 1 of the

Sherman Act. As a single entity, the courts have found them incapable

of conspiring in violation of the Sherman Act. 566

Cooperation Among Cooperatives

Sometimes cooperatives choose to remain separate and

independent associations but to work together, or to hire a common
567 7 U. S.C . § 291.

568 Farm ers' Livestock Comm ission Co. v. United States, 54 F. 2d 375,

377 (E.D . Ill. 1931).

569 Agricultural Act of 1961, P ub. L. No. 87-128, 75 Stat. 294.

570 S. 16 43, 87th Con g., 1st Sess. § 401(a)-(b) ( 1961). The spec ific

language of these provisions is printed at 107 Cong. Rec. 13, 225 (1961).

571 107 Cong. Rec. 13, 261-62 (1961) (remarks of Senator Ellender); 107

Cong. Rec. 14, 519 (1961) (remarks of Senator A iken).

572 107 Cong. Rec. 14, 565 (1961).

211

outside agent, to further their business objectives. These strategies are

also protected by the "marketing agencies in common" language in

Section 1 of Capper-Volstead. 567

This provision was noticed with approval in an early decision

upholding the Secretary of Agriculture's power to enforce the Packers

and Stockyard Act of 1921. The case involved an alleged refusal of

certain livestock dealers to do business with the common agent formed

by eight producers associations to secure orders for their members'

livestock. The court said the use of the common agent:

...gives to its eight constituent owners, the Producers

Companies, an approach of their own to the nonresident

market without dependence upon the old line order buyers,

and realizes for them and their members profits that would

otherwise go to the old line order buyers. Such an agency,

owned by co-operative associations in common, is authorized

by the Capper-Volstead Act, § 1. 568

Congress restated its support for joint marketing activity by

cooperatives during consideration of the Agricultural Act of 1961.569

The Senate version included two provisions570 reaffirming the national

policy of encouraging agricultural cooperatives and expr essly

permitting two or more cooperatives to perform acts that individual

cooperatives could lawfully perform. 571 The conference committee did

not include this Senate language in the final version of the legislation

because the committee believed it was "a mere restatement of existing

law." 572 However, the House managers agreed to include the language
573 107 Cong. Rec. 14, 521 (1961) (remarks of Senator Holland,

describing the House managers' statement).

574 United States v. Maryland Cooperative Milk Producers, 145 F. Supp.

151 (D.C . D. C. 1956). The other defendant was a frequen t target of the

Justice Department at the time, the Maryland and Virginia Milk Producers

Association.

575 The judge was not receptive to the Government' s case and issued a

terse opinion short on both fac ts and a description of the parties' positions.

576 Both defendants were farmer cooperatives organized without capital

stock and otherwise covered by Clayton § 6. After the quoted language, the

judge cited both Capper-Volstead and the Cooperative Mar keting Act of 1926

for reinfor cing Con gressiona l intent to allow co operative s to jointly set prices.

212

in the committee report, to provide guidance to courts as to

Congressional intent in any future litigation.573

The issue sometimes arises as to whether otherwise competing

cooperatives must organize a formal "agency in common" or whether

they can simply share information and discuss prices and other terms

of sale among themselves. The Government has occasionally taken the

position that cooperatives may not agree among themselves on the

prices they will charge for their member products. The courts have

uniformly rejected this argument.

The first such case involved an antitrust suit brought against two

dairy cooperatives for engaging in an unlawful conspiracy to fix the

price of milk they sold to distributors supplying Fort Meade, a military

base in Maryland. 574 Apparently the Government's argument was that

while producers can set prices as members of a single cooperative, a

price setting agreement between two otherwise competing cooperatives

is not protected from prosecution under the antitrust law. 575 After the

Government introduced a stipulation of facts previously agreed to by

the parties, the cooperatives moved for a judgment of acquittal.

The judge, relying heavily on Sec. 6 of the Clayton Act, granted

the cooperatives' motion.576 He found:

The obvious purpose of the Clayton Act was to liberate

combinations of farmers and their cooperative organizations

from the prohibitions of the antitrust laws as long as they do
577 145 F. Supp. at 153-154.

578 Treasur e Valley Potato Bar gaining Ass' n v. Or e-Ida Foods, Inc. , 497

F. 2d 203, 214 (9th Cir. 1974), aff' g, 1973-1 Trade Cases (C CH) ¶ 74,315

(D.C. Id. 1971), cert. denied, 419 U .S. 999 (1974).

213

not combine with others who are outside of this category. It

seems immaterial whether a large group of farmers organizes

a single organization or divides itself into several

organizations. Their joint activity, whether in the form of a

single association or two or more associations, is not an

illegal combination in restraint of trade in the light of the

provisions of the Clayton Act. Surely, the legality of the

actions of a group of farmers should not depend on such a

nebulous consideration as the question whether they found it

convenient to organize a single large cooperative or two

smaller groups. The effect of the joint action is the same in

either event and should be tested by the same yardstick. The

exemption should be construed as applicable to a group of

farmers irrespective of whether they are joined into a single

cooperative or into sever al cooperative associations acting

jointly. Any other construction would result in partially

defeating the intent of the Congress and frustrating the

meaning of the Act. 577

In the Treasure Valley case, the U.S. Court of Appeals for the 9th

Circuit found that a separate agency was simply not necessary for

producer associations to act together in marketing member product.

It reasoned:

If Section 1 of the Capper-Volstead Act, 7 U.S.C. § 291,

permits a common marketing agency, separate from the

cooperatives themselves, it would follow that without such a

separate agency, the associations may act together in

marketing and make the necessary contracts to accomplish

their legitimate purpose. If an act of the agent is lawful, the

same act performed by the principal is also lawful.578 (court's

emphasis)
579 7 U.S.C. § 45 5, cited, 497 F .2d at 214.

580 Fairdale Far ms v. Y ankee Milk, 1980-1 Trade Cases (C CH) ¶ 63,029,

at 77,113-77, 115 (D. Vt. 1979), aff' d, 635 F.2d 1037, 1039-1040 (2d Cir.

1980).

214

The court found support for its decision in Section 5 of the

Cooperative Marketing Act of 1926, which authorizes producers and

their associations to gather and share market information.579

Federal courts in New England reached the same conclusion in a

private litigation by a dairy processor attacking the legality of a

federation of seven dairy cooperatives whose only pur pose was to

serve as a forum for its members to agree on a common pricing policy.

The courts granted the federated's motion for summary judgment on

the basis that Capper-Volstead protected producers against the

processor's claim that multiple cooperatives can not engage in a price

setting endeavor. 580

A U.S. district court in California reached a similar result in an

antitrust case filed by a privately-owned tomato canner and processor

against the California Tomato Growers Association, a producer

bargaining association, and two cooperative canners. The private

canner alleged the three grower cooperative associations fixed the

price of canning tomatoes in violation of Section 1 of the Sherman Act

and attempted to monopolize the California canning tomato market in

violation of Section 2 of Sherman. The court didn' t discuss the armslength negotiation that takes place when a bargaining association and

a processing cooperative agree to a sales contract. Rather, it simply

ruled that whatever price fixing and attempts to monopolize may have

occurred were protected by Capper-Volstead:

In short, that which agricultural producers may combine

to accomplish within a single association, they may lawfully

combine to achieve by way of multiple organizations.

... 

...since price fixing is a legitimate Capper-Volstead

purpose, and since two or more agricultural associations may

act together in the furtherance of such legitimate activities,

the alleged conduct of Tri-Valley, Cal-Can and CTGA is

protected from the dictates of Sherman Act § 1.
581 GVF Cannery v. California Tomato Growers Ass' n, 511 F . Supp.

711, 714 (N. D. Cal. 1981).

582 511 F. Supp. at 715.

583 United States v. Dairym en, Inc., 660 F. 2d 192, 194, (6th Cir. 1981).

See also, F airdale Farm s v. Yankee Milk, 1980-1 T rade Cases (CC H) ¶

63,029, at 77,113 (D. Vt. 1979), aff' d, in p ert. part, 635 F .2d 1037, 1039 (2d

Cir. 1980).

215

...

Just as Capper-Volstead protects certain conduct from §

1 of the Sherman Act, it also shields certain combinations or

conspiracies to monopolize between or among agricultural

associations from the limitations of Sherman Act § 2.581

The court also noted that since a single cooperative may lawfully

acquire 100 percent of a market, two or more associations working

together may also gain such monopoly power, so long as they do not

employ predatory pr actices. 582

Finally, the courts have combined the holdings of Treasure Valley

and Central California Lettuce to hold that two or more cooperatives

"can voluntarily join together solely for the purpose of setting uniform

prices for their members." 583

One example of cooperation among cooperatives that has been

repeatedly challenged as anticompetitive is the dairy cooperative

standby pool. The standby pool isn' t a pool of milk, but rather a pool

of money, contributed by member cooperatives to a joint venture they

own. Normally the contributing cooperatives serve markets (usually

in the south) that have times during the year (usually in the fall) when

consumer demand exceeds the amount of milk their members produce.

Pooled funds are used to purchase options to buy milk from areas that

normally have excess production, such as Minnesota and Wisconsin.

If pool members need milk and the option price is below the

current market price, they exercise their options and milk is shipped

to them for resale to their customers. If they don't need the milk or if

milk can be purchased for less elsewhere, the options are allowed to

expire and the owners of the milk process it into other dairy products

such as butter and cheese. The standby pool operates like an insurance
584 Ewald Bros. v. Mid-America Dairymen, 877 F.2d 1384 (8th Cir.

1989).

585 During the early part of the period co vered in the litigation, the pool

was organized as a loose association of co-ops bound together by c ontract.

Later, it was reorganized as an incorporated federated cooperative. So the

court' s findings apply to e ither or ganizational a rran gemen t.

586 877 F. 2d at 1390. The court never specifically says the coopertives

providing surplus milk we re mem bers of the pool, so we are left to assume

that either they were or the cou rt didn' t care be cause they w ere eligible to

216

policy, making sure the cooperatives and their customers have an

adequate supply of fresh milk at all times.

While earlier cases had mentioned standby pools as part of a much

broader inquiry, one case dealt almost exclusively with the legality of

the standby pool. 584 Ewald Brothers, a fluid milk bottler, was unhappy

at having to pay more than the Federal order minimum price for milk.

It sued Mid-America Dairymen (Mid Am), the cooperative that

supplied its milk, on the grounds that the Mid Am’s participation in the

standby pool amounted to a violation of the Sherman Act.

Mid-Am answered that the standby pool was protected by the

Capper-Volstead Act. Ewald countered that the pool's claim of

Capper-Volstead status was tainted by participation of noncooperative

dairies in its activities. Ewald also alleged that the pool wasn't really

operated to provide a smooth supply of milk to consumers but rather

as a tool to maintain monopoly prices.

Mid-Am admitted that the pool entered into options contracts with

two or three proprietary dairies. However, Mid-Am placed the

majority of its options with producer-owned cooperatives. And it

proved that the pool was owned and controlled entirely by its producer

cooperative members. 585

In an unpublished opinion, the trial court granted Mid-Am's

request for summary judgment on all issues. The U. S. Court of

Appeals for the 8th Circuit had little difficulty in affirming that

decision. The appellate court found that the standby pool was totally

owned and controlled by producer associations and that it was free,

under Section 1 of Capper-Volstead, to sign contracts that facilitated

its objective of collectively marketing its members' products, so long

as the majority of the products handled came from members. 586 The
become mem bers if that was necessary.

587 Kinnett Dairies v. Dairym en, Inc., 512 F. Supp. 608, 633, 643 (M.D.

Ga. 1981).

588 Alexander v. NFO , 687 F .2d 1173, 1206-1207, (8th Cir. 1982).

589 877 F. 2d at 1394.

590 7 U. S.C . § 291.

217

fact that it bought a limited amount of milk from nonproducers fell far

short of the level of nonproducer involvement that would threaten the

pool's Capper-Volstead status.

The court also summarily dismissed Ewald's assertion that the

pool unlawfully raised prices to purchasers from Mid-Am. The court

cited earlier decisions involving this same standby pool by a district

court in Georgia587 and this court itself

588 holding the pool served the

legitimate purpose of providing additional supplies of milk as needed

in response to fluctuating consumer demand. While the pool may have

enhanced its members' ability to set prices, Ewald had failed to

introduce any evidence that the pool actually fixed prices or was

operated with predatory or anticompetitive intent. Thus, there was no

genuine issue of material fact to be tried and Mid-Am was entitled to

summary judgment. 589

These cases illustrate the substantial flexibility available to

producers in structuring their cooperative marketing operations. They

can use a single, centralized cooperative with a simple structure; join

centralized cooperatives together into one or more federated

cooperatives; form subsidiaries of either centr alized or federated

cooperatives; have their associations remain independent but hire a

common agent to facilitate their marketing; or have their independent

associations exchange information and agree on prices and other terms

of sale they will accept without any further coordination.

Necessary Contracts and Agreements

Section 1 of Capper-Volstead also provides that producer associations may "make the necessary contracts and agreements" to achieve

their marketing objectives. 590 Associations and producers can enter

into binding marketing agreements among themselves and have normal
591 Mar yland & V irginia Milk Producers Ass' n v. U nited States, 193 F. 2d

907, 915-917 (D.C . Cir. 1951) (full supply contracts with customers

approved). See also, Alexander v. N ational Farmers Organization, 687 F. 2d

1173, 1188 (8th Cir. 1982) (Normal business contracts with haulers and

processors to further direct mar keting efforts do n ot support a claim that the

cooperative conspir ed with these entities in violation of the antitrust laws. )

592 7 U. S.C . § 291.

593 See, U nited States v. Maryland & Virginia Milk Producers, 167 F.

Supp. 45, 52 (D.C. D.C. 1958), where the court noted the Capper-Volstead

"immunities relate solely to agricultura l products. If an organiza tion.. .sho uld

step outside of that field a nd carr y on business in products of a different

nature, then...Capper-Volstead...would not apply." 

218

contractual arrangements with others without running afoul of the bar

on "contracts" that restrain trade in Section 1 of Sherman.591

Statutory Limitations

Section 1 of the Capper-Volstead Act contains a short list of

limitations on association organization and operation. These are

designed to insure that the association operates in the best interests of

its members as agricultural producers, and not for the benefit of

investors. Compliance with these rules is critical for producers

wishing to use the marketing flexibility Capper-Volstead provides.

Mutual Benefit as Producers

The first limit on producer associations requires that they be

"operated for the mutual benefit of the members. .. as... producers. "

592

Capper-Volstead does not protect persons engaging in conduct not

directly related to tilling the soil or raising animals. For example, all

of the road builders in an area can't each plant a tomato patch beside

their parking lots and form a vegetable marketing association as a

vehicle to rig bids on construction contracts. They can agree on the

price they will accept for their tomatoes, but not the fees they will

accept for construction work.593

Plaintiffs in private antitrust cases have asserted that an

association that does not return earnings to member-patrons based on

the amount of business each does with the cooperative during the year
594 Waters v. N ational Fa rme rs Or ganization, 32 8 F. Supp. 1229, 1245

(S.D. Ind. 1971); Alexander v. National Farmers O rganization, 687 F. 2d

1173, 1184-1185 (8th Cir. 1982).

595 7 U. S.C . § 291.

596 United States v. Maryland & Virginia Milk Producers Ass'n, 167 F.

Supp. 45, 50 (D.C. D.C. 1958); aff'd in part and rev'd in part on other

grounds, United States v. Mar yland & Virginia Milk Producers Ass' n, 362

U. S. 458 (1960).

597 Agritronics Corp. v. National Dairy Herd Ass'n, 914 F. Supp. 81 4

(N. D. N. Y. 1996), wherein the court said, "Despite plaintiff's protestations

to the contrary, it is not always necessary that a cooperative be strictly <one

member, one vote.' The voting structure is irrelevant if the organization does

not pay dividends on stock or mem bership c apital in excess o f eight perc ent. "

914 F. Supp. at 823-824.

219

is not operating for the mutual benefit of its members. This argument

has been rejected by the courts. 594 Thus, while the payment of

patronage refunds is a requirement to qualify for single taxation of

income under the Internal Revenue Code, it is not a prer equisite to

qualify for the limited antitrust protection of the Capper-Volstead Act.

One Member/One Vote or 8 Percent Limit on Dividends

For an association to qualify for Capper-Volstead protection,

either "no member... is allowed more than one vote because of the

amount of stock or membership capital he may own, or the association

does not pay dividends on stock or membership capital in excess of 8

per centum per annum." 595

This provision compliments the one requiring the association to

operate for the mutual benefit of the members as producers. It places

objective limits on the ability of any segment of the membership to

seize control of the association to distribute benefits on the basis of

investment rather than use.

As this is an "either/or" standard, " the law does not require

compliance with both but merely with either one."596

The first test permits members to have a variable number of votes,

so long as the number of votes is not based on investment. Weighted

voting based on patronage is permissible.597
598 7 U. S.C . § 291.

599 Supra, p. 115.

220

The second clause offers the option of permitting voting based on

investment, so long as the annual return on equity does not exceed 8

percent per year. This rule provides cooperatives substantial latitude

in attracting capital, a concern of lawmakers at the time of enactment

that continues to be a challenge today. While many cooperatives make

governance decisions on the basis of one-member one-vote and pay

little or no return on equity, they have the option to pursue capital

more aggr essively without jeopardizing their antitrust status.

Majority of Product Handled Must Be Member Product

Section 1 of Capper-Volstead also mandates that a protected

association "shall not deal in the products of nonmembers to an amount

greater in value than such as are handled by it for members. "

598 As

indicated in the legislative history, this rule was added on the Senate

floor to keep a few wealthy farmers from conspiring to restrain trade

in a given commodity by forming a cooperative and then purchasing

a large share of a crop in the marketplace to adversely impact the

market. 599

The majority-member business test is an annual test. A majority

of the product handled by the cooperative each year must be produced

by the members. Product purchased from others by the members and

then resold through the cooperative is counted as nonmember product.

Some cooperatives, particularly ones without a sufficient

membership base to have any meaningful impact on prices or terms of

sale, complain that this rule hinders their ability to effectively serve

their members. While this may be true, the burden is on the members

of such an association to convince producers who want the benefits of

the association's service to join them in their cooperative effort.

This concludes the review of conduct authorized under the

Capper-Volstead Act. The next section examines activity courts have

found outside the protection of the Act and the r easons those

conclusions.
600 Maryland and Virginia Milk Producers Association v. United States,

362 U. S. 458, 466 (1960).

601 362 U. S. at 466-467. See also, Marketing Assistance Plan v.

Associated Milk Producers, Inc. , 338 F . Supp. 1019, 1023 (S.D. Tex. 1972).

221

UNPROTECTED CONDUCT

The Capper-Volstead Act protects farmersfrom prosecution under

the antitrust laws for forming a cooperative and pursuing normal

business objectives and strategies. As the Supreme Court has phrased

it, Capper-Volstead reflects a "general philosophy" of giving farmers,

"...through agricultural cooper atives acting as entities, the same

unified competitive advantage--and responsibility--available to

businessmen acting thr ough corporations as entities."

600

The Court went on to say that the legislative history suggests a

Congressional intent:

...to make it possible for farmer-producers to organize

together, set association policy, fix prices at which their

cooperative will sell their produce, and otherwise carry on

like a business corporation without thereby violating the

antitrust laws. It does not suggest a congressional desire to

vest cooperatives with unrestricted power to restrain trade or

to achieve monopoly by preying on independent producers,

processors, or dealers intent on carrying on their own

businesses in their own legitimate way.601

Over the years, the courts have held that certain types of conduct

by farmers and their cooperatives are outside of the protection

provided by Capper-Volstead. Such conduct may not be per se

unlawful under the antitrust laws. But, if challenged, it will be

reviewed under the same standards that apply to similar conduct

between two or more noncooperative firms.

Two types of conduct have been consistently found to be outside

the scope of Capper-Volstead. The first is conspiring with or

combining with nonproducer entities to engage in some activity that

violates the antitrust law. The second is engaging in anticompetitive

activity that cannot be justified for business reasons, often referred to
602 United States v. Borden, 308 U. S. 188 (1939). See, e. g., Bergjans

Farm Dair y v. Sanitary M ilk Prod ucers, 241 F . Supp. 476, 482 (E. D. Mo.

1965), aff' d, 368 F .2d 679 (8th Cir. 1966) (cooperative violates Sherman §

1 when it conspires with noncooper ative customers to fix the custom ers' resale

price).

603 United States v. National Broiler Mar keting Association, 436 U. S. 816

(1978).

222

as "predatory" conduct. This section will focus on the cases

establishing the boundaries of these limitations.

Collaborating with Nonproducers

The cardinal rule of limiting cooper ative antitrust risk is to avoid

engaging in activity that violates the antitrust laws with entities that are

not also Capper-Volstead protected associations. Yet it will receive

limited treatment here because it is a corollary to axioms discussed

earlier:

! The Capper-Volstead Act and other laws limiting antitr ust

exposure for agricultural producers do not cover conspiracies

to restrain trade, attempt to monopolize, or other actions that

violate the Sherman Act and other antitrust laws conducted in

conjunction with entities that are not also Capper-Volstead

protected producer associations. 602

! The Capper-Volstead Act and other laws limiting antitrust

exposure for agricultural producers only protect associations

that limit their membership to bona fide producers. 603

This does not mean that all contracts and other arr angements with

nonproducer entities, including competitors, subject producer

associations to antitrust liability. It only means that, if challenged,

such agreements will be tested under the rules of reason and per se

liability just as would similar agreements between noncooperative

firms.

For example, in the mid-1950s, Keith Young, an experienced

milk production and distribution manager, moved from Kansas City to
604 North Texas P roducers Association v. Young, 308 F.2d 235 (5th Cir.

1962), cert. denied, 372 U .S. 929 (1963).

223

Dallas. At the time, milk distributors in Dallas only offered milk in

half gallon containers which sold for about $.50 r etail. The price for

two half gallon containers was often as low as $.96.

Young signed a contract with North Texas Producers Association,

a milk marketing cooperative that furnished 85 percent of the fluid

milk sold in the Dallas area, to provide him with milk in one gallon

containers. Young wanted to sell the gallon containers for 69 cents

each at retail, resulting in a savings to the consumer of 27 cents per

gallon.

When word of Young's intentions spread through the milk

industry in Dallas, the established distributors suddenly agreed to a

price increase that North Texas Producers had been seeking for some

time. North Texas Producers then informed Young it would not honor

their contract, even though it had already spent a considerable amount

of money on equipment to provide bottled milk in one-gallon

containers.

Young sued North Texas Producers and its other distributorcustomers on the basis that they had conspired to restrain competition

and monopolize the Dallas milk market by refusing to sell him milk.

The defendants argued the acceptance of a price increase by the

distributors for milk furnished by the cooperative and the cooperative's

unilateral cancellation of its contract with Young were two separate

and unrelated events. The case went to the jury, which disagreed, and

awarded substantial monetary damages to Young.

Defendants appealed to the U.S. Court of Appeals for the 5th

Circuit, which easily affirmed the trial court verdict. 604 It dismissed

defendants' claim that Young was seeking a special advantage not

available to his competitors. It appears the primary reason the

cooperative appealed was to attack the size of the damage award,

which was also upheld. This decision sends a clear message to

cooperatives that engaging in anticompetitive conduct with

noncooperative firms will expose the association and its members to

considerable liability.

In a later case, a Federal district court judge refused to grant the

cooperative defendant's motion for summary judgment on Sherman
605 Farmland Dairies v. N ew York Far m Bureau, 1996-1 Trade Cases

(CCH ) ¶ 71,423 at 77, 148 (N. D. N. Y. 1996).

606 15 U. S.C . § 18.

607 United States v. Mar yland & Virginia Milk Producers Ass'n, 167 F.

Supp. 45 (D.C. D.C. 195 8), rev'd , 362 U.S. 458 (1960); 167 F. Supp. 799

(D.C. D.C. 19 58 ), aff' d, 362 U .S. 458 (1960); 168 F. Supp. 880 (D.C. D.C.

1959), aff' d, 362 U .S. 458 (1960). 

224

Section 1 and 2 claims when the parties agreed on the record that one

of the alleged coconspirators was not a producer and the plaintiff

introduced some credible evidence of anti-competitive conduct between

the two.605

Businesspeople, when they find that attempts to make certain

arrangements with other firms--usually competitors or customers--

aren' t going to work out for legal or other reasons, sometimes react,

"If we can' t work with them, then we' ll just buy them out." This leads

to the second area of possible antitrust risk for cooperatives,

combining with noncooperative firms.

Consolidating with Non-cooperative Firms

The provision of antitrust law governing mergers and acquisitions

is Section 7 of the Clayton Act. This section forbids a business

engaged in commerce from acquiring some or all of the stock or assets

of another business where the effect of the acquisition "may be

substantially to lessen competition, or to tend to create a monopoly." 606

The application of this provision to cooperative acquisitions of

noncooperatives was discussed in a series of opinions issued in a

complex late-1950s antitrust action by the Government against

Maryland & Virginia Milk Producers. 607 Before the acquisition in

question, about 86 percent of the fluid milk sold to dealers in the

Washington, DC, metropolitan area was provided by Maryland &

Virginia. Eight of the 12 dealers in the market, including the three

largest, bought most of their milk from the cooperative.

While cooperative dealers dominated the local private market,

they generated only 45 percent of the sales to Federal Government

establishments (primarily hospitals and military bases). These sales

were made under contracts awarded through competitive bidding. The
608 15 U. S.C . § 2.

609 15 U.S.C. § 3. Section 3 of the Sherman Act is virtually iden tical to

§ 1, except it applies to commerce involving U.S. territories and the District

of Columbia while § 1 only refers specifically to trade among the States or

with foreign countr ies.

610 15 U. S.C . § 18.

225

fourth largest dealer in the market, Embassy Dairy, had nearly 50

percent of this market. Embassy obtained this large market share by

frequently underbidding dealers who bought from the cooperative.

Embassy purchased its milk directly from dairy farmers who

chose not to market through Maryland & Virginia. In the spring of

1954, negotiations began on the sale of Embassy's assets to Maryland

& Virginia. The deal was completed in July, 1954.

After the acquisition, Embassy Dairy immediately went out of

business. Maryland & Virginia continued to operate the retail business

of Embassy. Many of the farmers who had sold to Embassy were

unable to find a home for their milk in the Washington area unless they

joined Maryland & Virginia. Some did so, increasing the

cooperative's share of milk controlled in the market. Others began

selling milk in the Baltimore market. The cooperative's share of sales

under contract to Federal institutions jumped from 45 percent to nearly

92 percent.

The United States challenged this acquisition on three grounds.

First, that Maryland & Virginia had monopolized or attempted to

monopolize the local milk market in violation of Section 2 of the

Sherman Act. 608 Second, Maryland & Virginia had conspired with

Embassy to restrain trade in the local milk market in violation of

Sections 1 and 3 of the Sherman Act. 609 Third, Maryland & Virginia's

purchase of all assets of Embassy substantially lessened competition or

tended to create a monopoly in violation of Section 7 of the Clayton

Act. 610

In the first of three decisions, the trial court considered whether

the Capper-Volstead Act was an absolute defense to the allegations

against the cooperative. It held that a properly organized cooperative

"...is entirely exempt from the provisions of the antitrust laws, both as

to its very existence as well as to all its activities, provided it does not

enter into conspiracies or combinations with persons who are not
611 United States v. Maryland & Virginia Milk Pr oducers Association, 167

F. Supp. 45, 52 (D.C . D .C . 1958), rev'd , 362 U .S. 458 (1960).

612 United State s v. M aryland & Vir ginia Milk Producers Association, 167

F. Supp. 799 (D. C. D.C. 1958), aff' d, 362 U .S. 458 (1960).

613 167 F. Supp. at 801, citing United State s v. M aryland & Vir ginia Milk

Producers, 167 F. Supp. 45 (D. C. D.C. 1958).

614 167 F. Supp. at 804-806 (the opinion contains various quotations from

the documents).

615 167 F. Supp. at 806.

226

producers of agricultural commodities. "

611 On this basis, the court

dismissed the charge that Maryland & Virginia attempted to

monopolize the local market for milk in violation of Section 2 of

Sherman, but not the charges that it conspired with Embassy in

violation of Sections 1 and 3 of Sherman and combined with Embassy

in violation of Section 7 of the Clayton Act.

Next the court held a trial (apparently without a jury) on the

allegation that Maryland & Virginia's purchase of Embassy's assets

substantially lessened competition or tended to create a monopoly in

violation of Section 7 of the Clayton Act. At the conclusion, the court

issued its second opinion. 612 The court made several findings of law,

all favorable to the Government.

 ! The acquisition is not immune from challenge under either

section 6 of the Clayton Act or the Capper-Volstead Act. The court

referred to its first opinion in this case where it said that neither statute

extends to contracts or combinations involving a cooperative and one

or more persons or concerns that are not Capper-Volstead

cooperatives. 613

 ! While the Government isn't required to establish an intent to

lessen competition, it can introduce evidence of such an intent. The

cooperative's case wasn't helped by the introduction into evidence of

internal memos and of papers given to the bank financing the

acquisition indicating an intent to eliminate an unwanted competitor.

614

Also, the court found it worth noting that the evidence indicated the

cooperative paid far more than its actual value for the property

purchased. 615
616 167 F. Supp. at 807.

617 Id.

618 Id.

619 Id.

227

 ! The acquisition tended to lessen competition in the

Washington milk market. First, it eliminated producer access to the

largest independent purchaser of milk in the area. Second, it reduced

competition for sales to Government installations by eliminating a firm

noted for underbidding customers of the acquirer.616

 ! The acquisition tended to create a monopoly by concentrating

a larger share of milk supply reaching the Washington market in the

hands of the cooperative. The court acknowledged that the purchase

did not give Maryland & Virginia a total monopoly in the market. It

found, however, that the law "is not aimed only at complete

monopolies or directed solely at entire elimination of all competition.

It is sufficient if the acquisition, merger, or absorption tends to lessen

competition or tends to create a monopoly." 617

 ! It does not matter that the number of dealers in the market was

not reduced. The court was not persuaded by the cooperative's

argument that the acquisition did not reduce competition because it

merely resulted in the substitution of a new dealer in the market,

Maryland & Virginia, in place of Embassy. It found this was an

assertion of form over substance because the dominant wholesaler now

owned the largest independent dealer, augmenting its influence over

the market and "getting rid of a troublesome rival." 618

 ! It does not matter milk prices in the area did not increase

after the transaction. The court noted milk prices are influenced by

numerous factors. They might have been even lower were it not for

Maryland & Virginia's purchase of Embassy.619

 ! Neither participation by the Bank for Cooperatives in

financing the purchase nor favorable comments by USDA employees

brings the acquisition within the exemption for transactions duly
620 167 F. Supp. at 807-808.

621 167 F. Supp. at 808-809.

622 United State s v. M aryland & Vir ginia Milk Producers Ass' n, 168 F.

Supp. 880 (D. C. D.C. 1959), aff' d, 362 U .S. 458 (1960).

228

authorized by the Secretary of Agriculture. Section 7 of the Clayton

Act exempts transactions duly consummated pursuant to authority

granted in other statutes to listed Government agencies and officials,

including the Secretary of Agriculture. The court found no statutory

provision existed empowering the Secretary of Agriculture to approve

any transaction such as this one. It didn' t even comment on the

approval of a loan to finance the pur chase by the Baltimore Bank for

Cooperatives. It found that comments by employees of the Farmer

Cooperative Service (predecessor to the Rural Business-Cooperative

Service) favoring the acquisition in no way amounted to formal USDA

approval. 620

 ! The "failing firm" defense is available to cooperatives. The

litigation also involved the acquisition of a second independent dealer

by Maryland & Virginia. The court found the evidence established

without contradiction that this firm was hopelessly insolvent and owed

the cooperative a large amount of money for milk delivered but not

paid for. As this firm was on the brink of going out of business, its

acquisition by Maryland & Virginia would not result in a lessening of

competition or additional monopoly power and the purchase did not

violate Section 7 of the Clayton Act.621

The court order ed Maryland & Virginia to divest itself of all

assets acquired from Embassy Dairy and to cancel all contracts

ancillary to the acquisition.

At this point the Government asked the court for a decision, based

on the record of the previous trial, on the issue of whether the

cooperative's purchase of Embassy restrained trade in violation of

Sections 1 and 3 of the Sherman Act. In a brief third opinion, the

court found the transaction illegally restrained trade by foreclosing

competition with respect to sales of milk to the Government and

purchases of milk from producers. 622
623 Mar yland & Vir ginia Milk Pr oducers A ss' n v. U nited States, 362 U. S.

458 (1960).

624 362 U. S. at 463.

625 362 U. S. at 468.

626 7 U. S.C . § 18.

627 362 U. S. at 469-470.

229

Both sides asked the U.S. Supreme Court to review the decisions.

The Court unanimously sided with the Government on all three

issues. 623

First, the Court overruled the district court's conclusion of law in

its first opinion that Capper-Volstead shields producer associations

from liability under Section 2 of the Sherman Act. 624 The Court' s

discussion of whether the Embassy acquisition amounted to an attempt

to monopolize referred to facts not mentioned in the trial court

opinion.

While not using the term, the events mentioned (disrupting truck

shipments, boycotting an unrelated business of the owner of a dairy to

persuade him to buy association milk, using the leverage of a loan

made to another dairy to compel it to buy association milk) were

similar to what lower courts were beginning to call "predatory

practices." The Court found that these anticompetitive activities were

"...so far outside the <legitimate objects' of a cooperative that, if

proved, they would constitute clear violations of § 2 of the Sherman

Act...."625 It found the district court erred in dismissing the

Government' s charge under Section 2 of the Sherman Act without

ascertaining the facts.

The Court limited its discussion of Section 7 of the Clayton Act

to consideration of the impact of the last sentence of that provision

which states the provision shall not apply "...to transactions duly

consummated pursuant to authority given by the...Secretary of

Agriculture under any statutory provision vesting such power in...(the)

Secretary."

626 The Court found no statutory authority exists giving the

Secretary the authority to approve acquisitions by a producer

association and thereby exempt them from the antitrust law.627

Then the Court turned to whether the acquisition amounted to an

illegal conspiracy to restrain trade. It noted the agreement of sale
628 362 U. S. at 470-471.

629 362 U. S. at 471.

630 362 U. S. at 472. Some cooperatives reacted strongly to the decision

and persuad ed the Senate Com mittee on A gricultur e to include a pr ovision in

its version of the 1961 farm bill that would have am ended Capper- Volstead to

give cooperatives the unencumbered right to merge with or acquire any firm,

cooperative or otherwise, in the same line of business as the cooperative.

Other cooperative leaders and advisers felt such an amendment "unneeded and

perhaps unwise." Harold Jordan, "The A pplication of Section 7 of the Clayton

Act to Integration of Farmer C ooperative Associations," Am erican

Cooperation 1961, pp. 388-389. Congress took no further action.

230

between Embassy and Maryland & Virginia contained provisions in

which the former owners of Embassy agreed (1) not to compete with

the association in the purchase of milk in the Washington area for 10

years and (2) to encourage all former Embassy producers to either join

the association or to ship their milk to Baltimore. It also mentioned the

spirited competition between the two firms and the inflated purchase

price paid by Maryland & Virginia.628

Apparently the cooperative had raised an argument before the

Court either not raised or not commented on in the third trial court

opinion. The Court rejected the assertion of Maryland & Virginia that

the purchase was protected by the Capper-Volstead provision "that

cooperatives can lawfully make <the necessary contracts and

agreements' to process, handle, and market milk for their producermembers. "

629

The Court said that a contract to purchase assets of a noncooperative firm merely for a business use is protected. But when the

purchase is designed to "restrain and suppress competitors and

competition," Capper-Volstead is not applicable.630

In summary, the Supreme Court made it clear that a business

combination between a Capper-Volstead cooperative and a firm

without Capper-Volstead protection that substantially lessens

competition and/or tends to create a monopoly will subject the

cooperative to liability under both Section 2 of the Sherman Act and

Section 7 of the Clayton Act.

Subsequent decisions have adopted and applied this rule. A

Federal judge in Missouri held that the purchase by a cooperative of
631 Bergjans Far m Dair y v. Sanitar y Milk Pr oducers, 241 F. Supp. 476,

486 (E.D . M o. 1965), aff' d, 368 F .2d 679 (8th Cir. 1966).

632 United States v. Rice Grow ers Association of California, 1986-2 Tr ade

Cases (CC H) ¶ 67, 287 at 61,459, n.5 (E. D. Cal. 1986).

633 See, e.g. , Maryland & Virginia Milk Producers v. United States, 362

U. S. 458, 468 (1960). In some instances, predatory conduct wa sn' t an issue

directly before the court. Nonetheless, evidence suggesting such illicit activity

was noted in the opinion and certainly didn' t help the cooperative's cause.

See, e.g. , Gulf Coast Shr impers and O ystermans A ssociation v. U nited States,

236 F. 2d 658, 665 (5th Cir. 1956).

231

its leading independent competitor with intent to reduce competition

constitutes an unprotected attempt to monopolize in violation of Section

2 of the Sherman Act. 631

In the 1980s, the Department of Justice challenged the purchase

of a non-cooperative competitor by a California rice marketing

cooperative. The trial court brushed aside the cooperative's attempt

to use Capper-Volstead as a defense as "...simply irrelevant... . The

Capper-Volstead Act cannot immunize a cooperative's acquisition of

a competing non-cooperative business when the acquisition is violative

of Section 7 of the Clayton Act.632

Thus, it is clearly established that combinations of cooperative and

non-cooperative firms are not shielded by the Capper-Volstead Act

from antitrust scrutiny. They ar e subject to review under the same

standards as similar combinations among non-cooperative entities.

Predatory Conduct

The courts have always taken a dim view of conduct without a

justifiable business purpose that is primarily, if not exclusively,

intended to restrain trade or inhibit competition.633 The courts have

come to refer to all such activity as "predatory conduct. " And they

have consistently held that predatory conduct is beyond the scope of

legitimate business activity protected by the Capper-Volstead Act.

The decisions that find the existence of predatory conduct are fact

specific. This section discusses various cases where the issue has

arisen and the reasons why courts have found specific actions to be

"predatory. "
634 United States v. King, 2 29 F. 276 (D.C. Mass. 1915); 250 F. 908

(D.C. Mass. 1916).

635 Id.

636 Gulf Coast Shr impers & Oysterm ans Ass' n v. United States, 236 F. 2d

658 (5th Cir. 1956), cert. denied, 352 U .S. 927 (1956).

232

United States v. King.

634 Case law regarding predatory conduct

predates enactment of the Capper-Volstead Act. In the first case

regarding cooperatives that followed enactment of Section 6 of the

Clayton Act, the executive committee of the Aroostook Potato

Shippers Association (APSA) had been authorized to determine that

someone who produced, r eceived, or otherwise dealt in Maine potatoes

was "undesirable. " Association members were forbidden by its bylaws

from doing business with a person on the so-called "black list." The

APSA circulated its list among other participants in the potato industry

and suggested that unless they ceased doing business with the

blacklisted persons, they would also be blacklisted by the APSA and

its members.

The court held that the association members could agree among

themselves not to do business with someone in their industry.

However, they engaged in unprotected conduct when they attempted

to coerce others in the industry to refrain from doing business with a

so-called "undesirable. " The court noted the Government's indictment

did not allege any anticompetitive intent or purpose behind the

blacklisting. However, the court held the Government need not do so

where a so-called "secondary boycott" was undertaken, because no

reasonable business justification existed for coercing outsiders to honor

the association's black list.635

Cooperative members can decide not to do business with an

outside entity; i.e. , engage in a direct boycott of it. However, they

can not engage in a secondary boycott, i.e. , coerce nonmembers not

to do business with another outside entity.

Gulf Coast Shrimpers & Oystermans Ass'n v. United States.

636

In the years after World War II, most commercial shrimp and oyster

fishermen operating out of ports in Mississippi were members of the

Gulf Coast Shrimpers & Oystermans Association. The Government

indicted the association and three of its officers for engaging in a
637 236 F. 2d at 661.

638 236 F. 2d at 665.

639 See, Fairdale Farms v. Yankee Milk, 635 F.2d 1037, 1044 (2d Cir.

1980); Alexander v. National Farmers Organization, 687 F. 2d 1173, 1182

(8th Cir. 1982).

233

conspiracy to fix prices in violation of Section 1 of the Sherman Act.

The case was tried before a jury and the Government obtained

convictions against all defendants. The association and the convicted

officers secured review by the U.S. Court of Appeals for the 5th

Circuit.

The 5th Circuit opinion does not provide a very clear picture of

the details in this case. During the trial, the Government apparently

introduced substantial evidence that the association used coercive

tactics designed to prevent nonmembers from gaining access to

Mississippi fish processors. The court summarized the Government' s

evidence as showing that:

...to insure dealer compliance with its pricing policies,

the appellant Association either authorized or ratified mass

member picketing, designed to prevent nonmembers or outof-state fishermen from fishing in Mississippi waters or

selling to Mississippi coast packers; boycotting of

nonconforming dealers by association members; and

coercion of nonmember fishermen to join the association and

comply with its price schedule.637

The court found that "... the Association exceeded any possible

privilege or exemption granted by the Fishermen' s Collective

Marketing Act when it undertook not simply to fix prices demanded by

its members, but to exclude from the market all persons not buying

and selling in accordance with its fixed prices."

638

Coercion of nonmembers to join the association and/or adhere to

its pricing and marketing practices is a predatory practice that violates

the antitrust laws and is not protected by the Capper-Volstead Act.639
640

 United States v. Mar yland & Vir ginia Milk Pr oducers A ss' n, 362

U. S. 458 (1960), rev'g , 167 F . Supp. 45 (D.C . D .C . 1958).

641 362 U. S. at 465-466.

642 362 U. S. at 468.

234

Several private cases alleging predatory conduct by producer

associations were filed after the U.S. Supreme Court issued its opinion

in the second case involving Maryland & Virginia Milk Producers. 640

As part of this complex opinion, the Court reversed a district court

decision granting the cooperative's motion to dismiss charges that it

violated Section 2 of the Sherman Act. The Court said:

Thus, the full effect of § 6 (of the Clayton Act) is that a

group of farmers acting together as a single entity in an

association cannot be restrained "from lawfully carrying out

the legitimate objectives thereof," (emphasis supplied), but

the section cannot support the contention that it gives such an

entity full freedom to engage in predatory trade practices at

will.

...

...We believe it is reasonably clear from the very

language of the Capper-Volstead Act, as it was in § 6 of the

Clayton Act, that the gener al philosophy of both was simply

that individual farmers should be given, through agricultural

cooperatives acting as entities, the same unified competitive

advantage--and responsibility--available to businessmen

acting through corporations as entities. 641

The Court listed several alleged wrongdoings by the cooperative--

attempts to interfere with truck deliveries to dealers who didn't buy

their milk from the cooperative; inducing a dairy to shift its

nonmember milk to another market; boycotting a feed and farm supply

store to compel its owner, who also owned a dairy, to buy milk from

the cooperative; and threatening to call in a loan made to a dairy unless

it limited its milk purchases to cooperative milk. It said these alleged

acts "... are so far outside the <legitimate objects' of a cooperative that,

if proved, they would constitute clear violations of § 2 of the Sherman

Act by this Association..." 642
643 North Texas Producers A ss' n v. M etzger Dairies, 348 F. 2d 189 (5th

Cir. 1965), cert. denied, 382 U .S. 977 (1966).

644 Fairdale Farms v. Yankee Milk, 715 F.2d 30, 31-34 (2nd Cir. 1983).

645 348 F. 2d at 195-196. 

235

North Texas Producers Ass'n v. Metzger Dairies.

643 North Texas

Producers Association supplied almost 90 percent of the raw milk

marketed in Dallas and Ft. Worth, Texas. The Dallas-Ft. Worth area

was covered by a Federal milk marketing order that guaranteed

producers a minimum price for their milk. This was the price received

by North Texas Producers until late 1958, when the cooperative

announced that it was now charging a price 30 cents per

hundredweight over the Federally set minimum price.

Purchasers who did not want to buy milk from North Texas at the

higher price were asked to notify the association at once. Four

processors balked. But within two weeks, all four acknowledged that

the cost per hundredweight of bringing in milk from other areas

exceeded that of buying from the cooperative at the new price and

asked to be reinstated as customers.

Under Capper-Volstead, cooperatives are free to set a price for

member milk that includes an "over order premium."644 However,

North Texas went further. It resumed normal business relations with

three of the four dairies, but it apparently decided to stop certain

practices of the fourth firm, Metzger Dairy, that it didn't like.

Metzger was the major purchaser of nonmember milk in the

Dallas-Ft. Worth area and used two independent trucking firms to haul

milk to its plant. North Texas informed Metzger it would only resume

selling it milk if Metzger agreed that (1) no additional producers would

be taken on by Metzger without prior approval of the association and

(2) association member milk would be delivered to Metzger' s plant in

association owned or leased vehicles.

Metzger refused these conditions and continued to purchase milk,

at a higher overall cost, from other suppliers. A letter from a

cooperative director to the members urged them to talk to their friends

and ask them not to buy Metzger milk because it was produced by

nonmembers of the association. The court said that this stimulated a

boycott of certain grocers that compelled them to stop offering

Metzger milk for sale.645
646 348 F. 2d at 194, citing Maryland & Virginia Milk Producers v. United

States, 362 U. S. 458 (1960).

647 348 F. 2d at 196.

236

Further, the cooperative launched an unsuccessful attempt to buy

out Metzger. Metzger filed a private antitrust suit seeking triple

damages from North Texas for losses caused by its attempt to

monopolize milk sales in the Dallas-Ft. Worth market in violation of

Section 2 of the Sherman Act.

The trial resulted in a jury verdict for the cooperative. However,

the trial judge determined that the verdict was contrary to the evidence

and granted Metzger's motion for a new trial. A second trial produced

a jury verdict for Metzger and an award of substantial damages.

The cooperative appealed the jury verdict and asked the U.S.

Court of Appeals for the 5th Circuit to reverse the judgment on the

grounds that its conduct was protected by Section 6 of the Clayton Act

and the Capper-Volstead Act. The 5th Circuit refused, stating that the

Supreme Court has made it clear that:

...farmers may act together in a cooperative association,

and the legitimate objects of mutual help may be carried out

by the association without contravening the antitrust laws,

but that otherwise, the association acts as an entity with the

same responsibility under section 2 of the Sherman Act as if

it were a private business corporation. (court's emphasis).646

The appellate court sustained the trial court's ruling granting

Metzger a new trial and the jury verdict against the producer

association in the second trial. The court noted the covert attempt by

the cooperative to purchase Metzger and efforts by association leaders

to convince not only members but outsiders as well to boycott stores

that sold milk supplied by Metzger. It concluded that the facts justified

the jury's finding the cooperative' s conduct amounted to monopolistic

practices or attempts to monopolize in violation of Section 2 of

Sherman. 647
648 Bergjans Farm Dairy v. Sanitary Milk Producers, 241 F. Supp. 476

(E.D . M o. 1965), aff' d, 368 F .2d 679 (8th Cir. 1966).

649 241 F. Supp. at 483.

237

Bergjans Farm Dairy v. Sanitary Milk Producers.

648 The case

was brought by six small dairy processors against Sanitary Milk

Producers, a cooperative which controlled about 60 percent of the raw

milk in the St. Louis area. The court considered Sanitary's market

position to have reached "monopoly, or near monopoly, " status.

However, the court was not concerned with the level of Sanitary's

market power, which it found "was contemplated by the CapperVolstead Act" and "lawfully obtained." But it was concerned about

possible "unlawful (use)" of that market power.649

For many years, Sanitary operated as a bargaining association,

selling member raw milk on a collective basis. In late 1961, Sanitary

was frustrated that dairies in the St. Louis area wouldn' t sign solesource contracts with it and brought milk in from outside the market

area. This reduced the amount of member milk marketed as fluid milk

which, under the Federal milk market order program, was more

profitable than milk used for manufactured products.

In early 1962, Sanitary purchased a bottling plant and began

direct marketing of member milk. Dairymen who had supplied the

former owner of the plant, including members of other cooperatives,

were cut off and their supply replaced with milk of Sanitary members.

In an attempt to enhance its market presence, Sanitary lowered the

price of wholesale milk. If it had reduced the price and made up the

difference from higher fluid milk utilization of member production, the

court suggested Sanitary' s conduct would have been legal.

However, when the other local processors met its price, Sanitary

tried a new strategy. It raised the price back to earlier levels and

began providing secret cash rebates, literally in plain brown paper

envelopes, to customers. To cover the deceit, the customers raised

their retail prices to reflect the bogus wholesale price increase. But in

a few weeks, the scheme became public and other processors lowered

their price to reflect what Sanitary was actually charging.

Sanitary next purchased the noncooperative processor that had led

the coordinated response to Sanitary's price moves. Again, producers

who were not Sanitary members lost their home for their milk.
650 241 F. Supp. at 484.

651 Sanitary Milk Producers v. Bergjans Farm Dairy, 368 F. 2d 679, 690,

(8th Cir. 1966), aff' g, 241 F . Supp. 476 (E.D . M o. 1965).

652 Isaly Dairy Compa ny of Pittsburgh v. United Dairy Farmers, 250 F.

Supp. 99 (W. D. Pa. 1966).

238

The case was tried before a jury, which awarded monetary

damages to the plaintiffs. The judge wrote his opinion in response to

plaintiffs' request for an injunction against further unlawful conduct by

Sanitary.

While the case only involved an alleged attempt to monopolize

under Section 2 of Sherman, the court pointed out that the secret rebate

agreement between Sanitary and buyers in the St. Louis market could

be interpreted as a conspiracy to fix prices in violation of Section 1 of

Sherman and would be considered as evidence of intent to monopolize

in violation of Section 2.650

The court viewed this conduct in combination with a general

assessment of the way Sanitary built and conducted its processing

business. The court concluded that this evidence showed a predatory

intent to eliminate competition not protected by the limited antitrust

immunity granted by Capper-Volstead. The court granted the

processors' request for an injunction, placing Sanitary and its officers

under orders to act lawfully in the future.

Sanitary appealed to the U.S. Court of Appeals for the 8th

Circuit, primarily on the basis of numerous alleged errors made by the

judge during the trial phase of the case. While the appellate court

found some of Sanitary's points valid, it concluded that the errors did

not justify overturning the decision. In a key ruling, the court said that

the mere existence of the secret cash rebates paid by the cooperative

to milk retailers was sufficient to support a finding that the cooperative

engaged in a conspiracy to fix wholesale prices of milk. 651

Thus, covert manipulation of market pricing through secret

rebates to purchasers is an unlawful predatory practice.

Isaly Dairy Company of Pittsburgh v. United Dairy Farmers.

652

Dairymen's Co-operative Sales Association (DCSA) was the dominant

milk marketing cooperative serving Pittsburgh, PA. This case was

initiated by disgruntled DCSA members who withdrew and formed a
653 Otto Milk Company v. United Dairy Farmers Cooperative Association,

261 F. Supp. 381 (W. D. Pa. 1966), aff' d, 388 F .2d 789 (3rd C ir. 1967).

239

new cooperative, United Dairy Farmers (UDF). When UDF was

unsuccessful in negotiating contracts with dairy processing firms, it

filed suit against four dairy companies and DCSA for conspiring to fix

the price of milk at levels below what farmers should be receiving.

One of the noncooperative dairies, Isaly Dairy Company, countersued by filing a complaint against UDF and some of its members for

conspiring to monopolize the Pittsburgh milk market and to fix the

price of milk sold there. Isaly sought an injunction against farmer

picketing of its plant and some of its customers' stores. One day, the

picketing at the plant got out of hand, police restored order, and a

local judge issued an order regulating future picketing. Farmer

picketing continued subject to the order, without interrupting traffic in

or out of the plant or the stor es and without any further incidents.

The Federal district court judge handling the case suggested that

all of the litigation was an abusive use of antitrust law. He said that

Islay could sign a contract buying all of the milk it needed from DCSA

and the farmers were free to sell their milk through UDF. The judge

also ruled that the farmer pickets, conducted in compliance with

guidelines established by a local judge, did not amount to an attempt

to monopolize the market. The request for an injunction was denied.

This judge found the cooperatives in this case did not engage in

illegal predatory conduct by entering into full supply contracts with

buyers, selling member products for less than competitors thought they

ought to be charging, or peacefully picketing stores of a firm that had

signed a full supply contract with a competing cooperative.

Otto Milk Company v. United Dairy Farmers.

653 Apparently

emboldened by its victory in Islay, within a few months UDF launched

an aggressive picketing campaign against grocery stores that carried

milk by another dairy, Otto Milk. Like Islay, Otto had a contract to

purchase its raw milk from DCSA.

UDF members told the store managers the pickets would leave if

their store stopped selling Otto products. In some instances, managers

were asked to substitute products of another dairy for those of Otto.

If a store stopped buying Otto products, the pickets would leave and
654 261 F. Supp. at 383, 384.

655 362 F. 2d 189 (5th Cir. 1965), supra. at 235-236.

656 261 F. Supp. at 384-385.

657 261 F. Supp. at 385.

240

move on to another store still doing business with Otto. Otto filed a

complaint in Federal court alleging violations of Sections 1 and 2 of

the Sherman Act. After oral argument, Otto dropped its claim for

damages and the court was faced with only a request for an injunction

against further illegal conduct by UDF.

This time, UDF found itself before a less friendly judge. While

this judge never mentioned the Islay decision, he clearly distanced

himself from it.

UDF's first defense was that the court lacked jurisdiction under

the Sherman Act because the picketing was purely local, not interstate,

in nature. The court disagreed, stating "The Sherman Act.. .is not to

be construed so narrowly. It <extends not only to transactions in the

stream of interstate commerce, but also to intrastate transactions which

substantially affect interstate commerce.' " (court's emphasis, citation

omitted).654 The court found that because Otto purchases materials

used in its business from and sells milk in states other than

Pennsylvania, Otto's lost sales resulting from UDF's action had a

substantial affect on interstate commerce.

Next, UDF urged that its conduct was protected by Section 6 of

the Clayton Act and the Capper-Volstead Act. The court, citing North

Texas Producers v. Metzger,

655 held these laws only protected actions

to further the legitimate objectives of farmers. It said the Congress

never intended ".. .that agricultural cooperatives be given a blanket

exemption from the antitrust laws that would allow them to engage in

predatory practices or conspire with others to monopolize or otherwise

restrain trade in violation of the antitrust laws."

656

This judge found that UDF' s picketers not only wanted to tell

their story but also to stop customers from patronizing the stores and

force the stores to stop purchasing milk from Otto. He held the

picketing was ".. .designed ultimately to exclude DCSA from

competition... and corner the market for...(UDF). "

657 He ruled that the
658 Id.

659 261 F. Supp. at 386.

660 Id.

661 Otto Milk Company v. United Dairy F armers Cooperative Ass' n, 388

F. 2d 789 (3rd Cir. 1967), aff' g, 261 F . Supp. 381 (W. D. Pa. 1966).

241

boycott was an attempt to monopolize trade in violation of Section 2

of the Sherman Act.

He also found an illegal conspiracy between UDF and the stores

that ceased doing business with Otto that restrained trade in violation

of Section 1 of Sherman. He determined that it did not matter that the

stores were coerced into dropping Otto, stating:

Simultaneous or express agreement between parties is not

necessary to the formation of a conspiracy (cite omitted). It

is sufficient if there is acquiescence in an illegal scheme (cite

omitted). Indeed, even if one is coerced by economic threats

or pressure to participate in an illegal scheme, that does not

make him any less a co-conspirator (cite omitted). "

658

Finally, this court rejected UDF' s claim that its picketing, when

peaceful, was free speech accorded constitutional protection. The

judge said the UDF members were mixing speech with conduct

intended to induce customers to stop shopping at retail stores handling

Otto milk and thus coerce those stores to cease doing business with

Otto. The court held, " .. .the objective of the picketing was to achieve

a result contrary to the provisions of the Sherman Act....The enjoining

of picketing, the sole purpose of which is in conflict with a valid

statute, is not inconsistent with Constitutional guarantees of freedom

of speech (cites omitted)." 659

The district court found UDF's actions amounted to "a boycott

designed to restrain and monopolize interstate commerce in violation

of the Sherman Antitrust law. "

660 The judge granted Otto's request for

a permanent injunction barring UDF from picketing Otto' s customers.

UDF appealed to the U.S. Court of Appeals for the 3rd Circuit.

UDF raised the same defenses on appeal that it had used earlier in

the district court and again they were rejected. 661 The appellate court
662 388 F. 2d at 797.

663 388 F. 2d at 799.

242

went into the facts of the case in more detail than the district court and

condemned the actions of UDF and its leaders in even harsher words,

finding it a "raw endeavor. .. to monopolize.. .(by) destroying their

major competitor, Dairymen's Co-operative Sales Association and

taking over the Western Pennsylvania milk products field."662

UDF raised the favorable decision it had received in Isaly but the

court distinguished that case on the basis that in Isaly the picketing was

aimed at plaintiff's plant and stores, not innocent third parties.

Finally, the 3rd Circuit found "no merit" in UDF' s argument that it

was engaged in constitutionally protected free speech.663

Another form of boycotting was added to the list of predatory

conduct, picketing and harassment of innocent third party customers

of a buyer or competitor.

In summary, agricultural producers are privileged to act together

in deciding on the prices and terms of sale they will accept for their

production, just as shareholders in an investor-owned firm can do. But

cooperative directors, managers, and members must constantly

remember that the Capper-Volstead Act provides only a limited

antitrust immunity for associations of agricultural producers.

The previous sections of this report discussed circumstances

where producers worked too closely with, or illegally combined with,

their competitors. This section covered instances where producers

were too aggressive in their methods of competition. These cases

illustrate conduct that can be held predatory, while by no means an

exhaustive list of actions, a court might find to be predatory conduct:

! Using intimidation and coercion to force otherwise unwilling

producers to join, or at least abide by the prices set and other

rules of, an association.

! Advocating secondary boycotts against buyers; i. e., pressuring

persons not affiliated with the association to refrain from doing

business with buyers to force otherwise unwilling buyers to
664 Anyone interested in studying a more detailed list of actions the

government might consider "predator y" might review the final judgment

entered as part of the consent decr ee in United States v. Associated M ilk

Producers, Inc., 394 F. Supp. 29, 49 (W. D. Mo. 1975).

665 15 U. S.C . § 2.

666 7 U. S.C . § 291.

243

deal with the association, or at least abide by the prices and

other terms of trade established by the association.

! Covert manipulation of prices paid by buyers, as through the

payment of secret rebates to underbid competitors.

! Picketing retail establishments that bought from processors

who did not secure their raw product from members of the

association, to force the retailers to buy from processors who

did obtain their raw product from association members.

! Disrupting deliveries of raw product to the facilities of

processors unwilling to do business with the association.

! Loaning money to customers and then using the leverage

created by the loan to force the customer to accept prices and

other terms of trade set by the association.664

COOPERATIVE MONOPOLIZATION

Section 2 of the Sherman Act makes it a felony for any person to

"...monopolize, or attempt to monopolize, or combine or conspire with

any other person or persons, to monopolize.. ." any part of interstate

commerce. 665

Section 1 of the Capper-Volstead Act provides agricultural

producers "...may act together in associations... in collectively

processing, preparing for market, handling, and marketing in interstate

and foreign commerce.. ." the products they produce.666

As early as the Borden case, it was established that the power to

collectively market bestowed on producers by Capper-Volstead is not
667 United States v. Borden, 308 U. S. 188, 204-205 (1939).

668 Manaka v. Monterey Sar dine Industries, 41 F. Supp. 531 (N. D. Cal.

1941).

669 41 F. Supp. at 534.

244

absolute.667 The last major issues to be addressed in this report are

whether the collective marketing authority granted producers under

Capper-Volstead empowers them to "monopolize" the markets in

which they participate and, if so, what are the restraints, if any, on a

cooperative monopoly.

Early Decisions Accept Cooperative Monopolies

For several decades, the concept of a cooperative "monopoly"

received little attention. Most producer marketing associations were

local or regional and controlled a relatively modest share of the

markets in which they operated. While there were some exceptions in

specific fruits and vegetables such as oranges, raisins, and cranberries,

numerous substitutes existed in the produce sections of virtually every

grocery store for these items. Judges, when confronted with a

dominant cooperative, didn' t see any reason to be alarmed.

A Federal district court judge, in a decision involving the fishing

industry issued shortly after Borden, just seemed to assume a

cooperative could establish a monopoly. However, he also believed

a cooperative could not abuse its monopoly power.668

All fish processors along the Monterey Bay had signed contracts

agreeing to only accept fish from members of the Monterey Sardine

Industries, Inc., a cooperative association of boats that fish the waters

in the vicinity of the bay. Nonmember fisherman Fr ank Manaka

leased a fishing boat and found a canner willing to accept his catch, but

the association refused to waive its contract provision requiring the

processor to take only fish provided by members. Manaka sued the

association alleging it was an illegal conspiracy in restraint of trade.

The court did not question the authority of the fishermen to attain

". .. monopolistic control over the business and over all fish caught.. ."

in the area. 669 Nonetheless, the court did not condone their conduct.

The court didn' t provide much analysis but rather just held that as the

association was a monopoly, its contract provision requiring processors
670 Cape Cod F ood Products v. National Cranberr y Ass' n, 119 F. Supp.

900 (D.C. Mass. 1954). The available facts in this case are sketchy as the

published opinion is merely the instructions of the judge to the jury.

671 119 F. Supp. at 906.

245

to buy only from its members closed the market to nonmembers and

thus amounted to an illegal restraint of trade.

The first case to discuss an agricultural cooperative monopoly

concerned the post-World War II cranberry industry. 670 In 1946,

production greatly exceeded demand, leading to a collapse in

cranberry product prices. Cape Cod Food Products found itself with

substantial debt and an inventory of cranberry products worth less than

cost and, in 1949, the company was foreclosed. Someone, in the

name of the company, brought a civil antitrust action to recover triple

damages against National Cranberry Assn, a cooperative with about 50

percent of the production under contr act, certain lenders, and some of

its officers. The complaint charged that the lenders conspired with the

producer association to drive Cape Cod Foods out of the cranberry

business.

In his instruction to the jury, the judge offered an explanation of

the term "monopolize" as used in the Sherman Act. He said that a

layman might assume that anyone with 100 percent of the market has

a "monopoly." But in antitrust law "the verb <monopolize' means to

acquire through means which are not specifically approved a dominant

position in the market so as to exclude actual or potential competition,

and to follow such a course of conduct with the intent of

monopolizing."671

He continued:

There is nothing unlawful under the Sherman Act or any

other antitrust act in trying to get even 100 per cent of the

market through skill, efficiency, superiority of product, or

like entirely laudable steps. It is not unlawful under the antitrust acts for a Capper-Volstead cooperative, such as the

National Cranberry Association admittedly is, to try to

acquire even 100 per cent of the market if it does it

exclusively through marketing agreements approved under

the Capper-Volstead Act.
672 119 F. Supp. at 907. Cited with approval, Shoenberg F arms v.

Denver M ilk Producers, 231 F. Supp. 266, 268-269 (D.C . Colo. 1964). In

subsequent cases, courts would consistently hold that Capp er-V olstead per mits

farmers to combine into cooper ative mon opolies, places no lim its on

combination, nor does it forbid far mers from combinin g once their

cooperative reaches a certain size. See, e. g., Fairdale Far ms v. Yankee Milk,

635 F. 2d, 1037, 1040 (2d Cir. 1980), cert. denied, 454 U .S. 818 (1981);

Kinnett Dairies v. Dairymen, Inc., 512 F. Supp. 608, 631 (M.D. Ga. 1981),

aff' d, 715 F .2d 520 (11th Cir. 1983).

673 United States v. Grinnell, 384 U. S. 563, 570-571 (1966). 

246

... 

Hence, it is not a violation of the Sherman Act or any

other anti-trust act for a Capper-Volstead cooper ative to

acquire a large, even 100 per cent, position in a market if it

does it solely through those steps which involve cooperative

purchasing and cooperative selling.672

Thus, a trend had already begun that would be developed during

a period of intense scrutiny of cooperative activity to see if it amounted

to an illegal attempt to monopolize a market. Courts will not be overly

concerned with the fact per se that a cooperative has significant market

power. But, they will look into how that market power is attained and

how it is exercised.

United States v. Grinnell

In 1966, the U.S. Supreme Court attempted to clarify the scope

of Section 2 of the Sherman Act. It stated:

The offense of monopoly under § 2 of the Sherman Act

has two elements: (1) the possession of monopoly power in

the relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from growth or

development as a consequence of a superior product,

business acumen, or historic accident... .monopoly power (is)

the power to control prices or exclude competition.673
674 A major issue in many antitrust cases, including those against farmer

cooperatives, is defining the proper product and geographic markets to be used

in measuring whether the defendant has the power to control prices and

exclude competition as required by the first element of Grinnell. W hile the

court rulings on the se issues we re significa nt to the parties, this analysis is fact

intensive and commodity or produc t specific and be yond the scop e of this

repor t.

675 Case-Swayne v. Sunkist Growers, 369 F. 2d 449 (9th Cir. 1966).

247

After Grinnell, a court must find two elements exist to hold a

business entity guilty of monopolizing or attempting to monopolize

trade or commer ce in violation of Section 2 of the Sherman Act.

First, the firm must have the ability to control prices or exclude

competition in the relevant commercial market.

Second, the firm must have deliberately set out to acquire

monopoly power, or taken steps to maintain its monopoly status, rather

than to have unintentionally become and/or remained a monopoly as

a result of having developed a superior product, made superior

management decisions, or historical accident. 674

The primary focus of the following discussion involves

rationalizing the inherent conflict between the Grinnell language

making it illegal to deliberately attempt to create monopoly power and

the Capper-Volstead Act's language authorizing agricultural producers

to collectively market their products with no stated limitation on that

power. To date, the issue has not been satisfactorily resolved, partly

because the U.S. Supreme Court has declined several opportunities to

consider the matter. But it may also be an issue which defies an

answer that is both equitable and easy to apply.

The first case to apply Grinnell to cooperative marketing was the

9th Circuit Court of Appeals decision in Case-Swayne v. Sunkist

Growers. 675 This ruling came out only a few months after Grinnell.

The district court had granted Sunkist's motion for a directed

verdict on various issues, including a charge that Sunkist had

monopolized certain citrus fruit markets. In reviewing that portion of

the directed verdict, the 9th Circuit took a general view of the second

element of Grinnell. It said ". ..size alone does not constitute an

offense under the Sherman Act; nor does the mere possession of
676 369 F. 2d at 458.

677 A majo rity on the ap pellate cour t panel affirmed the d istrict court

holding on the issue for which this case is mo re wid ely known , tha t Sunkist' s

organizational structur e came within the scop e of the Ca pper-V olstead Act.

Both sides petitioned the U. S. Supreme Court for w rits of certiorari. T he

Court granted Case-Swayne' s request, but not that of Sunkist (387 U.S. 903

(1967)), and held Sunkist had certain no n-produ cer m embers which void ed its

claim to Capper-Volstead protection, 389 U. S. 384 (1967). In 1968, Su nkist

reorganized and revoked the mem bership sta tus of its non-producer affiliates.

The district court held Sunkist now qualified for Capper-Volstead protection.

355 F. Supp. 408 (C. D. Cal. 1971). The ultimate resolution of the Sherman

§ 2 claims was not reported.

248

monopoly power. It is the wrongful use and exercise of that power

which is proscribed by section 2 of the Act. "

676

Case-Swayne alleged that Sunkist manipulated prices and refused

to sell product to it to exclude Case-Swayne from the market. The

appellate court did not find Sunkist had done anything illegal, but said

Case-Swayne had introduced sufficient evidence that Sunkist might

have had a monopoly and might have used any monopoly status it did

have to control prices and exclude Case-Swayne from the market to

avoid a directed verdict. The case was remanded to the district court

to continue the trial.

Thus Case-Swayne established that Capper-Volstead did not

immunize farmer cooperatives from liability under Section 2 of the

Sherman Act (as interpreted by Grinnell) for the "wrongful use and

exercise" of monopoly power. But it didn't provide any guidelines to

use in deciding when a cooperative is abusing its market power.677

After Case-Swayne, the focus on cooper ative antitrust status

moved to the Midwest and Southeast, where the unprecedented consolidation among dairy cooperatives was occurring. Grinnell become the

vehicle for measuring cooperative conduct in a series of complex cases

arising, with one exception, out of dairy cooperative consolidation.

Reporting on these cases is made difficult by the length of time

some of them took to litigate. One case lasted 20 years. While the

cases were in progr ess, decisions would come down in other cases that

impacted how the courts viewed the current cases. The following

treatment is more chronological than case-specific to reflect how

opinions in contemporaneous cases influenced each other.
678 Background infor mation in this section is based prima rily on Ro nald

D. Knutson, Cooperative Bargaining Developments in the Dairy Industry,

1960-70, USDA F armer C ooperative Service Research Report 19 (1971), and

the factual information in the court opinions discussed herein.

249

Milk Industry Transformation

Milk is a unique commodity. Numerous substitutes exist in most

consumers' minds for oranges, raisins, cranberries, etc. For many

people, especially mothers, there is no substitute for milk. And while

many food products can stay on the farm, in the warehouse, or on the

store shelf for extended periods of time, fresh milk is highly

perishable. Producers literally sell it or smell it.

Since the Depression of the 1930s, the Government has

recognized the desires of consumers for a ready supply of fresh,

wholesome milk and the difficulties producers face in satisfying that

demand. USDA, under laws enacted by Congress, has regulated milk

marketing and, through regulation, guaranteed minimum prices for

dairy farmers.

During the late 1950s and early 1960s, milk-producer incomes

were extremely low, in relation to both the amount of work required

and to what people could earn in other agricultural pursuits and in offfarm jobs. 678 From 1955 to 1965, the number of farms having milk

cows declined about 61 percent.

The wave of technological change that had altered the market for

other agricultural commodities earlier now reached the milk industry.

Improved production, processing, transportation and distribution

methods changed previously isolated markets into broad, competing,

and yet interdependent ones.

Weak milk prices, declining cooperative membership, and

expanding competition among previously isolated production areas

caused dairy industry and cooperative leaders to rethink how they were

organized and operating. The result was an upheaval in the Midwest

and Southeast that led to the formation of three large regional

marketing cooperatives and the aggressive entry of a general farm

organization into milk marketing.

Existing cooperatives first attempted to solve their problems by

forming federated organizations to coordinate their separ ate activities.
679 The impact of the developing interstate highway system and large dairy

tank trucks is mentioned, for example, i n United States v. Dairym en, Inc.,

1978-1 Trade Cases (C CH) ¶ 62,053, at 74,539 (W. D. Ky. 1978).

250

In 1960, producer associations in Detroit, Toledo, Cleveland, and

Pittsburgh formed the Great Lakes Milk Marketing Federation. By

1969, the now renamed Great Lakes-Southern Milk Inc. encompassed

20 cooperatives and stretched from the Canadian border to the Gulf of

Mexico and from the Mississippi River to the East Coast. Member

associations represented 34,000 members producing 11.3 percent of

total U.S. milk production and 70 percent of the Grade A milk in their

marketing areas.

In 1964, cooperatives West of the Great Lakes-Southern Milk

group formed their own federation, Associated Dairymen, Inc. Its 15

members stretched from Minnesota and Wisconsin to Texas and from

Indiana to Kansas and Nebraska. By 1970, it represented 50,000

producers with 17.2 percent of total U.S. milk production.

Other, smaller federations were formed in the New York-New

England market, Mid-Atlantic states, Florida, the mountain west, and

in the Chicago market.

However, the federateds couldn't make significant headway in

raising the incomes of dairy farmers. Producer problems were still

perceived as local in nature. Each local association, while part of a

federated system, was still governed by independent directors and

managers. These local cooperatives were unwilling to sacrifice local

autonomy and money to address problems from a broader perspective.

Now that milk could be safely hauled longer distances, buyers were

able to take advantage of the industry fragmentation and play one

cooperative against another when negotiating purchase prices and

terms of sale.679

AMPI. The movement away from federation to consolidation

was swift and substantial. In August of 1967, six large members of

Associated Dairymen, Inc., merged into Milk Producers, Inc. (MPI).

Several other diaries joined by the end of the year and MPI had

substantial market shares in Kansas (40 percent), Texas (70 percent),

Oklahoma (80 percent) and Arkansas (95 percent).

MPI picked up additional members in succeeding months. In

November, 1969, it became a major force in the industry when Pure
680 For a detailed history of the development of NFO, see Don Muhm,

The NF O: A F arm Belt Rebel (Lone Oak P ress, 2000).

251

Milk Association and four smaller cooperatives serving the Chicago

market joined the renamed Associated Milk Producers Inc. (AMPI).

By 1971, AMPI supplied over 75 percent of the milk to such fluid milk

markets as Chicago, Dallas, Houston, Indianapolis, Madison,

Memphis, Oklahoma City, and San Antonio. In a little more than 3

years, 111 formerly independent producer associations and 31,000

dairy farmers had consolidated into a single marketing cooperative.

Mid-Am. Mid-America Dairymen (Mid-Am) was formed in

1968 with the merger of cooper atives serving markets in Iowa, Kansas,

Missouri, and Illinois. Associations serving the Omaha and

Minneapolis markets soon joined. By 1971, Mid-Am included 31

former associations and 23, 000 producers.

DI. Dairymen, Inc. (DI) was also formed in 1968, by eight

cooperatives mainly serving the central and southeastern states.

Sixteen other cooperatives soon joined DI, and by 1971 it had 9,800

producer members.

In summary, from 1967 to 1971, nearly 170 predominantly local

cooperatives had combined into three large multi-market regional

cooperatives with nearly 64,000 producer members. It is easy to

understand the interest this development aroused among antitrust

enforcement officials and others in the milk industry.

NFO. In the mid-1950s, after the Korean War, farm prices

collapsed and a drought occurred. Disgruntled midwestern farmers

formed the National Farmers Organization (NFO) as a not-for-profit

corporation under Iowa law. The original mission was to educate the

world, and Washington, DC, in particular, about the difficult times for

farmers. However, when prices rebounded and the drought ended,

NFO realized it could no longer survive simply as a protest

organization.

Under the direction of its evangelistic president, Oren Lee Staley,

NFO launched a new initiative to facilitate collective bargaining in

agriculture. 680

NFO members signed contracts naming NFO as their exclusive

representative to sell all commodities produced on their farms. Until

a resale agr eement for a given commodity was signed, the members
681 NFO or ganized several "farmer strikes," called holding actions, during

the 1960s. Members would withhold production from the market in an

attempt to force buyers to agree to pay higher prices for m ember products.

Many withholding actions turned violent when participants confronted

nonparticipants. A milk holding action began on March 15, 196 7. It

collapsed two weeks later when the Depar tment of Justice filed an antitrust

suit against NFO for using threats, intimidation, harassment and acts of

violence in an attempt to monopo lize the milk tr ade in violation of Section 2

of the Sherman Act. While NFO blamed the failure of the holding action on

the antitrust suit, other obser vers said that once the initial flurry of publicity

subsided, farmers simply didn' t support it and milk continu ed to flow fr eely

to stores and consumers. (Muhm at 103-105).

682 NF O negotiate d some loc al agreements to sup ply produ ct to

processors, but participation by members under these contracts was voluntary.

683 NFO also had to battle over antitrust issues with its own mem bers.

Some membe rs becam e disenchanted and sued N FO on sev eral groun ds,

including broad a llegations of antitr ust violations, in an attemp t to void their

marke ting contracts.

NFO countered that it met all of the requirements to qualify for the

limited antitrust protection under Capper-Volstead. The dissident members

argued that NF O was n ot operated for the "m utual benefit of its members"

because, as a nonprofit corporation, it could not distribute earnings and

surpluses to its member-owners unless the organization dissolved and

liquidated its assets. The court agreed with NF O. It held NF O met the

standards for coverage under C apper-Volstead and that payment of patronage

252

were free to sell to whomever they chose. The contracts were for 3

years and renewed automatically unless the member canceled during

a 10-day window before the renewal date.

Despite great effort over several years, including its infamous

"holding actions" designed to force processors to sign agreements to

buy product from NFO members at NFO-established prices, 681 NFO

was unable to sign enough processors to so-called "master contr acts"

to activate its role as a cooperative bargaining association. 682

While NFO never became a major presence in milk marketing as

did the three cooperatives, it did become a major headache for them.

First, it attracted some producers away from the cooperatives,

undercutting their efforts to present a united producer front when

bargaining with processors. Second, it was an active participant in a

series of costly and decisive legal battles. 683
refunds or other distributions to members was not a requisite for a producer

association to be "oper ating for the mutual bene fit of its members."

The members also asserted that NFO violated antitrust law by signing

contrac ts with processors. NFO r esponded that norm al, a rms-length contr acts

to sell member product, w ithout a showing of restraint of trade or attem pt to

monopolize, were not forbidden by the antitrust laws. Again the court agreed

with NFO and enter ed a judgment in its favor. Waters v. National Farmers

Organization, 328 F. Supp. 1229 (S. D. Ind. 1971). See also, Alexander v.

National Farm ers Organization, 687 F. 2d 1173, 1184-1187 (8th Cir. 1982).

684 Don Muhm, The NFO: A Farm Belt Rebel (Lone Oak Press, 2000).

253

Mid-Am Fires the First Shot

Muhm684 reports that in the late 1960s, NFO determined that it

could not work with the new regional dairy cooperatives and decided

to compete with them. Although it had neither experience in milk

marketing nor access to processing facilities, NFO told farmers that

existing cooperatives weren't doing enough for them and promised

farmers higher prices if they agreed to sell their milk through NFO.

Some farmers terminated their marketing arrangements with their old

cooperatives and signed contracts with NFO.

Mid-Am was especially upset with NFO activity in Mid-Am's

home state of Missouri. Mid-Am believed NFO was backing up

unfounded claims that it could do a better job of marketing milk by

undercutting Mid-Am prices to dealers, particularly in St. Louis, and

paying premium prices to farmer members with money provided by

producers of other crops and loans by members to keep NFO afloat.

Mid-Am fired the first shot in a 20-year battle. In March, 1971,

Mid-Am brought suit in Federal district court in Missouri charging

NFO with various violations of Federal antitrust law, including illegal

price fixing, restraining trade by inducing Mid-Am members to breach

their marketing agreements, and illegally encouraging farmers to

boycott Mid-Am.

Apparently, Mid-Am hoped the suit would discourage NFO from

trying to compete with it as the representative of dairy farmers in the

area. But instead of backing off, NFO counterclaimed against MidAm and also sued AMPI and two reserve pools set up by the

cooperatives to manage surplus milk in times when production
685 Id. at 125.

254

exceeded demand. NFO made essentially the same allegations against

the other cooperatives as Mid-Am had made against it. AMPI then

counterclaimed against NFO, on the same grounds as Mid-Am in the

original complaint.

The case was referred to Judge John W. Oliver who, according

to Muhm, 685 made two assumptions when handling the case, one valid

and one questionable. First, Judge Oliver decided the case was too

complex to try before a jury. Since few people understand and even

fewer can explain the Federal milk market order system, this was

probably sound reasoning.

Second, Judge Oliver believed he could leave no stone unturned

because he was handling the case that would determine the future

course of agricultural marketing. This assumption turned out to be

wrong, but it played a major part in the length and cost of the

litigation. Under Judge Oliver's control, the parties embarked on a 10-

year period of discovery that cost farmers millions of dollars and

created hard feelings that set neighbor against neighbor and even split

families along the lines of "co-op" v. NFO.

While this case dragged on, other developments occurred that

ultimately had an equal or greater influence on agricultural marketing.

Justice Department Action

The phenomenal change in dairy cooperative structure in the late

1960s ushered in a period of intense scrutiny of all cooperatives, but

particularly dairy cooperatives, by antitrust enforcement officials.

Printed reports of economic analyses of cooperatives by the Antitrust

Division of the Department of Justice and the Federal Trade

Commission's Bureau of Competition totaled more than 1,000 pages.

Commissions were formed, testimony gathered, r eports written and

published, and responses prepared.

However well intended and developed, these academic exercises

had little impact on farmers or their cooperatives. Producers were

focused on the rising tide of litigation. During 1972 and 1973, the

Department of Justice (Justice) brought a separate civil antitrust suit

against each of the three new milk cooperatives.
686 Agricultural Marketing Agreement Act of 1937, 7 U.S.C. §

608(c)(12). Under legislation enacted in 1983 authorizing marketing orders

for promotional purposes only, cooperatives are also allowed to bloc vote for

all of their m embers, bu t members ar e perm itted to vote individually if they

so choose. The Dairy Production Stabilization Act of 1983, 7 U.S.C. § 4508.

No such opt-out pr ovision applies to other mar keting orders.

255

AMPI. The first complaint, filed February 1, 1972, against

AMPI, provided a succinct description of the economic picture

troubling Federal antitrust officials. Of particular concern was the

interplay between the new regional cooperatives and USDA's milk

market order program.

At the time, more than 60 Federal milk marketing orders

regulated the sale of milk in local geographic (usually metropolitan)

markets. Prior to 1967, one or more local cooperatives and private

dairies typically served these markets.

The sudden emergence of AMPI, Mid-Am, and DI created

producer associations that oper ated in several market order territories.

They treated their entire service area as a market and shipped milk

between various metropolitan markets to enhance the earnings of their

membership as a whole.

Marketing orders are usually adopted and amended by a favorable

vote of producers who produce at least two-thirds of the milk for the

market. Justice was particularly unhappy with a provision in the law

permitting cooperatives to bloc vote on behalf of their members in

marketing order elections. 686 Justice noted that since AMPI controlled

90 percent or more of the production in various marketing order areas,

AMPI had the only vote that counted in governance decisions affecting

those orders.

Justice accused AMPI of manipulating the milk market order

system by moving milk from areas where it had little competition to

areas where it had meaningful competition. This enabled AMPI to

drive down the price of milk in areas where it had competition while

charging over-order premiums where it had little competition.

Nonmember producers were squeezed by low prices in competitive

areas, while AMPI members were protected by receiving payments

based on AMPI's overall performance. Justice charged this activity

was an illegal attempt to restrain trade, eliminate competition, and

monopolize in violations of Sections 1 and 2 of the Sherman Act.
687 United States v. Associated M ilk Producers, Inc., 394 F. Supp. 29

(W. D. Mo. 1975). 

688 394 F. Supp. at 38-40.

256

Justice also asserted AMPI engaged in other illegal

anticompetitive conduct. One charge concerned alleged agreements

with unnamed processors that they would not purchase milk from

competitors of AMPI. Another attacked alleged agreements with

truckers, who hauled milk for AMPI members, that they would not

haul nonmember milk.

This case never produced a written opinion on the issues. The

complaint was originally filed in the Western District of Texas in San

Antonio, the city where AMPI had its headquarters. In 1974, the case

was transferred to Judge Oliver in an attempt to coordinate it with the

private litigation involving the same issues and cooper atives.

In April, 1975, Justice and AMPI agreed on a consent decree

ending the litigation. The settlement barred AMPI from engaging in

a number of activities identified an anti-competitive by Justice, but did

not otherwise attempt to break up or restructure the cooperative. 687

When it realized that Justice wasn' t going to attempt to break up

AMPI, NFO aggressively sought to intervene in the case. NFO's

argument was that AMPI, through political contributions documented

in the Senate Watergate Committee's final report, had undermined the

objectivity of Antitrust Division of the Department of Justice.

As Judge Oliver saw it, NFO wanted to supplant the Justice

Department as the prosecutor in this case. The judge found that no

evidence clouding the integrity of the Justice people handling this case.

He rejected NFO' s position and its motion to intervene. 688

NFO appealed the denial of its request to intervene to the U. S.

Court of Appeals for the 8th Circuit. This court took judicial notice

of NFO' s interest in blocking any consent decree in this case and

forcing the Government to go to trial. Section 5 of the Clayton Act

has provided, since enactment in 1914, that a final judgment against

the defendant in a Government antitrust case is prima facie evidence

against that defendant in private litigation involving the same situation.

But a consent decree is excluded from this rule and is inadmissable in
689 7 U. S.C . § 16(a).

690 United State s v. A ssociated Milk Producers, Inc. , 534 F .2d 113

(1976), aff' g, 394 F. Supp. 29 (1975). The Supreme Court denied NFO's

request that it hear the case on a writ of certiorari, 437 U .S. 905 (1978).

691 United States v. Mid-America Dairymen, Inc., 1977-1 Trade Cases

(CCH ) ¶ 61,508 (W .D . M o. 1977).

692 The Antitrust Procedures and Penalties Act, § 2, Pub. L . N o. 93-528,

88 Stat. 1706 (1974), codified at 15 U. S.C . 16(b)-(h).

693 41 Fed. Reg. 21, 799-21,811 (1976).

694 41 Fed. Reg. 37, 353-37,367 (1976).

257

 private litigation.689 After a review of the proceedings, the 8th Circuit

affirmed Judge Oliver' s denial of NFO's intervention request. 690

Mid-Am. In December, 1973, the United States filed suit against

Mid-America Dairymen (Mid-Am) alleging antitrust violations and

seeking relief similar to what it asked for in its suit against AMPI.

This case was filed in the Western District of Missouri and was

assigned to Judge Oliver. Thes case was also settled via a consent

decree barring Mid-Am from using numerous alleged anticompetitive

tactics. 691

Just as the AMPI case was nearing conclusion, a major

amendment to Section 5 of the Clayton Act was enacted.692 The

amendment consisted of new provisions requiring greater disclosure to

the public of proposed consent decrees and an opportunity for public

comment. As a result of the Antitrust Procedures and Penalties Act

(APPA), anyone wishing to study this case in detail has access to the

Federal Register publication of the proposed consent decree, a

summary of the case called a competitive impact statement,

693 and to

the written comments provided by the public and Justice's response to

those comments. 694

As in the AMPI case, NFO asked to intervene, this time on the

grounds that the Government's proposed settlement wasn't in the

public interest. NFO also asserted that Justice had not been vigilant

enough in forcing Mid-Am to disclose information under the APPA.

NFO asked the court to order the breakup of Mid-Am or, in the

alternative, to give members an unlimited right to leave Mid-Am on 30
695 United States v. M id-America Dairymen, Inc., 1977-1 Trade Cases

(CCH ) ¶ 61,508 at 71, 980 (W. D. Mo. 1977).

696 United States v. Dairym en, Inc., 1978-1 Trade Cases (CCH ) ¶ 62,053

(W.D. Ky. 1978), aff' d in part, rev' d in part, and remanded, 660 F .2d 192

(1981).

258

days notice. The court noted that members of Mid-Am were permitted

to leave on 30 days notice anytime during the year following final

approval of the consent decree, and on the anniversary date of his or

her membership agreement each year thereafter. Judge Oliver again

denied NFO' s motion to intervene and approved the consent decree as

proposed by the parties. 695

DI. On March 29, 1973, Justice brought suit against Dairymen,

Inc. (DI). Justice made the same allegations of illegal conduct it had

against AMPI and Mid-Am--oving milk to depress prices received by

competing producers; r estricting truckers from hauling for

nonmembers; coercing producers to become members; and suppressing

efforts of members to resign and compete with DI. The main

difference between this litigation and the other two cases is that DI did

not settle, but rather conducted a lengthy defense of both the

Government's charges and related private actions.

The case was filed in the Western District of Kentucky in

Louisville, where DI had its headquarters. DI was not a direct

participant in the private litigation before Judge Oliver, so the case was

not transferred to his court. After more than 5 years, the District

Court Judge in Kentucky issued an opinion generally favorable to

DI. 696

This judge, citing Maryland & Virginia Milk Producers

Association v. United States, 362 U.S. 458 (1960), tacitly rejected the

Government' s request that he look at the evidence in its entirety for a

pattern of attempted monopolization. Rather, he examined each

allegation separately and found the Government failed to prove, in

most instances, that DI's actions reached the level of predatory

conduct.

Full supply and committed supply contracts. DI attempted to

compel all purchasers of its milk to sign contracts obligating them to

purchase all of their milk from DI (full-supply contracts). When this
697 1978-1 Trade Cases (C CH) ¶ 62,053, at 74,544.

698 1978-1 Trade Cases (C CH) ¶ 62,053, at 74,545.

699 Id.

700 1978-1 Trade Cases (C CH) ¶ 62,053, at 74,546.

259

failed in some instances, it offered to supply milk under contracts

requiring the purchasers to buy a certain amount of milk from DI

(committed supply contracts). The court noted that buyers could

continue preexisting purchase arrangements with independent

producers and other cooperatives, and that firms who had signed fullsupply contracts were offered the option to switch to committed supply

contracts. The court also observed that some handlers were parts of

agribusiness firms with assets greatly exceeding those of DI, who

could, and sometimes did, turn to sources other than DI for all their

raw milk needs. The court concluded DI's efforts to obtain full and

committed supply contracts did not amount to predatory conduct. 697

Acquisitions. Over a 5-year period, DI had acquired 18

processing plants. The government admitted it could not prove the

purchases were predatory (the prices paid were reasonable and the

purchases occurred at a leisurely pace). The court refused to treat

them as part of an overall scheme to monopolize. Thus, the court held

these acquisitions were not made to illegally restrain or suppress

competition.698

Hauling contracts. Truckers hauling DI milk signed contracts

requiring them to haul only for DI. The court said that the threat of

contamination from commingling outside milk with member milk

justified DI requiring truckers to haul only DI milk in trucks that

hauled any DI milk. However, DI could not foreclose its contract

haulers from transporting nonmember milk in other trucks they owned

and/or operated. 699

Membership contracts. Membership agreements bound producers

to market through DI for 2 years. The court found the Government

failed to show the 2-year length of the marketing contracts was

unreasonable. 700

Pooling. The court held DI had moved milk into Mississippi with

a predatory intent of coercing nonmembers serving that market to join
701 1978-1 Trade Cases (C CH) ¶ 62,053, at 74,546-74, 547.

702 United States v. Dairym en, Inc. , 1978-2 Trade Cases (CCH) ¶ 62, 186

(W. D. Ky. 1978).

260

DI. 701 The practice was suspended after 4 months when USDA took

steps to stop it. In a subsequent opinion, the court held that since the

practice was unlikely to resume, no injunctive relief was appropriate.702

Thus, at the district court level, DI scored an almost total victory.

The court, interpr eting each Justice Department allegation

independently to see if it was predatory conduct, found the

Government hadn' t met its burden of proof.

Related Private Litigation

Beginning in 1979, a number of court decisions issued in private

cases would impact both the Government's action against DI and the

NFO litigation with AMPI and Mid-Am. One concerned a dispute

between producer associations and a private dairy in New England.

A second was a suit by a Georgia dairy against DI based essentially on

the Government's action against that cooperative. A third concerned

the relationship among cooperative bargaining and processing

associations marketing the same crop.

Fairdale Farms v. Yankee Milk

In June, 1973, dairy farmers in the northeastern states believed

the minimum prices set under the milk market orders in their area

were too low to provide them an adequate return on their farming

operations. Seven producer associations serving those markets created

the Regional Cooperative Marketing Agency (RCMA). RCMA was

a federated organization patterned on the early attempts by midwestern

producers to affiliate for the purpose of increasing their market power.

From its inception through August, 1975, members of RCMA set

prices they would accept for member milk above the market order

minimums.

Fairdale Farms was a milk producer and a dealer-processor

located near Bennington, VT. Historically, it had purchased a large

portion of the milk it processed from members of Yankee Milk, a

cooperative member of RCMA. In 1974, Fairdale refused to continue
703 The courts' dismissal of the Sherman § 1 charges on the basis that

Capper-Volstead authorizes producers and associations of producers to engage

in mer e price fix ing is discussed ea rlier in th is report.

704 Fairdale Far ms v. Yankee Milk, 1980-1 Trade Cases (CCH) ¶ 63, 029,

at 77, 116 (D. C. Vt. 1979), aff' d in part, vacated in part, and remanded, 635

F. 2d 1037 (2d Cir. 1980), cert. denied, 454 U .S. 818 (1981).

705 Id.

261

paying over-order premiums and discontinued purchasing milk from

Yankee members.

In 1976, Fairdale brought an antitrust action against Yankee Milk

and RCMA. Fairdale raised two issues. First, it alleged that price

fixing by Yankee members and among the RCMA members was illegal

per se as a conspiracy to restrain trade prohibited by Section 1 of the

Sherman Act. Second, Fairdale charged Yankee and the other RCMA

members attempted to monopolize the raw milk market from which

Fairdale obtained it supply in violation of Section 2 of Sherman.

Yankee and RCMA admitted agreeing on prices and, citing the

Capper-Volstead Act, moved for summary judgment on both counts. 703

As a defense against the attempt to monopolize charge, Yankee

and RCMA argued that Capper-Volstead permits cooperatives to

acquire monopoly power unless they do so through predatory means.

To prevail, Fairdale had to prove both that Yankee and/or RCMA had

monopoly power and had committed at least one predatory act. As

Fairdale had not alleged any predatory conduct, the cooperatives

argued that they were entitled to summary judgment. The cooperatives

pointed out that all of the various cases finding cooperatives had

violated Section 2 of Sherman involved associations engaged in

predatory conduct.

The trial court judge refused to accept the premise that Congress

intended to authorize agricultural producers to attain monopoly

power.704 He pointed out that the cooperatives had not produced a

decision wherein a plaintiff's case was dismissed because it failed to

introduce evidence of predatory conduct. In denying the cooperatives'

motion for summary judgment, he wrote that while he did "...not

doubt that proof of predatory practices adds substantial weight to a

plaintiff's monopoly claim, .. .(I) r efuse to hold that it is a necessary

element." 705
706 Fairdale Farms v. Yankee Milk, 635 F .2d 1037, 1040 (2d Cir. 1980)

707 635 F. 2d at 1043.

708 "The offense of monopoly under § 2 of the Sherman Act has two

elements: (1) the possession of monop oly power in the relevant market and (2)

the willful acquisition o r ma intenance of that power as distinguished from

grow th or development as a conse quence of a superior product, business

acumen, or historic accident." U nited States v. Grinnell, 384 U .S. 563, 570-

571 (1966).

262

The cooperatives appealed to the U.S. Court of Appeals for the

Second Circuit, which took a tack more favorable to cooperatives.

First, the appellate court agreed with Yankee Milk that producers

could attain monopoly status, saying:

By exempting farmers from Sherman Act limitations on

the ability to combine into cooperatives, Capper-Volstead

gives farmers the right to combine into cooperative

monopolies. The Act places no limits on combination; it

does not forbid farmers from combining after their

cooperative reaches a certain size. For a court to impose

such limits and hold cooperatives liable for treble damages

if they run afoul of a judicial standard would discourage the

growth of these cooperatives. The Capper-Volstead Act

recognizes that farmer cooperatives may grow into

monopolies and includes precautions to prevent abuse of

monopoly power.706

After citing numerous laws favorable to cooperatives, the court

observed, "In short, when Congress enacted the Capper-Volstead Act,

it did not intend to prohibit the voluntary and natural growth that

agricultural cooperatives needed to accomplish their assigned purpose

of effective farmer representation." 707

The 2nd Circuit then attempted to reconcile the Capper-Volstead

Act with Grinnell,

708 reasoning that:

...the effect of Capper-Volstead is to prevent the full

application of the second element of this test to agricultural

cooperatives. Capper-Volstead permits the formation of
709 635 F. 2d at 1045.

710 Fairdale Far ms v. Y ankee Milk, 715 F .2d 30 (2nd Cir. 1983), cert.

denied, 464 U .S. 1043 (1984).

263

such cooperatives and places no limitation on their size. As

the cooperative grows, so, normally, does its power over the

market. Thus, while the formation, growth, and operation

of a powerful cooperative is obviously a "willful acquisition

or maintenance of such power, " and will rar ely result from

"a superior product, business acumen, or historic accident, "

it is exactly what Capper-Volstead permits.

We conclude that Grinnell does not apply to monopoly

power that results from such acts as the formation, growth,

and combination of agricultural cooperatives, but applies

only to the acquisition of such power by other, predatory

means. 709

The 2nd Circuit vacated the district court's denial of the

cooperative's motion for summary judgment and remanded the case for

the trial court to clarify whether predatory acts had been shown that

would justify denying the cooperative's motion again and conducting

further proceedings.

In summary, the Second Circuit in Fairdale Farms added a fourth

exception to the second element of Grinnell. To show a cooperative

violated Section 2 of the Sherman Act, a plaintiff must first show that

the cooperative has monopoly power (the power to control prices or to

exclude competitors from the relevant market). Then it must also

show that the cooperative willfully acquired or maintained that power

and did not achieve it from growth or development as a consequence

of (1) a superior product, (2) business acumen, (3) historical accident,

or, (4) conduct compatible with what Congress authorized in Section

1 of the Capper-Volstead Act.

On remand, the district court dismissed the monopolization claim

and Fairdale Farms appealed. The Second Circuit affirmed the

dismissal on the basis that Fairdale had not shown the cooperatives

engaged in any conduct not protected by Capper-Volstead.710 The

court found that Yankee and RCMA did not engage in predatory

practices when they established over-order premiums, charged
711 715 F. 2d at 31-34.

712 Kinnett Dairies v. Dair ymen, Inc., 512 F. Supp. 608 (M .D . Ga.

1981), aff' d, 715 F.2d 520 (8th Cir. 1983), cert. denied, 465 U .S. 1051

(1984).

264

different premiums in different market order areas, or refused to sell

milk to Fairdale unless it paid the price set by producers and paid by

other purchasers in the marketing area. 711

Kinnett Dairies v. Dairymen, Inc.

In August 1973, just weeks after the Department of Justice sued

DI, Kinnett Dairies, a privately owned and operated dairy, filed a

similar private complaint in the U.S. district court in Columbus, GA.

Kinnett made two basic allegations against DI. First, it said that DI

participated in several arrangements with other cooperatives that

restrained trade in violation of Section 1 of the Sherman Act by

keeping surplus milk out of Georgia and thereby keeping prices it

could charge Kinnett artificially high. Second, that DI violated Section

2 of Sherman via various business practices designed to monopolize

the milk market in Georgia.

After nearly 8 years, the district court issued an opinion following

trial that was a total victory for DI. 712 The court relied heavily on

Fairdale Farms and the district court opinion in United State v. DI.

The case is getting more coverage in this report than is justified by its

legal significance because the jurist, Senior District Judge Bootle, not

only took the time to explain why certain issues that keep recurring in

these cases were important to the parties but did a better job than many

of his judicial colleagues in explaining his rulings in plain English.

Problems between Kinnett and its cooperative supplier began

before DI entered the picture. Until 1970, Kinnett hauled the milk

from the farms of its producer-suppliers, both coopertive members and

independent producers, to its plants. In 1969, GMPCA, a local

cooperative association which provided milk to Kinnett and later

became part of DI, began hauling its members' milk to market.

Both entities found hauling operations desirable because they were

profitable and provided a regular opportunity to place an employee or

contractor on the farms to establish personal contacts and build

producer loyalty. In early 1970, the manager of GMPCA informed
713 512 F. Supp. at 622-623.

265

Kinnett that it would no longer be allowed to haul milk for GMPCA

members because GMPCA feared its members' milk might be

contaminated by nonmember milk mixed in the same tanker and that

Kinnett employees were talking producers into leaving GMPCA.

GMPCA treated Kinnett just like it did other processors. It took

over hauling member milk to all its customers' plants. In September,

1970, GMPCA joined DI. DI continued the exclusive hauling

requirement, retained the manager of GMPCA, and terminated any

hauler who attempted to influence members to leave the cooperative.713

Kinnett's lawsuit was triggered by the convergence of several

events in late 1972 and early 1973 that drove up the cost of milk

production while actual output was decreasing. A severe drought in

the eastern United States was causing a decline in local grain

production and stressing the animals. Grain sales to Russia were

depleting midwestern grain reserves and further driving up the cost of

animal feed in the southeast.

DI asked its customers to accept an increase in the transfer price

in their sales agreements to protect dairy farmer income. All of DI's

customers agreed to the price increase except Kinnett. On the day

before the price increase was to go into effect, Kinnett notified DI that

it would accept the increase if DI would guarantee that all of the extra

money collected would be passed through to producers. DI considered

this to be an attempt to gain a role in its internal decision-making

process and rejected the suggestion.

A provision in DI sales agreements said that all customers were

entitled to the most favorable terms of trade received by any other

customer. Thus, if DI gave in to Kinnett it would have to rescind the

price increase accepted by its other customers. On August 2, 1973, DI

ceased providing milk to Kinnett and Kinnett sued.

Kinnett obtained a temporary r estraining order requiring DI to

continue selling milk to Kinnett under the terms of their contract until

that contract expired. USDA softened the impact of this decision. It

recognized the predicament facing Georgia dairymen and increased the

minimum price required under the applicable milk marketing order to
714 512 F. Supp. at 621-622.

715 512 F. Supp. at 630-631.

716 512 F. Supp. at 632.

717 Id.

718 Id.

266

cover more than half of DI's requested price increase. DI's other

customers voluntarily agreed to continue paying the difference.714

The court considered Kinnett' s claim that DI illegally conspired

to restrain trade through agreements with other cooperatives to manage

the supply of milk available for sale in Georgia. Citing Fairdale

Farms at length, this court agreed that farmers were free to combine

as they saw fit and obtain monopoly status. 715

Then Judge Bootle outlined the steps a cooperative could take on

its own to restrict competition.

1. A cooperative may recruit an unlimited number of farmer

members, even if the production of those members amounts to a

dominant position in the market for the product they produce. Judge

Bootle found that "(t)he acquisition and growth of market power by

farmers through voluntary association in agricultural cooperatives is

not only tolerated by the terms of the Capper-Volstead exemption, but

is encouraged." 716

2. A cooperative, as agent for its farmer members, may " lawfully

perform all of the tasks necessary to the processing, preparing for

market, handling and marketing of their (products)."

717

 The judge

noted this included gathering, testing, hauling, and processing, as well

as selling.

3. A cooperative may fix the price of member product it sells

and, in seeking the best price it can, "may exercise such market

leverage as is afforded by managing in the market the combined

production of its members. "

718

4. A cooperative without monopoly power may r efuse to sell

product to anyone. A cooperative that is a monopoly may not r efuse

to sell to someone offering reasonable terms of purchase, if the refusal

is intended to perpetuate its monopoly. In other words, a cooperative

may refuse to sell to anyone who declines to accept a fair and

reasonable offer.
719 512 F. Supp. at 633.

720 Id.

721 512 F. Supp. at 633-635.

267

5. A cooperative may allocate territory among its members.

6. A cooperative may agree with other cooperatives on the prices

each will charge for member product and allocate sales territories and

customers among themselves "... if this furthers the legitimate

marketing purposes of the farmers, even though the antitrust laws may

forbid other types of organizations from combining together in similar

conduct."

719

Judge Bootle then determined that none of the conduct questioned

by Kinnett was "... predatory in any sense of the word" because:

The entire spirit of Section 6 of the Clayton Act and of

the Capper-Volstead Act was its purpose to free farmers

from the role of pricetakers and to enable them through joint

action to agree upon, announce, and with some measure of

assurance and confidence insist upon the agreed upon price

for their product. 720

The conduct allowed cooperatives with Capper-Volstead antitrust

protection includes (1) working with other cooperatives to set prices

and manage supplies, (2) charging prices above the Feder al minimum,

(3) taking over transportation functions previously performed by

Kinnett, (4) threatening to stop providing product to customers who

began buying from a competitor, and (5) insisting on full or committed

supply sales contracts. 721

He also noted that all of Kinnett's allegations, other than DI

cutting off its milk supply, had been reviewed and found to be

nonpredatory by the district court in the Government's case against DI.

This court said that, under the circumstances (the unprecedented low

levels of dairy farmer income and DI's obligation to sell to all

customers at the lowest price offered any customer), DI did not act

with predation when it attempted to convince Kinnett to revise its

contract like all other buyers from DI had done. Whether DI acted
722 512 F. Supp. at 635-638.

723 512 F. Supp. at 638.

724 512 F. Supp. at 641.

268

properly was a matter of contract law, not predatory conduct

amounting to a violation of antitrust law. 722

The court's treatment of the hauling issue is a good example of its

common sense approach and language. In finding the cooperative did

not act with predation in taking over Kinnett's role as milk hauler for

its members, the court found the cooperative's motive:

 .. .was to terminate Kinnett's practically unlimited access

to D.I. 's dairy farmer members which access Kinnett was

obviously ready, willing and able to use, legitimately albeit,

to persuade such members to desert D.I. at the expiration of

their membership contracts and become independent

producers for Kinnett. D.I. does not have, and does not

claim any right to prevent such attempts at persuasion on the

part of Kinnett, but at the same time, D.I. is under no

obligation to provide or continue to provide ready access for

such attempts... .How long would plaintiff itself have

continued to employ a hauler who was attempting to

convince independent producers marketing their milk

directly to plaintiff to join (the co-op)?723

The judge made another interesting finding. He noted that

Kinnett had been so successful in persuading producers to leave DI that

it no longer needed to purchase any milk from DI. He said, "This

underscores the fact that a cooperative's market power is somewhat

tenuous and transitory. What power defendant had had largely

vanished." 724 The fact that members could, and did, leave DI led him

to find that DI never really possessed sufficient market power to incur

liability for monopolization under Section 2 of the Sherman Act.

Judge Bootle held that DI had not engaged in anticompetitive

conduct with outsiders nor in any predatory conduct. Relying

primarily on Fairdale Farms, he issued a judgment for DI.
725 512 F. Supp. at 641.

726 512 F. Supp. at 643.

269

However, he also seemed to anticipate where the appellate court

was heading with the Government's case against DI. He

acknowledged that judges in cases not involving cooperatives had ruled

that otherwise lawful conduct, with an exclusionary intent, is evidence

of an illegal attempt to monopolize commerce. He noted that he found

it very difficult "... to discern whether conduct is legally exclusionary

or illegally exclusionary.. .(because) all businessmen, even those

honestly competing, have an exclusionary intent. "

725

The judge concluded that the evidence indicated that DI had ".. .no

conscious intent to stifle or smother competition or to exclude others

from the market place." 726

GVC Cannery v. California Tomato Growers

Decisions in antitrust cases involving cooperatives seemed to flow

with regularity in the Spring of 1981. A month after the Kinnett

decision, a California judge decided a suit by a private canner alleging

a producer bargaining association and two processing cooperatives

were engaged in an unlawful attempt to monopolize the canning tomato

market. In rejecting the private canner' s assertion, the judge said:

It is not unlawful under the antitrust acts for a CapperVolstead cooperative.. .to try to acquire even 100% of the

market if it does it exclusively through marketing

agreements approved under the Capper-Volstead Act." Cape

Cod Food Products v. National Cranberry Association, 119

F. Supp. 900 (D. Mass. 1954).

Because an agricultural cooperative may lawfully achieve

100% of a market, it necessarily follows that two or more

such organizations may together hold such monopoly power.

A contrary holding would impose grave legal consequences

upon organizational distinctions that are of de minimis

meaning and effect [citation omitted]. Given that price

fixing is a legitimate Capper-Volstead purpose--even where

such activity fosters a monopoly of one or more agricultural

associations--the § 2 combination and conspiracy allegation
727 GVF Cannery v. California Tomato Growers Ass'n, 511 F. Supp.

711, 714-715 (N. D. Cal. 1981).

728 511 F. Supp. at 716.

729 Id. The judge deter mined tha t GVF Canning had not pr operly pleaded

predatory conduct on the part of California Tomato Gr owers Ass' n and gave

it 60 days to file an ame nded com plaint. In accor d with the basic holding that

a plaintiff has to prove predatory conduct before produc ers can b e held to have

engaged in an illegal restraint of trade, Am arel v. C onnel, 1994-1 Tr ade

Cases (CC H) ¶ 70, 632 (D. D. Cal 1993).

730 United States v. Dairym en, Inc. , 1978-1 Trade Cases (CCH) ¶ 62, 053

(W. D. Ky. 1978).

270

must fall under the weight of Congress's intent to immunize

such conduct from the antitrust laws. 727

The private canner also charged that the bargaining association

had illegally monopolized the market for canning tomatoes. Since this

case fell within the jurisdiction of the 9th Circuit, the court cited CaseSwayne to show that the second element of Grinnell rendered unlawful

"...the wrongful use and exercise of [monopoly] power."728 Taking

guidance from Fairdale Farms, this court held "wrongful" as used in

Case-Swayne meant "predatory. " Thus, this court agreed with the 2nd

Circuit that a plaintiff had to establish that a cooperative with CapperVolstead status either acquired or exercised monopoly power in a

predatory fashion to prove the cooperative monopolized or attempted

to monopolize commerce in violation of Section 2 of Sherman.729

United States v. DI Revisited

Three months after Judge Bootle's decision in Kinnett, the U. S.

Court of Appeals for the 6th Circuit issued its opinion in the

Government' s case against DI. The trial court said that DI's

requirement that buyers sign full or committed supply contracts before

DI would sell them milk was not a predatory practice and therefore did

not indicate any violation of antitrust law. 730 The Justice Department

made a partial comeback on appeal. The U.S. Court of Appeals for

the 6th Circuit found that the district court:
731 United States v. Dairymen, Inc., 660 F.2d 192, 194-195. (6th Cir.

1981), aff'g in part, rev' g in part, and remanding, 1978-1 Trade Cases (CCH)

¶ 62, 053 (W. D. Ky. 1978).

732 Fairdale Far ms v. Y ankee Milk, 635 F .2d 1037 (2nd Cir . 1980).

271

...set too high a burden on the Government when it

required the Government to show that D.I.' s practices rose

to the level of predatory practices, i.e. , anticompetitive

practices without any business justification. The offense of

attempt to monopolize requires only that the defendant has

engaged in anticompetitive conduct with a specific intent to

monopolize and that there was a dangerous probability that

the attempt would be successful. (cites omitted) The district

court did not determine whether D.I. used its full supply and

committed supply contracts and exclusive hauling contracts

with the specific intent to monopolize.. ..

Although there is evidence of economic justification for

the use of full supply and committed supply contracts, the

question of intent is paramount. An anticompetitive practice

may have economic justification, but its use may be

undertaken with unlawful intent and in the desire to achieve

an unlawful goal. On remand. .. the most important inquiry

is whether these contracts were intended to stifle competition

or were intended to meet legitimate business purposes. 731

This Sixth Circuit opinion is somewhat at odds with the Second

Circuit opinion in Fairdale Farms v. Yankee Milk.732 The Second

Circuit held that Section 1 of Capper-Volstead protected cooperative

conduct that did not rise to the level of a predatory practice, an

anticompetitive practice without any business justification. The Sixth

Circuit did not question the ability of producers to accumulate

monopoly power through voluntar y combination. But it said that a

cooperative could be found in violation of antitrust law for acquiring

that power through the use of anticompetitive practices with a business

justification if the conduct was undertaken with a specific intent to

stifle or eliminate competition.

On remand, in an unreported opinion, the district court held that

DI's actions, taken as a whole, demonstrated a specific intent to
733 The district court opinion is summarized in the subsequent opinion of

the 6th Circuit, United States v. Dairymen, Inc, 1985-1 Trade Cases (CCH)

¶ 66, 638 (6th Cir. 1985).

734 Section 3 of the Clayton Act (15 U.S. C. § 14) forbids agreements not

to buy the goods of a competitor if the effect of the agre ement m ay be to

substantially lessen competition or tend to create a monopoly. 

735 1985-1 Trade Cases (C CH) ¶ 66,638, at 66,156-7.

736 United States v. Dairym en, Inc, 1985-1 Tr ade Cases. (C CH) ¶ 66,638

(6th Cir. 1985).

737 7 U. S.C . § 291.

272

monopolize the fluid milk market in the Southeast.733 However, it

rejected the Government's claim that DI violated Section 2 of the

Sherman Act because it found that the Government didn' t meet its

burden of proof under the first element of Grinnell, to establish that DI

could control prices or exclude competitors from the relevant markets.

The district court did find DI' s full and committed supply

contracts violated Section 3 of the Clayton Act. 734 The court said that

DI had "sound and legitimate" reasons for entering into the

agreements. Nonetheless, at the time the contracts were obtained, DI

had sufficient market share (59.5 percent) to exclude competitors from

markets they had previously served, and the contracts achieved that

end. 735

On appeal, the Sixth Circuit affirmed the district court opinion.736

The court never mentioned the language in Section 1 of CapperVolstead authorizing producer associations to "make the necessary

contracts and agreements" to carry out their legitimate business

objectives. 737 The appellate court just seemed to accept the district

court finding that a full or committed supply contract, negotiated by a

cooperative with an undefined but substantial market share, was

inherently intended to lessen competition and therefore a violation of

Section 3 of Clayton.

Midwest Milk Revisited

In January, 1981, after 10 years of argument that produced a

record of more than 15,000 pages, Judge Oliver issued a 140-page
738In re Midwest M ilk Monopolization Litigation, 510 F. Supp. 381

(W.D. Mo. 1981), aff'd in part, rev'd in part, and remanded, Alexander v.

National Farm ers Organization, 687 F. 2d 1173 (8th Cir. 1982), cert. denied,

461 U. S. 937 (1983).

739 Alexander v. National Farm ers Organization, 687 F. 2d 1173 (8th Cir.

1982).

740 687 F. 2d at 1182.

273

exhaustive summary of the facts and allegations in the case. He

directed judgments be entered on behalf of the defendants in all three

phases of the litigation on the grounds that none of the parties had

presented sufficient evidence to prove their allegations. 738

AMPI, Mid-Am, and NFO all appealed to the U.S. Court of

Appeals for the 8th Circuit. The appellate court issued a lengthy

opinion covering a broad range of issues. 739

The court summarizing the facts of the case and the general

antitrust principles as modified by the Capper-Volstead Act. Citing

Fairdale Farms, the court noted that agricultural "cooperatives may,

singly or in combination with other exempt cooper atives, obtain

monopoly power in a given market so long as it is achieved through

natural growth, voluntary confederation and without resort to

predator y or anti-competitive practices. "

740

On the complex issue of the standard to be used in determining

whether cooperative conduct is outside the protection of CapperVolstead, the Eighth Circuit sided with the Sixth Circuit opinion in

United States v. Dairymen, Inc., saying:

Whether a co-op's given business practice is unlawful

thus is not merely a question of whether it is "predatory" in

a strict sense, e.g. , lacking a legitimate business justification.

As the Sixth Circuit recently noted, "[a]n anti-competitive

practice may have economic justification, but its use may be

undertaken with unlawful intent and in the desire to achieve

an unlawful goal." United States v. Dairymen, Inc., 660

F.2d 192, 195 (6th Cir. 1981). That court squarely rejected

the argument that Section 2 prohibits co-ops only from

engaging in narrowly defined "predatory practices." Id. at

194. We agree. A cooperative may not use its position, no
741 687 F. 2d at 1183. But in a subsequen t decision the 10th Circ uit

seemed to accept the standard set by the 2nd Circuit in Fairdale Farms. It

stated that Capp er-V olstead pro tected coope rative con duct that did not involve

anti-competitive agreements with non-producers or "pr edatory tactics. .. ."

Holly Sugar v. Goshen County Cooper ative Beet Growers, Ass' n, 725 F .2d

564, 569 (10th Cir. 1984).

742 687 F. 2d at 1187-1188.

743 687 F. 2d at 1188.

274

matter how lawfully acquired, "to stifle or smother

competition." Maryland & Virginia Milk Producers Assoc,

supra, 362 U.S. 463. Where such an unlawful intent is

clear, overt acts in furtherance of this purpose are not

immunized simply because they also have other justifications

or because they are merely "anticompetitive" rather than

"predatory. "

741

After concluding that NFO met the structural tests for CapperVolstead protection, the court sustained Judge Oliver's dismissal of the

established cooperatives' claims against NFO. The court rejected

claims that NFO illegally coerced or induced members of other

cooperatives to join NFO. It held that asking members of other

cooperatives to join NFO actually fostered legitimate competition

where none existed.742 The court also found that NFO withholding

actions, not directed at eliminating competition, were protected by

Capper-Volstead.743

The appellate court, however, reversed Judge Oliver's findings

that Mid-Am and AMPI had not engaged in illegal conduct. The

Eighth Circuit held the district court had reached a clearly erroneous

factual conclusion that the cooperatives had not engaged in predatory

conduct. It also stated the judge erred in looking at each action by the

Mid-Am and AMPI separately rather than analyzing them collectively

and finding an intent to eliminate competition.

The court noted the cooperatives were free to act in concert to

eliminate competition among themselves and to gain market share and

raise milk prices through lawful means. But, they could not engage in

conduct designed to eliminate competition from other parties. It noted

that conflicting evidence would justify the finding of the trial court that
744 687 F. 2d at 1193.

745 In the 1960's the Supreme Court was asked to balance the conflicting

goals of policies (1) pr otecting private rights to petition the government for a

redress of grievances and (2) prohibiting conspiracies to monopolize and

eliminate competition . In tw o separate c ases, the Supreme Court held

concerted effort aim ed solely at influencing public officials did not violate the

Sherman Act. E astern Railroads Presidents Conference v. N oerr M otor

Fre ight, 365 U. S. 127 (1961); United Mine W orkers v. Pennington, 381 U .S.

657 (1965). 

746 687 F. 2d at 1195-1196.

747 Id. at 1198.

275

many actions of the cooperatives, viewed in isolation, were not

unlawful. But some conduct was clearly predatory in nature and,

when their conduct is viewed as a whole, the only conclusion that can

be drawn is that Mid-Am and AMPI conspired to monopolize the

market for Grade A milk and to eliminate competition in that

market. 744

The court referred to several actions as evidence of a general

intent to monopolize and eliminate competition.

1. The cooperatives vigorously opposed attempts by NFO to

become "qualified" as a cooperative under Federal milk market orders.

Their actions included numerous letters and personal contacts with key

State and Federal government officials questioning NFO' s

qualifications. They also proposed an amendment to the definition of

"cooperative association" under the applicable orders which, if

adopted, would have seriously hindered NFO's efforts to become

qualified. The court held that while this activity was not illegal in and

of itself under the Noerr-Pennington doctrine, 745 it could be considered

to indicate the purpose of other, unprotected activity.746

2. The court discussed examples of the Mid-Am and AMPI shortshipping and making late deliveries to dairies that bought milk from

NFO rather than from them, charging discriminatory "fees" only to

dairies who bought from nonmember producers, and threatening to

stop shipping milk to a dairy that bought from NFO. The court found

such conduct "plainly predatory" as well as further evidence of an

overall intent to eliminate NFO as a competitor.

747
748 Id. at 1203.

749 Id. at 1207.

750 Alexander v. N ational Farmers Organization, 614 F. Supp. 745 (W.D.

Mo. 1985).

751 National Farmers Organization v. AMPI, 850 F.2d 1286 (8th Cir.

1988), aff'g in part, rev' g in part, and remanding, 614 F . Supp. 745. 

276

3. Mid-Am and AMPI threatened to sue dairies that bought milk

from NFO on the grounds that they were aiding and abetting NFO' s

allegedly illegal attempts to induce cooperative members to market

through NFO. The courts found this was further evidence of an

unlawful attempt to prevent NFO from being a competitor in milk

marketing. 748

When it viewed the record as a whole, the court concluded, "The

foregoing pattern of conduct establishes that (the cooperatives)

conspired to gain control over milk marketing and to eliminate

competition through unlawful pr actices. "

749

The 8th Circuit remanded the case to the district court to

determine the level of damages due NFO. Normally, at this stage of

the proceedings, a case winds down and disappears below the radar

screen. But this was not a normal case.

After 3 years Judge Oliver, who was probably not too pleased to

have his original opinion overturned or to see this set of litigants again,

ruled that NFO had not proven it was entitled to any damages. 750 NFO

appealed. The Eighth Circuit sustained his denial of NFO request for

injunctive relief. But it held NFO was entitled to substantial monetary

damages. 751

The wrangling continued until finally, in 1991, the litigation was

settled when NFO agreed to drop all claims against Mid-Am and

AMPI in exchange for a cash payment of $21.4 million.

While NFO "won" the ultimate battle, it suffered some

unexpected casualties. Farmers throughout the Midwest were sick and

tired of their organizations in constant turmoil with each other. At the

time of the settlement, NFO President DeVon Woodland, who had

succeeded Oren Lee Staley and continued his policies of attacking

large cooperatives and agri-business in general, declared NFO was

headed for a new era.
752 United States v. Dairym en, Inc. , 660 F .2d 192 (6th cir. 1981).

753 Kinnett Dairies v. Dair ymen, Inc., 715 F. 2d 520, 521 (11th Cir.

1983), aff' g, 512 F . Supp. 608 (M. D. Ga. 1981).

754 7 U. S.C . § 292.

277

A half-year later, in December 1991, Woodland was voted out of

office at the NFO annual meeting and succeeded by Steven Holloran,

a young farmer from Nebraska, who had never met Oren Lee Staley.

NFO, now flush with cash for the first time in its history, was

ready to move from constant confrontation to more cordial conciliation

with other agricultur al groups. It was time for cooperatives to focus

on making money for their farmer-members instead of their lawyers.

Kinnett Dairies v. DI Revisited

Kinnett Dairies appealed Judge Bootle's adverse ruling in its case

against Dairymen, Inc. Kinnett's main contention, based on the 6th

Circuit' s decision in the Government's case against DI, 752 was that the

district court had used an overly stringent test of requiring it to show

predatory conduct to prevail.

The Eleventh Circuit Court of Appeals, which had jurisdiction

over Kinnett's case, issued a brief opinion rejecting Kinnett's claim.

It referred to the Judge Bootle's specific finding that DI had "no

conscious intent to stifle or smother competition.... (512 F. Supp. at

643)" and found Kinnett's reliance on the 6th Circuit opinion did not

sustain its request for reversal. 753

SECTION 2 OF CAPPER-VOLSTEAD

Congress deemed it necessary to provide a mechanism to prevent

producers from abusing their combined market power to the detriment

of consumers. Section 2 of the Capper-Volstead Act754 doesn' t directly

limit the ability of producers to accumulate market power through their

cooperative. However, it does bar producer associations from

monopolizing or restraining trade and using their market power to

unduly enhance the prices they charge for the products they sell.
755 Id.

756 Id.

278

USDA Enforcement

In Section 2, Congress directed that if the Secretary of

Agriculture determines a producer association "monopolizes or

restrains trade.. .to such an extent that the price of any agricultural

product is unduly enhanced thereby, he shall.. ." serve a complaint

stating the reasons for his action and a notice of hearing for the

cooperative to show cause why the Secretary should not issue an order

directing it to cease the challenged conduct. "

755

After the hearing, if the Secretary believes that an association

monopolizes or restrains trade in interstate or foreign commerce to

such an extent that the price of any agricultural product is unduly

enhanced thereby, he or she shall issue an order r eciting the facts

found and directing the association to cease and desist from its

monopolization or restraint of trade.

If the association fails to comply with the order within 30 days,

the Secretary is required to file a certified copy of the order and

certified copies of all records in the matter, in U.S. district court in the

judicial district in which the association has its principal place of

business.

The Department of Justice is responsible for enforcing the order.

The district court may affirm, modify, or set aside the Secretary's

order; issue a temporary injunction against the cooperative while the

case is pending; and "a permanent injunction or other appropriate

remedy" after it hears argument. 756

A particularly vexing aspect of Section 2 is ascertaining an

objective standard for determining when the price of an agricultural

product is "unduly enhanced. " This issue has been the subject of some

academic inquiry, but never an administrative or judicial decision.

In a simple sense, "unduly" and "unr easonably" are synonyms.

So a price is unduly enhanced when it is unreasonable or excessive

under the circumstances. But also in a simple sense, to say a price is

illegal when it becomes "unreasonable" is like having no standard at

all. How, or if, this issue will be addressed in uncertain at this time.
757 Office of the Secretary, Memor andum No, 1332, 18 F ed. Reg. 4408

(1953).

758 Office of the Secretary, Administration of Capper-Volstead Act, 24

Fed. Reg. 8335 (1959).

759 Office of the Secreta ry, Admin istration of Capper-Volstead Act, 37

Fed. Reg. 3196 (1972).

760 Office of the Secretary, Capper-Volstead Act, Assignment of

Responsibility, 40 Fed. Reg. 6696 (1975). In 1981, the Secretary

reauthorized the Capper-Volstead Act Committee as it is currently composed.

It is chaired by USDA' s chief economist (7 C.F .R. § 2.29(a)(9)). The other

two members are the general counsel (7 C.F .R. § 2.31(n)) and the Under

Secretary for M arketing and Regulatory Progr ams 7 C. F. R. § 2. 22(a)(9)).

279

Apparently, until 1953, responsibility for enforcing Section 2 of

Capper-Volstead rested in the Office of the Secretary of Agriculture.

In 1953, that r esponsibility was assigned to the Office of the

Solicitor.757

In 1959, the Secretary revoked the previous delegation of

authority and created a three-person committee to ".. .carry out the

responsibilities assigned to the Secretary of Agriculture by the CapperVolstead Act...."758 The members of the original so-called CapperVolstead Committee were the general counsel (chair), the administrator

of the Agricultural Marketing Service, and the administrator of the

Farmer Cooperative Service.

In 1972, Secretary Earl Butz, who might have seen the committee

as a waste of time and money, terminated it.759 By 1975, Secretary

Butz was under mounting pressure from cooperative critics and

antitrust enforcement officials who questioned USDA's commitment

and ability to enforce Section 2 of Capper-Volstead. He responded by

appointing a new Capper-Volstead committee. This time the committee consisted of the general counsel (chair), the Assistant Secretary

for Marketing and Consumer Services, and the director of Agricultural

Economics. 760

Two reports, issued in 1979, increased the institutional pressure

on USDA to be more aggressive in monitoring cooperatives. The

first, by the Presidentially-appointed National Commission for the

Review of Antitrust Laws and Procedures, recommended that

enforcement authority under Section 2 of Capper-Volstead be clearly
761 National Commission for the Review of Antitrust Laws and

Procedur es, Report to the President and the Attorney General, Januar y 22,

1979, p. 263.

762 General Accounting Office, Family Farmers N eed Cooperatives --But

Some Issues Need to Be Resolved (CED -79-106, July 26, 1979).

763 USDA Capper-Volstead Study Committee, Undue Price Enhancement

by Agric ultural Coopera tives: C riteria, Monitoring, Enforcement (June 1979).

764 Proposed Rules of Practice G overning Cease and Desist Proceedings

Under Section 2 of the Capper-V olstead Act, 44 Fed. Reg. 39409 (1979)

765

 Rules of Practice Governing Cease and Desist Proceedings Under

Section 2 of the Capper-Volstead Act. 7 CFR § 1.1 60-1. 175. The F inal Rule

is published at 45 Fed. Reg. 6587 (1980). Technical amendments to the

regulation are published at 60 Fed. Reg. 8457-8459 (February 14, 1995).

766 7 CFR § 1. 162(a).

280

separated from USDA's activities to promote cooperatives, either

within the Department or by moving Section 2 authority outside of

USDA. 761

The second, by the General Accounting Office, recommended that

USDA establish a more active oversight program including (1) the

active monitoring of cooperative pricing activities and (2) the

placement of the Capper-Volstead enforcement responsibilities in an

agency separ ate from USDA's cooperative promotion functions. 762

Critics seemed most concerned that USDA didn't have a

procedure in place to continuously review prices charged by

cooperatives for undue price enhancement. They felt USDA's position

of waiting for and responding to outside complaints was ineffective.

In June, 1979, the USDA Capper-Volstead Committee issued a

paper outlining a possible approach to establishing a new office within

USDA to identify and investigate potential incidents of undue price

enhancement. 763

The following month, USDA published Proposed Rules of

Practice for proceedings to enforce Section 2 of the Capper-Volstead

Act. 764 In early 1980, USDA published a Final Rule formalizing

procedures to implement Section 2 of Capper-Volstead.765

 The regulations begin with an open invitation for anyone to

submit information on activity by a cooperative that could trigger an

enforcement action.766 However, USDA chose not to establish a
767 General A ccounting Office, Dairy C ooperatives: Role and Effects of

the Capper-Volstead Antitrust Exem ption (RCED -90-186, September 1990),

p. 32.

768 Notice, P roviding Information Regarding Undue Price Enhancement

Under the Capper -Volstead Act, 56 F ed. Reg. 4594 (February 5, 1991).

769 61 Fed. Reg. 8224 (M arch 4, 1996).

281

separate monitoring and investigation office.

In 1990, the General Accounting Office (GAO) once again called

for USDA to actively monitor cooperative pricing practices. This time

GAO suggested that Congress keep an eye on USDA. If the Department didn't become more active in enforcing Section 2 of CapperVolstead, GAO recommended legislation transferring enforcement

authority to the Federal Trade Commission.767

In early 1991, the Capper-Volstead Act Committee published a

Notice in the Federal Register reminding the public of USDA's Section

2 enforcement mechanisms. 768 No other changes in USDA policy on

Capper-Volstead Section 2 enforcement procedures have been

implemented.

At one time, the Department of Commerce had similar regulations

concerning enforcement of the Fishermens Collective Cooperative

Marketing Act. In 1996, they were removed from the Code of Federal

Regulations as no longer needed because ".. .no. .. complaints have been

filed and (the Department) is unaware of any complaints that may be

filed." 769

The Secretary of Agriculture has never been called upon to

determine whether an association has restrained trade to such an extent

that it has unduly enhanced prices. Thus there are no administrative

rulings or court decisions interpreting Section 2.

This is not an indication of any lack of diligence on the part of the

Secretary of Agriculture or of competitors and customers of

cooperatives to look for instances of abusive trade restraint by

cooperatives. Nor does it mean farmers are such good citizens that

they would never even consider testing the limits of permissible

conduct. Rather, it reflects (1) the nature of agriculture and the mind

set of many farmers and (2) the lack of meaningful penalties in Section

2 of Capper-Volstead.
282

Barriers to entry into the production of most agricultur al products

are quite low. Since farmers can' t control production, as soon as a

cooperative earns higher prices for its members, more people begin

producing that product, supply soon outstrips demand, and prices fall.

Also, many farmers are independent by nature. Some simply

don' t want anyone else involved in their business operations. While

they may buy supplies and services from a cooperative, they aren' t

inclined to participate in a group marketing scheme--especially if a

marketing contract is involved. This usually requires surrendering

some control over their crops and/or animals to a manager and board

of directors.

Some suggest that a real failing of the farmer cooperative

movement has been the inability of producer associations to ever

acquire enough market power to even approach the threshold of unduly

enhancing their prices. Whether the continuous evolution of

agricultural markets and cooperative structur e will result in producers

acquiring that power is a matter of pure conjecture at this time.

Also, it should be noted that the only penalty available to the

Department in a Section 2 enforcement action is the issuance of a cease

and desist order. If a party is successful in a private antitrust suit, it

can collect three times its actual damages. This is a strong incentive

to forego administrative channels in favor of litigation.

Limits on USDA Jurisdiction

Producer associations generally assume they will receive more

favorable treatment from USDA than from the Department of Justice

or the Federal Trade Commission. Thus, they have attempted to

establish that Section 2 of Capper-Volstead gives the Secretary of

Agriculture exclusive jurisdiction over allegations that they engaged in

anti-competitive behavior. Failing to establish exclusive jurisdiction

in USDA, they have then tried to show USDA has primary

jurisdiction.

The U.S. Supreme Court addressed the jurisdiction issue in its

first interpretation of the Capper-Volstead Act, holding Section 2

establishes an additional tool to limit anticompetitive conduct and in no
770 United States v. Borden, 308 U. S. 188, 205-206 (1939), rev'g , 28 F .

Supp. 177 (N. D. Ill. 1939). 

771 15 U. S.C . § 45.

772 This case is the covered in great detail in a book: Fritz F. Mueller,

Peter G. Helmberger & Thom as W. Paterson, The Sunk ist Case, A Study in

Legal-Economic Ana lysis (Lexington MA: L exington Books, 1987).

283

way shields producers from liability for conduct that violates the

Sherman Act. 770

Sunkist Growers raised the issue of USDA jurisdiction in relation

to that of the Federal Trade Commission (FTC). In May 1977, the

FTC issued a formal complaint charging Sunkist with engaging in

unfair methods of competition in violation of Section 5 of the Federal

Trade Commission Act. 771 Most of the allegations centered on

Sunkist's exclusive dealing arrangements with various packing houses

serving its orange and lemon growers. In August 1980, the dispute

was settled. Sunkist would sell its Arizona processing plant and refrain

from purchasing other processors or signing contracts with additional

packing houses for a limited number of years without prior FTC

approval. 772

During the administrative process, Sunkist filed a complaint in

Federal district court seeking injunctive relief on the basis that the FTC

was operating outside its statutory jurisdiction. Sunkist asserted the

Capper-Volstead Act vested exclusive jurisdiction over any

anticompetitive activity by an agricultural marketing association in the

Secretary of Agriculture. In the alternative, it argued the doctrine of

primary jurisdiction requires USDA to act or fail to act before the FTC

can interfere with such a cooperative.

Sunkist admitted that the Borden decision holds that if the charges

were brought under Section 2 of the Sherman Act, the Department of

Justice has jurisdiction. However, it asserted that different rules apply

to the FTC. To support its case, Sunkist referred to congressional

consideration, and rejection, of an attempt to designate the FTC as the

agency charged with enforcing the provisions of Section 2 of CapperVolstead.
773 Sunkist Gr owers v. F ederal T rade C omm ission, 464 F . Supp. 302

(C. D. Cal. 1979).

774 Cincinnati Milk Sales Ass' n v. N FO, 1967 Trade Cases (CC H) ¶

72,092 (S. D. Ohio 1967).

284

A Federal district court judge rejected Sunkist's position and

issued a judgment for the FTC. 773 The judge noted that USDA might

have jurisdiction over allegations of undue price enhancement.

However, the FTC charged Sunkist with engaging in monopolistic

practices intended to deter entry and reduce the number of competitors

in the industry. As USDA does not have any express jurisdiction in

these areas, the FTC properly asserted jurisdiction over Sunkist.

Section 2 of Capper-Volstead also does not stand as a barrier to

private litigation. During one of its holding actions to raise the price

of milk, some NFO members used threats and some actual violent acts

to attempt to prevent members of a competing cooperative from

delivering their milk to market. The competing cooperative sued NFO

and the members on several grounds, including conspiring to restrain

trade in violation of Section 1 of Sherman.

NFO raised Section 2 of Capper-Volstead as a defense, arguing

that the Secretary of Agriculture, not the court, had jurisdiction over

the events as they were intended to enhance prices. The court

disagreed, holding that when violence is alleged in a non-frivolous

manner, the court has jurisdiction to hear the case.774
775 Green v. Associated Milk Producers, Inc., 1981-2 Trade Cases (CCH)

¶ 64, 346 (D. Minn. 1981), aff' d, 692 F .2d 1153 (8th Cir. 1982).

285

CHAPTER 7: ODDS AND ENDS

Over the years, antitrust issues concerning cooperatives have

come before the courts that may not necessarily go to the heart of

producers' protections under Capper-Volstead and other laws, but are

significant to the parties when they arise. This section summarizes

how these issues have come up and how they have been resolved.

COOPERATIVES, EMPLOYEES AND MEMBERS

The relationship of a cooperative with its employees and members

under antitrust law was reviewed in a case brought by a terminated

milk hauler against a dairy cooperative.

Rollin Green was an independent milk hauler who picked up milk

from AMPI members and delivered it to a local dairy under a contract

with AMPI. Several members complained about the quality of Green's

hauling service and threatened to resign from AMPI because of it.

AMPI employees consulted with a hauling committee of its members,

terminated Green's contract, and allocated his customers to two other

contract haulers.

In an antitrust action, Green alleged various conspiracies in

violation of Section 1 of the Sherman Act. Both sides moved for

summary judgment. The district court judge decided all issues in favor

of AMPI and the U.S. Court of Appeals for the Eighth Cir cuit

affirmed.775

The first allegation charged AMPI and three of its employees

conspired to restrain trade in the milk hauling business. The court

noted that two entities are required to establish a conspiracy and a

corporation and its employees, agents, and officers are generally

considered a single entity incapable of conspiring with each other.

An exception to this general rule exists if the employees, agents,

or officers are, at the time of the conspiracy, acting for their own

behalf. While Green alleged the employees were doing so, no
776 692 F. 2d at 1156-1157.

777 692 F. 2d at 1157.

778 Ripplemeyer v. National Grape Cooperative Association, 807 F . Supp.

1439, 1460 (W .D . Ar k. 1992).

286

evidence in the record supported that charge. The court held the

general rule that a corporation and its employees, agents, and officers

were a single entity not capable of engaging in a conspiracy applied to

the cooperative and dismissed this allegation.776

The second allegation charged AMPI, its employees, and its

members conspired to boycott and refused to do business with Green.

The court cited Section 6 of the Clayton Act and Section 1 of the

Capper-Volstead Act to support its finding that the cooperative and its

members were also a single entity for antitrust purposes. It also

dismissed this charge. 777

A district court in Arkansas reached a similar conclusion in a case

brought by growers terminated by their cooperative when it withdrew

from serving the area where they farmed. Among the growers'

numerous allegations were charges that the cooperative, its board

president, and chief executive officer conspired to restrain trade in

violation of Section 1 of Sherman. Although the court found CapperVolstead did not apply to the facts, it nonetheless granted summary

judgment for the cooperative and the other defendants because

plaintiffs had failed to introduce any evidence that the board president

and chief executive officer acted outside of their scope of authority or

did anything contrary to the interests of the cooperative.778

Thus, the courts have established that a cooperative, its

employees, and its members are, as a general rule, a single entity and

by law not capable of conspiring among themselves in violation of the

antitrust law.

COOPERATIVES AND CONTRACTORS

Green alleged a third conspiracy, that AMPI and the milk haulers

given his former customers conspired to stifle competition in the milk

hauling business. The court noted that Capper-Volstead does not

shield a conspiracy between a cooperative and non-cooperatives.

Nonetheless, AMPI's motion for summary judgment was granted on
779 Green v. AMP I, 692 F .2d 1153, 1157 (8th Cir. 1982).

780 L & L H owell v. Cincinnati Cooperative Milk Sales, 1983-2 Trade

Cases (CC H) ¶ 65, 595 (6th Cir. 1983).

287

this issue because Green failed to provide any evidence that the other

haulers conspired with AMPI to terminate Green. AMPI's action was

unilateral, with the contract haulers only input being a subsequent

decision to take over Green' s route. 779

Green makes it is clear that a cooperative and its contractors can't

be engaged in a conspiracy when the underlying decision for a change

in their relationship was made unilaterally by the cooperative.

A second case involving a cooperative's relationship with an

unhappy contract milk hauler was decided shortly after Green. In this

instance two cooperatives had jointly negotiated a hauling contract with

L & L Howell to truck their commingled milk to the same dairy.780

When Howell decided the contract wasn't as favorable as he had

hoped, he asked to cooperatives to renegotiate. When they refused,

Howell sued alleging the cooperatives violated the Sherman Act by

conspiring and using their monopoly power to coerce him to accept an

unreasonably low and therefore "predatory" fee for his trucking

services.

The trial court judge allowed the case to go to the jury, which

found for Howell and awarded him $136, 000 for lost profits. The

cooperatives appealed the judge's failure to direct a verdict for them

on all issues to the Sixth Cir cuit Court of Appeals.

The cooperatives raised Capper-Volstead as a defense to Howell's

claims. Relying on Green v. AMPI and another case, the court held

that milk hauling is among the cooperative activities protected by

Capper-Volstead. The court noted that the only evidence of coercion

was the fact that the two cooperatives controlled about 85 percent of

milk produced in the local area and said:

This near monopoly status is precisely what the CapperVolstead Act makes lawful, and it would not be unlawful

even if defendants controlled 100% of the farmers. The

evidence does not suggest that the cooperatives sought to

expand their monopoly power by setting the price of milk
781 1983-2 Trade Cases (C CH) at 68, 969.

782 Id. at 69,970. The Court of Appeals reversed the district court

judgment and ordered the case dismissed.

783 Cape Cod Food Pr oducts v. National Cranberry Ass' n, 119 F . Supp.

900, 909 (D. C. Mass. 1954).

288

hauling or eliminating competition among haulers; the

cooperatives themselves did not engage in milk hauling and

evidenced no intention of doing so. They simply obtained an

advantageous price of hauling for the benefit of their

members. .. .

781

The court concluded that offering a price to a contractor, even an

unreasonable low one, "is simply not the type of predatory or

anticompetitive behavior the courts have forbidden to dairy

cooperatives. Plaintiff Howell was not coerced into accepting the low

price to eliminate or restrain competition, and the Capper-Volstead Act

protects cooperatives that lawfully acquire and use their monopoly

power."782

Thus, two Capper-Volstead cooperatives with a high combined

market share are not exposed to antitr ust liability simply for signing an

advantageous agreement with the same contractor.

DIRECTOR, EMPLOYEE, AND ADVISER LIABILITY

Officers, directors, or agents of a cooperative, like those of any

other business corporation that violates the penal provisions of the

antitrust laws, may be prosecuted if they are responsible for the

violation.

In its jury instruction in a private antitrust case,783 the court said

that ordinarily an officer of a cooperative and the cooperative cannot

conspire together. When the officer acts, he or she normally acts on

behalf of the cooperative, and under the law, this is the conduct of a

single person, so no conspiracy is possible. However, the court said,

when an officer of one entity also has an interest in a second entity and

acts on behalf of both entities, or on behalf of one entity and his own

account, a dual role is created and a jury may find a conspiracy

occurred.
784 Id. at 919.

785 Tillamook Cheese & D airy Ass' n v. T illamook County Creamery

Ass' n, 358 F. 2d 115, 118 (9th Cir. 1966). See, a lso, Bergjans Farm Dairy

Co. v. Sanitary M ilk Producers, 241 F. Supp. 476, 486 (E.D. Mo. 1965),

aff' d, 368 F .2d 679 (8th Cir. 1966).

786 358 F. 2d at 118.

289

The court also noted later in the instructions that if an officer or

director of a cooperative or other corporation had no connection with

a violation of the antitrust laws, except that he or she happened to be

an officer at the time the violation occurred, then the officer is not

personally liable. The court said, "To be liable an individual must

either himself participate or must authorize another to act or must with

knowledge of the responsibility acquiesce in the act of another with

which he is affiliated as an officer or in a like relationship." 784

Subsequent private cases have held that a cooperative manager,

other officers, the board president, and other directors, " (t)he

individuals through whom a corporation acts and who shape its

intentions, " can be held liable for engaging in an illegal conspiracy

with non-cooperative purchasers of the cooperative's product and for

attempted monopolization in the conduct of their regular duties. 785

A somewhat different standard was applied to counsel for a

cooperative. The court in the Tillamook(s) case held counsel could not

be held liable if his or her role was limited to the regular duty of

providing legal advice, even if he or she mistakenly advised that a

particular course of conduct would not violate antitrust law. However,

if counsel goes beyond that role and acting alone or jointly with others

makes policy decisions, then counsel can be held liable for antitrust

violations just as any other officer of the company performing a similar

function.786

SUPPLY CONTROL

One way to raise prices in the marketplace is to reduce available

supply. Certainly a cooperative entity, whether selling raw product it

controls or processed products made from raw commodities provided

by its members, has the right to resell its inventory whenever it

chooses. But it is less clear whether producer members can, through
787 In re Washington Crab A ssociation, 66 F. T.C. 45 (1964).

788 66 F. T.C. at 126-127.

290

the mechanism of a producer association, agree among themselves to

withhold product from the market to force buyers to pay a higher price

for their products.

One administrative opinion interpreting the Fisherman's

Collective Marketing Act suggests cooperative members may limit

production. 787 The Washington Crab Association was organized to

negotiate higher prices and fairer terms of trade for its members from

the processors who purchased their catches. When a stalemate

developed, the fishermen "sat on the beach" for nearly a month,

refusing to fish.

FTC Chairman Paul Rand Dixon found nothing wrong with the

cooperative members limiting production, either by refusing to fish at

all or by sending only a few boats out each day on a rotating basis to

supply those processors willing to pay the association's requested

price. He wrote:

To be sure, this is a "limitation on production" and,

except for the exemption afforded... by the (FCMA). .. would

be a per se violation of the Sherman Act and the Federal

Trade Commission Act.. ..Thus, so long as the members of

a cooperative are acting pursuant to an agreement voluntarily

entered into among themselves, they are to be considered a

single entity for antitrust purposes, the same as an ordinary

business corporation with a number of "divisions. " There is

no obligation on the single corporation to produce at

capacity; it may produce any volume that it likes and allocate

production among its several "divisions" in such proportions

as it sees fit.. ..We see nothing unlawful in their limiting

production by agreement among themselves, or in their "boat

rotation." 788

Another case involved a dairy producers association that

sponsored a two-week milk withholding action to attempt to raise the

price of milk for its members. The 8th Circuit Court of Appeals

determined that since no member was coerced into participating and
789 Alexander v. National Farm ers Organization, 687 F. 2d 1173, 1188

(8th Cir. 1982).

790 Com petitive Imp act Statement accompanying proposed consent

judgmen t, Antitrust Division, Department of Justice, Or egon v. M ulkey,

1997-1 Trade Cases (C CH) ¶ 71,859 at 80, 042 (D. Ore. 1997).

791 Johnson v. Pacific Lighting Land Co. , 817 F .2d 601 (9th Cir. 1987).

291

the action was not intended to eliminate competition, it fell within the

scope of conduct protected by the Capper-Volstead Act.789

In another action against crab fishermen, the Department of

Justice said that commercial crab harvesters who simply agree among

themselves to refrain from fishing while negotiating prices with buyers

were engaged in a conspiracy to restrain trade in violation of Section

1 of Sherman. However, such conduct was protected by the

Fisherman's Collective Marketing Act if the commercial crab

fishermen formed a fishermen's marketing association before agreeing

to limit production.790

It is uncontested, using the rationale of Chairman Dixon, that a

value-added cooperative can, just like its non-cooper ative competitors,

limit the amount of product it offers for sale. These precedents suggest

that members of a cooperative may voluntarily agree among

themselves to limit their production as well.

Producers contemplating a withholding action should realize that

if the action backfires, the courts may not be sympathetic to their

plight. In 1975, lemon packing houses in Arizona, some of whom

were members of the Sunkist system, withheld lemons from the market

hoping to boost the prices received. But the final crop was larger than

expected and the lemons were ultimately sold for less than they would

have sold for at harvest.

Grower-members of Sunkist sued the for-profit packing house that

packed and shipped their lemons under contract with Sunkist, alleging

the withholding action violated Arizona antitrust law. The trial court

jury found for the growers and awarded them damages for their losses.

The U.S. Court of Appeals for the Ninth Circuit reversed the

order on the verdict. 791 The appellate court said, "The growers sought

damages for the profits they would have realized had competition been
792 817 F. 2d at 605.

793 Columbia River P ackers Ass' n v. Hinton, 34 F . Supp. 970 (D.C . Or e.

1939), rev'd , 117 F .2d 310 (9th Cir. 1941), rev'd , 315 U .S. 143 (1942).

794 Supra, pp. 142-145.

292

reduced. This is not the type of injury that (antitrust laws are)

intended to forestall."

792

COOPERATIVE OR UNION?

People who wish to deride cooperatives, particularly to others

with a hostile attitude toward the labor movement, will sometimes call

them little more than farmer unions. A case that began about the same

time as Borden, but took significantly longer to make its way through

the judicial system, addresses the important distinction between the

cooperatives and labor unions under antitrust law. 793

As noted earlier, during the Depression the economic conditions

confronting fishermen were as challenging as those facing farmers. In

1934, Congress responded by passing the Fisherman's Collective

Marketing Act. This extended the same antitrust protection to

fishermen that farmers gained under Capper-Volstead.794

By the late 1930s, fishermen in the Pacific Northwest had formed

a powerful association, the Pacific Coast Fishermen's Union.

Membership included 90 percent of the commercial fishermen fishing

off shore in Oregon and Washington and a substantial portion of the

fishermen working the adjacent rivers and bays.

The Union played hardball. Members were forbidden by its

constitution and bylaws from selling fish to processors not under

contract with it. A packer or canner who signed up to take product

from members was barred from buying fish from anyone not a

member. Both the district and appellate court opinions relate that the

Union engaged in boycotts, coercion, and other forms of what would

today be called predatory conduct to keep both its members and its

customers in line.

Apparently both the fishermen and the processors assumed they

were engaged in an employee-employer relationship. The Union had

applied for and been accepted as a member of the Congress of

Industrial Organizations (CIO). The processors had formed an
795 34 F. Supp. at 973.

796 29 U. S.C . § 101 et seq.

797 34 F. Supp. at 974.

293

association, the Commercial Fisheries Association, to bargain with the

Union.

When most of the other processors signed with the Union,

Columbia River attempted to hold out. But in 1938, faced with a lack

of product, it too signed. When independent fishermen who had been

its suppliers offered to sell it fish, Columbia River told them it could

not buy from them because of the exclusive dealings clause in its

contract with the association. At this point the independent fisherman

threatened to bring an antitrust suit against Columbia River.

As the 1939 fishing season approached Columbia River was, as

the trial court put it, "Caught between two fires--the demand of the

union that it renew the exclusive buying clause of the union contract,

and the threat of the independent fishermen to claim damages.. .if it

does renew the exclusive buying clause.... "

795

Columbia River offered to buy fish from Union members at the

price negotiated with the Commercial Fisheries Association, but not on

an exclusive basis. When this offer was refused, Columbia River sued

the Union and several of its leaders for engaging in an illegal

conspiracy to restrain trade.

Columbia River asked the court to issue an injunction restraining

the Union from interfering with its efforts to buy fish from

nonmembers, a judgment invalidating the exclusive dealing clause of

the contract, and damages. The judge issued a temporary restraining

order preventing the Union from enforcing its rules barring (1)

members from selling fish to packers or canners not under contract

with the Union and (2) a packer or canner who signed up to take

product from Union members from buying fish from anyone not a

member.

As the case proceeded, the Union's primary defense was that the

parties were engaged in a "labor dispute" between employees and an

employer and the Norris-LaGuardia Act796 prohibits injunctions in

labor disputes. In its brief, the Union also asserted it was a "trade

association" protected by the Fisherman' s Collective Marketing Act. 797
798 Id.

799 34 F. Supp. at 974-975.

800 34 F. Supp. at 977.

801 Hinton v. Columbia River Packers Ass'n, 117 F.2d 310 (9th Cir.

1941).

802 Cert. granted, 314 U .S. 600.

294

Columbia River, challenging the conventional wisdom in the

industry, argued the Norris-LaGuardia Act was not applicable. It

showed the judge that the fishermen fished when and how they wanted

without any control by it. He held that the Norris La-Guardia Act did

not apply and then said "...the defendant union has more aptly

described itself in claiming the benefits of the Fishermen's (Collective)

Marketing Act. It is truly a cooperative marketing association, and we

look to the law of cooperative marketing rather than to labor law in the

determination of the legality of (its) acts. "

798

The judge cited and apparently had studied the Borden opinion

more carefully than he had the Fisherman' s Act. First, he mistakenly

referred to the Secretary of Agriculture as having enforcement

authority under the Fisherman's Act. Second, rather than analyzing

the Union's conduct in light of the statutory law, he found for

Columbia River on the basis that research had not uncovered any

examples of agricultural marketing cooperatives requiring customers

to buy exclusively from them or enforcing against their own members

a requirement that they sell exclusively to buyers who had signed

agreements with the cooperative.799 He held both strategies to be

illegal restraints of trade and enjoined the Union from enfor cing these

rules without ever looking at whether the law allowed such

restraints. 800

The Union appealed to the 9th Circuit Court of Appeals. The

only issue discussed in that court's opinion is the applicability of

Norris-LaGuardia. The appellate court read Norris-LaGuardia to

apply beyond traditional employee-employer relationships. It found

the rules used by the Union were part of labor contracts protected from

antitrust attack and reversed the trial court. 801

The U.S. Supreme Court accepted an appeal by Columbia River802
803 Columbia River P ackers Ass' n v. H inton, 315 U. S. 143 (1942), rev'g,

Hinton v. C olumbia River Packers Ass' n, 117 F .2d 310 (9th Cir. 1941).

804 315 U. S. at 144-145.

805 315 U. S. at 145.

806 315 U. S. at 147.

807 Hinton v. C olumbia River Packers Ass' n, 131 F .2d 88 (9th Cir. 1942).

808 131 F. 2d at 89.

809 Gulf Coast Shrimpers and O ystermans Association v. U nited States,

236 F. 2d 658 (5th Cir. 1956).

295

and reversed the 9th Circuit. 803 In a brief opinion, the Court said that

"Although affiliated with the C.I.O., the Union is primarily a

fishermen's association, composed of fishermen who.. .carry on their

business as independent entrepreneurs, uncontrolled by (Columbia

River) or other processors. "

804

The Court described the Union as "a collective bargaining agency

in the sale of fish caught by its members. "

805 It found the NorrisLaGuardia Act inapplicable because this dispute concerned the sale of

fish between fish sellers and fish buyers and "...does not place in

controversy the wages or hours, or other terms and conditions of

employment." 806

The case was remanded to the 9th Circuit which, perhaps not

pleased to be reversed, issued a brief opinion now affirming the district

court's conclusion that the Union was an illegal conspiracy to restrain

trade. 807 The 9th Circuit, without ever referring to the Fisherman's

Collective Marketing Act, issued three terse findings that (1) Union did

not qualify as an organization exempt from the antitrust laws, (2) the

antitrust laws applied to Union, and (3) the fishermen had acquired the

power to fix prices and control production which, the court said,

". .. we understand, is a violation of the Sherman Act." 808

A subsequent criminal prosecution by the Government involving

similar facts reached a similar conclusion.809 In this instance,

commercial shrimp and oyster fishermen operating from Mississippi

ports formed an association. The association secured contracts with all

of the packers and canners in these ports requiring the processors to

purchase all shrimp and oysters brought in by association members and
296

to refrain from purchasing such product from boats outside the

association. Although some of the boats were owned by the

processors, all captains and crew working on association boats were

paid a percentage of the value of each catch delivered to a processor

(after the boat owner was reimbursed for fuel, food, and certain other

operating expenses). Each boat fished when and where the captain

chose and if the boat had a bad day neither the captain nor the crew

got paid.

The transfer price for the catch was established according to

schedules agreed to by the association and the packers and canners.

At the trial, conflicting evidence was presented as to whether prices

were established solely by the association or through discussion and

negotiation with the processors.

The association probably attracted the Government's attention in

1951, when several hundred members picketed the docks in

Pascagoula and forcefully prevented out-of-State fishermen from

selling their shrimp catches to local packers. At trial, the Government

also introduced evidence of the association coercing nonmember

fishermen to join the association and boycotting buyers who didn't

conform to association wishes.

The Government asserted that the fishermen were independent

contractors engaged in price fixing with the packers and canners who

purchased their catch. The defendants asserted they were a labor

union of employees selling their services and the use of their vessels

and equipment at wages determined at so many cents per pound of

shrimp and oysters delivered. The jury was instructed that if it found

the association was a union, then any talks with the packers and

canners were protected negotiations over wages and other terms of

employment. A jury found the defendants guilty of violating the

Sherman Act.

The fishermen appealed the convictions but were unsuccessful for

two reasons. First, the court, citing Columbia River Packers

Association v. Hinton, held the fishermen had not proven that they

were engaged in a "labor dispute" with the processors under the

Norris-LaGuardia Act. Second, the court rejected a modest attempt by

the fishermen to claim protection under the Fisherman's Collective

Marketing Act. It did not dwell on the intent and scope of the law. It

simply concluded that the fishermens' repeated use of coercive meth-
810 236 F. 2d at 665.

811 The W ebb-Pomer ene Act (1 5 U. S.C . §§ 61-65) allow s exporte rs to

form associations for the sole purpose of marketing goods abroad. Such

associations enjoy a limited antitrust exemption for that export trade.

297

ods "exceeded any possible privilege or exemption granted by

the.. .Act. "

810

Thus, it was established that in a traditional agribusiness

environment a union represents people negotiating wages and hours

and other term of employment while a cooperative represents people

negotiating terms of sale for something they produced. However, in

the so-called "industrialized" agriculture, that distinction is becoming

more difficult to discern. For example, when a poultry processor

issues detailed instructions to a contract poultry grower on how the

grower must raise the processor's chicks, the line between employee

and independent contractor become more difficult to see.

As contract production spreads, the issue of whether grower

associations will be considered unions or cooper atives by the courts

will be one of potential interest to all parties involved.

CAPPER-VOLSTEAD AND EXPORTING

When cooperatives export products as part of their marketing

function, the same antitrust rules apply as in their domestic operations.

Prior to 1966, Sunkist's export department relied on numerous

exporting companies to gener ate and maintain sales to Hong Kong

importers. That March, Sunkist terminated these arrangements and

began direct sales to Hong Kong through a single broker of citrus

fruits in the Far East, Reliance Commercial Enterprises. Reliance

arranged for bids and letters of credit from Hong Kong importers.

Sunkist performed the actual export functions, including handling,

shipping, and insurance.

In six months Sunkist, which had been only an occasional shipper

into the export market, captured nearly 70 percent of the Hong Kong

market for American oranges. Several of the former brokers for

Sunkist assigned their rights to sue to a Webb-Pomerene association in

which they participated, Pacific Coast Agricultural Export

Association.811 The association brought an antitrust action alleging
812 Pacific Coast Agricultural Export Association v. Sunkist Growers, 526

F. 2d 1196 (9th Cir. 1975), cert. denied, 425 U .S. 959 (1976).

813 526 F. 2d at 1203. See also, 526 F .2d 1204-1205.

814 526 F. 2d 1206.

298

Sunkist and Reliance violated sections 1 and 2 of the Sherman Act by

conspiring to restrain trade and attempting to monopolize exports of

oranges from California and Arizona to Hong Kong.

After a trial, the jury returned a general verdict against Sunkist

and awarded monetary damages and attorneys' fees. The court also

issued a limited injunction ordering Sunkist to terminate its exclusive

sales agreement with Reliance and to stop refusing to sell oranges to

other qualified exporters at competitive prices. The court denied

association requests that it enjoin Sunkist from exporting oranges to

Hong Kong, either directly or indirectly, and that it order the

dissolution of Sunkist. Sunkist appealed the awarding of any equitable

relief and the association appealed the denial of its request for

additional penalties against Sunkist.

The U.S. Court of Appeals for the Ninth Circuit affirmed the trial

court outcome.812 It held that an exclusive agency agreement is not

illegal per se and that a good faith, economically motivated decision to

switch exporters would also not subject Sunkist to antitrust liability.

However, it found sufficient evidence existed to support the jury's

finding that Sunkist's refusal to deal with its former brokers "was

motivated by a desire to exclude the plaintiffs from the market or to

accomplish some other anti-competitive objective." 813

Sunkist tried to avoid being penalized by arguing the plaintiffs

hadn't shown they suffered any injury by its agreement with Reliance

because Sunkist could have legally entered and dominated the Hong

Kong market on its own under the shield of the Capper-Volstead Act.

However, the court rejected this argument, finding Sunkist's course of

action was not justified merely because it "might have achieved the

same result by legal means. "

814

The court then discussed each issue of equitable relief and

determined the trial court had fashioned an appropriate remedy.
815 Midland Cooperative Wholesale v. Icke s, 125 F.2d 618 (8th Cir.

1942).

816 The Bituminous Coal Act of 1937, 50 Stat. 72 (1937), was repealed

in 1966, 80 Stat. 649, 651 (1966).

817 125 F. 2d at 622-623.

299

UNPROTECTED COOPERATIVES

By its wording, the Capper-Volstead Act is only available to

associations of agricultural producers engaged in preparing for market

and marketing member production. This raises a number of interesting

issues. The first is whether the phrase "preparing for market" as used

in Section 1 of Capper-Volstead is broad enough to encompass

providing farm supplies and services to agricultural producers. The

courts have never addressed this issue. But, this has not hampered

farm supply cooperatives because the courts have found properly

conducted cooperative supply activities do not violate the antitrust

laws.

Other issues concern the status of farmer cooperatives compared

to non-farm cooperatives. First, is there a legitimate basis for

Congress to differentiate between types of cooperatives? And second,

without Capper-Volstead protection, what is the status of

nonagricultural cooperatives under the antitrust laws? Two cases

decided in the early 1940s shed light on both of these matters.

The power of Congress to grant privileges to farmer cooperatives

but not other types of cooperatives was approved in a case815

concerning the Bituminous Coal Act of 1937. 816 The Coal Act was

passed to stabilize the bituminous coal industry, which was facing

"destructive competition" among producers. The heart of the act was

a regulatory program requiring all coal to be sold above a minimum

price and below a maximum price set by the Secretary of the Interior.

One of the two exemptions from price regulation cover ed coal sold to

a farmers cooperative or an intervening agency brokering a sale for a

farmers cooperative. 817

Midland Cooperative Wholesale was a federated purchasing

cooperative serving about 200 locals in the upper Midwest. Some

Midland locals were owned and controlled by farmers and others had

a more general membership consistent with treatment as a consumer
818 125 F. 2d at 631.

819 Mid-W est Theatres Co. v. Co-opertive Theatres of Michigan, 43 F.

Supp. 216 (E. D. Mich. 1941).

820 The cou rt found this admission to be a "fact of great importance. " 43

F. Supp. at 219.

300

cooperative. The Department of the Interior issued an administrative

order permitting Midland to purchase coal at a discount below the

minimum regulated price for resale to its farmer cooperative members

but not for r esale to its other cooperative members.

Midland appealed to the U.S. Court of Appeals for the 8th

Circuit, which upheld the Interior Department decision. The court

reasoned that the purpose of the act was to stabilize the bituminous

coal industry and that an exception to its coverage should be read

narrowly. The court reviewed the law's legislative history and

concluded:

The legislative history indicates clearly that Congress was

well aware of a distinction between consumers' and farmers'

cooperatives, that it was well aware that the Act extended

certain treatment to farmers' cooperatives which it did not

extend to consumers' cooperatives, and that it fully intended

to do so....Congress had the right to discriminate between

the types of cooperatives and it manifestly did so, and the

failure to treat them alike it neither novel nor

unreasonable. 818

The second case involved a complex scheme used to allocate

movies to theaters in Detroit and a cast of very aggressive players who

all seemed eager to do whatever they could to gain an upper hand in

the business. 819 Independent second-run theaters in Detroit formed a

cooperative to negotiate exhibition privileges with production studios

and major film distributors. Plaintiff, a chain of second-run theaters,

admitted to the judge that it could outbid independent theaters for films

but wanted the court to rule it was unfair competition for the

independents to associate in a cooperative to combat the power of

chain operators. 820
821 43 F. Supp. at 221. Citing Appalachian Coals v. United States, 288

U. S. 344 (1933).

822 43 F. Supp. at 222. The court did not find it objectionable that the

cooperative had "b uying pow er of som e magnitu de, " only that it abused that

power at tim es.

823 43 F. Supp. at 222-223.

824 Sewell Plastics v. Coca-Cola, 720 F. Supp. 1186 (W. D. N.C. 1988),

720 F. Supp. 1196 (W. D. N.C. 1989), both aff' d, 1990-2 Trade Cases (CCH)

¶ 69, 165 (4th Cir. 1990).

301

As a general principle, the court determined that independent

businesses "may organize for the reasonable promotion of their

economic activity without violation of the Sherman Act."

821 It held

that the cooperative, organized pursuant to a state law, had a right to

function so long as it did not violate any Federal or state law.

After reviewing the facts, the court concluded ".. .there are two

sides to this question--first, that Co-Operative can and does protect the

independents who would otherwise be helpless; and second, that CoOperative does, at times, go too far in extending this "protection." 822

Conduct which the court felt exceeded legitimate cooperative

activity included (1) coercing a distributor to break a contract with a

nonmember, (2) threatening not to do business with a producer who

released pictures to nonmembers, and (3) leasing more pictures than

its members could show to keep them out of the hands of nonmember

competitors. 823 The court denied plaintiff's request for damages and

issued an injunction requiring both parties to refrain from the conduct

listed above.

Mid-West Theatres holds that independent businesses without

Capper-Volstead protection can form a purchasing cooperative.

However, like any other venture including agricultural marketing

cooperatives, such an association may not engage in conduct that lacks

any observable business objective other than eliminating competition.

A series of opinions in litigation against a cooperative formed by

Coca-Cola bottlers discuss several issues important to agricultural and

nonagricultural supply cooperatives. 824 One reason these cases may be

insightful for farmer cooperatives is that soft drink bottlers, like agri-
825 15 U. S.C . §§ 3501-3503.

302

cultural producers, have the benefit of a limited exemption from

antitrust liability for their marketing activity.

Under the Soft Drink Interbrand Competition Act, 825 contracts

granting bottlers the exclusive right to bottle and sell a manufacturer's

products within a specific territory are shielded from antitrust liability.

Thus bottlers have an absolute monopoly to market a line of products

within their trade territory, but must compete with bottlers of other

manufacturer' s products.

Prior to 1977, carbonated soft drinks were sold in containers

made of glass, aluminum, or steel. About 1977, Sewell Plastics, Inc.

(Sewell), among others, began to manufacture plastic soft drink

bottles. The plastic bottles were well received by bottlers and

consumers.

By 1981, Sewell was the dominant force in the plastic bottle

market in the Southeast. It produced more than 50 percent of all

plastic bottles sold in this area and more than 90 percent of the plastic

bottles purchased by area Coca-Cola bottlers. Sewell increased its list

prices every year from 1977 to 1981 and its earnings grew over 800

percent.

Cooperation was an established practice among soft drink bottlers.

In 1975, several Coca-Cola bottlers in the Southeast had formed a

cooperative to own and operate a modern can filling facility. About

1980, manufacturers of plastic-bottle equipment began encouraging the

bottlers to consider self-manufacture of plastic bottles. The Coca-Cola

Co., which had a vested interest in helping its franchisees hold down

costs so they could compete more effectively against bottlers for Pepsi

and other soft drink companies, also encouraged its bottlers to

manufacture their own containers on a cooperative basis.

In 1981, various bottlers told Sewell that unless it agreed to a

substantial reduction in its price, the bottlers would jointly manufacture

their own plastic bottles. When Sewell refused, 33 Coca-Cola bottlers

in the Southeast formed Southeastern Container, Inc., as a cooperative;

built a manufacturing plant; and began manufacturing plastic bottles

for its members.
303

All of Southeastern's members signed supply contracts with their

cooperative that included these provisions:

! Long-term commitment. Members agreed to purchase 80

percent of their two-liter bottles from the cooperative for the

next 5 years.

! Freight equalization. Members all pay the same price for the

bottles, including delivery.

! Price competition clause. Members are permitted to purchase all their bottles elsewhere if they can show that two

other suppliers offered lower prices over a six-month period

and Southeastern was unable to meet the average of the two

lower prices within 60 days.

In 1986, Sewell brought suit in Federal district court against the

Coca-Cola Company, Southeastern Container, and the 33 members of

Southeastern. Sewell alleged a number of claims under Federal

antitrust law:

! The long-term commitment and freight equalization agreements constitute a conspiracy to restrain trade in violation of

Section 1 of the Sherman Act.

! The long-term commitment agreement (to purchase 80 percent

of their requirements from Southeastern) constituted an attempt

to monopolize and monopolization of a line of commerce in a

distinct geographic market in violation of Section 2 of

Sherman

! The long-term commitment agreement constitutes an exclusive

dealing arrangement in violation of Section 3 of the Clayton

Act.

! The bottlers' ownership of Southeastern stock has the effect of

substantially lessening competition in violation of Section 7 of

Clayton.
826 Sewell Plastics v. Coca-Cola, 720 F. Supp. 1186 (W.D.N.C. 1988).

827 Sewell Plastics v. Coca-Cola, 720 F. Supp. 1196 (W. D. N. C. 1989).

828 Sewell Plastics v. Coca-Cola, 1990-2 Trade Cases (CCH) ¶ 69,16 5

(4th Cir., Sept. 4, 1990), cert. denied, 498 U .S. 1110 (1991).

304

Sewell claimed damages in excess of $17 million as lost profits it

would have made if the cooperative had not been formed, and sought

monetary and permanent injunctive relief. Both sides moved for

summary judgment. In May of 1988, the district court granted partial

summary judgment in favor of the bottlers, holding their conduct

wasn't per se illegal, but leaving open the question of whether the

alleged conduct violated antitrust law under rule of reason analysis. 826

The court convened a jury and began a trial. After opening

arguments, the court gr anted defendants' motion for summary

judgment and dismissed Sewell's claims. 827 The U.S. Court of

Appeals, Fourth Cir cuit, affirmed both decisions in an unpublished,

per curium opinion. 828

Sewell I. In its first opinion the district court reduced Sewell's

claims to two basic arguments, namely group boycott and price fixing,

and examined each under the rule of per se illegality. In finding

Southeastern wasn' t illegal per se as a group boycott, the court focused

on three points. First, the fact that Sewell could compete for up to 20

percent of defendant bottlers' business and that of other bottlers meant

the cooperative wasn't precluding Sewell from competing in the

relevant market. Second, Southeastern wasn't really a combination

between competitors because the exclusive territorial licenses limited

competition between the members of Southeastern. Thir d, the

arrangement had legitimate business benefits to the members of

Southeastern that enabled them to compete with other soft drink

bottlers.

The court relied extensively on Northwest Wholesale Stationers v.

Pacific Stationary and Printing, 472 U. S. 284 (1985). In this case the

U.S. Supreme Court held that exclusion by a wholesale purchasing

cooperative of one of its member-retailers for violation of a

cooperative rule was not an unlawful boycott under either per se or

rule of reason analysis.
829 720 F. Supp. at 1194.

830 720 F. Supp. at 1194-1195.

305

The court didn' t grant total summary judgment because while not

unlawful per se, it felt the conduct of the members of Southeastern

might be unlawful under a rule of reason analysis if Sewell could

prove their anticompetitive effects outweighed their pro-competitive

justifications.

In assessing the per se illegality of the price-fixing agreement, the

court focused on the cooperative nature of the venture, stating:

Several features of the defendants' enterprise make the

anticompetitive effect of these restraints less than obvious.

First, the defendants are setting a price for inputs to their

production charged by a joint venture which they own. In

this situation, defendants have no obvious incentive to raise

prices or restrict output, because they would be raising the

cost of their own products. That price is subject to

competitive pressure from the prices charged by the

distributors of other br ands of soft drinks.

This feature of defendants' conduct distinguishes the per

se price-fixing cases on which plaintiff r elies. In no case

cited by plaintiff did a court hold a price-fixing agreement

per se illegal where the price-fixing companies were setting

a price charged to them by a source of supply owned by

them. (court' s emphasis)829

The court also discussed legitimate business justifications for the

price-setting agreement: equalizing cost would help attract investors

who might not be as close to the plant as other potential members,

"... increasing the volume, and lowering Southeastern's marginal cost

of production. This, in turn, could enable Southeastern to lower its

prices, enabling the bottlers to compete more effectively with bottlers

of other soft drink brands." 830

At this point, the court again felt compelled to give Sewell the

chance to produce evidence sufficient to raise issues of material fact

appropriate for a rule of reason analysis at trial.
831 At this point, the court noted, "The antitrust laws ... were enacted for

' the protection of competition, no t competitors.' " (citations omitted)(emphasis

in original) 720 F. Supp. at 1199.

306

Sewell II. When the court decided to grant defendant' s motion

for summary judgment after opening arguments, it did so after

concluding Sewell had failed to develop any economic justification for

finding this supply cooperative constituted a violation of Federal or

State antitrust law. The court listed several telling facts symptomatic

of the entry of a supply cooperative into a concentr ated market:

! Economic consequences in the relevant market of the bottlemaking actions of defendants were dramatic.

! Prices for plastic bottles dropped to about half what they had

been when Sewell had the regional bottle manufacturing

market mostly to itself.

! Prices have remained low.

! The number of competitors in the market has remained the

same, but market concentration has decreased.

! Some competitors have left the bottling business, and others

have entered it.

! Consumers benefit from lower bottle prices.

! Production of plastic bottles has increased.

! Production processes have continued to become more efficient.

! Although some competitors may be making less profit, there

has been no adverse effect on competition.831

After a lengthy review of the procedural history of the case, the

court restated the general facts and expanded on the economic findings
307

of fact. The court then expressed further understanding of the procompetitive impact of a supply cooperative on the marketplace:

Sewell contends that defendants' "purpose and intent in

forming Southeastern was to lock Sewell and other plastic

beverage bottle suppliers out of the Coke-bottler business in

the areas where the bottlers were located." Complaint, para.

20. This claim makes no economic sense in the factual

context of this case, because Sewell cannot explain how the

bottlers would benefit in a way prohibited by the antitrust

laws (i.e. , earning monopoly profits), by forming a

corporation to manufacture plastic bottles for sale to

themselves. Because the Bottlers' profits ultimately derive

from the sale of soft drinks packaged in plastic bottles, the

Bottlers have no economic incentive to invest in a

cooperative manufacturing enterprise and "lock out" existing

suppliers if that will raise the cost of an input such as the

plastic bottles to themselves. Once the decision to invest is

made, the Bottlers do have an economic incentive to cause

their cooperative manufacturing enterprise to produce plastic

bottles of the highest quality at the lowest possible price.

...Thus assuming that Southeastern would experience

economies of scale similar to its competitors, one would

expect Southeastern to be as efficient as its competitors and

produce a bottle of the same or similar quality. Because

Southeastern only sells bottles to its owner-members, there

is no economic incentive for Southeastern to sell bottles at

any price other than a price at or slightly above its total cost

of production (including, for example, research and

development expenditures). Selling at a price below cost

would simply require the Bottlers to make capital

contributions to Southeastern in the amount of any loss,

offsetting any aggregate benefit from the lower prices

charged to the Bottlers. Selling at a price very much above

the actual cost of production would increase the effective

price of the bottles by causing Southeastern to earn high

profits, which could not simply be distributed back to the

Bottlers as dividends because they would first be subject to

the corporate income tax. Thus, as an efficient producer
832 720 F. Supp. at 1216-1217.

833 720 F. Supp. at 1219.

834 Id.

308

pricing its product at or just above its costs, one would

expect the entry of Southeastern in the market to have a

procompetitive impact. The facts of this case confirm that

expectation. (court' s emphasis)832

Then the court discussed the specifics of the contractual

relationship between Southeastern and its members and found:

Southeastern's supply contracts are reasonably justified

means of achieving legitimate, procompetitive purposes. . ..

Even if we assume that purchasers of plastic bottles were not

willing to sign supply contracts with established suppliers in

1982, that assumption does not make it unreasonable for

buyers to sign such contracts with a potential entrant to the

market. This is particularly true where, as in this case, the

buyers have a financial interest in the newcomer. (court's

emphasis).833

The court explained why the use of a delivered price is justified,

saying "...use of a delivered price eliminated any advantage from

being located relatively near the plant. This removed a potential

obstacle to the formation of Southeastern and had plausible utility in

attracting investors to the enterprise, thereby increasing volume and

reducing Southeastern's marginal cost of production."834

The court also found the price competition clause in

Southeastern's contracts justifiable as the most reasonable means to

prevent Sewell from selective pricing to key members of Southeastern

in order to disrupt the operation of the cooperative.

Relying on this analysis, the court found its application of the per

se rules in Sewell I still valid and required no further discussion. It

then looked for evidence of an antitrust violation under the rule of

reason. It determined Sewell would be unable to show the cooperative

would harm the competitive process, that the cooperative had engaged

in predatory pricing, that the cooperative could raise prices above
835 720 F. Supp. at 1223. This case will be rememb ered, in the courthouse

at Charlotte, N C, at least, for the hug e amoun t of paper it generated. At one

point early in the litigation the District Court, in a brief opinion worthy of

reading as an example of the judicial system letting off steam , r efused to

decide the motions for summary judgm ent until the parties filed 10-page

summaries of the over three feet of documents subm itted to establish

"undisputed" facts. West Publishing Com pany, har dly known for

embellishing its legal reporters with abundant illustrations, found it

approp riate to include two pictures of the court record in conjunction with the

opinion. 119 F. R.D . 24-26 (W. D. N. C. 1988).

836 Agmax v. Countrymark C ooperative, 795 F . Supp. 888 (S.D. Ind.

1992).

309

those charged in a competitive market, or that the cooperative led to

any actual or threatened antitrust injury. The court dismissed all of

Sewell's claims, concluding, "Even if Sewell had advanced 'some'

proof of anticompetitive effect, any restraints on trade arising out of

defendants' formation and operation of Southeastern were reasonably

necessary to achieve procompetitive benefits which clearly outweigh

any anticompetitive effect. " (court's emphasis)835

Capper-Volstead was raised as a defense in one case by a farm

supply cooperative but not relied on by the court in making its

decision.836 In 1991, Indiana Farm Bureau Cooperative Association

(IFBCA) merged with Countrymark Cooper ative to form a multi-state

entity. Agmax, a local member of IFBCA, successfully sued to

establish dissenters' rights and withdrew its equity investment in

Countrymark, the successor organization.

Countrymark then refused to sell certain products to Agmax and

ordered its member locals not to resell such products to Agmax. In

response, Agmax sued Countrymark for violating Sections 1

(conspiring with its members to eliminate Agmax as a competitor) and

2 (monopolization) of Sherman and asked the court for an injunction

requiring Countrymark to r esume selling supplies to it.

Countrymark argued the request for an injunction should be

denied because Agmax had no chance to win on the merits. Countrymark based this request on its alleged status as a Capper-Volstead

cooperative which it asserted made it immune from liability under the

Sherman Act for conspiring with it members or monopolization.
837 795 F. Supp. at 896.

838 Id.

839 State v. Golden Guer nsey Dairy Coopera tive, 43 N .W .2d 31 (W is.

1950).

840 Superior Dairy v. Stark County Milk Pr oducers' Ass' n, 100 N. E. 2d

695 (Ohio 1950).

310

According to the decision, Agmax countered that Countrymark's

conduct, especially pressuring its member locals not to sell to Agmax,

amounted to predatory conduct outside the protection of CapperVolstead. Apparently neither Agmax nor the court questioned whether

the selling of supplies was conduct protected by Capper-Volstead.

At one point, the court seemed to say that Countrymark was

protected if it had not engaged in predatory conduct. 837 But in the next

paragraph, the court said it didn't need to resolve the issue in light of

the facts in the case.838 Ultimately, the court ruled in Countrymark' s

favor on the grounds that Agmax had failed to justify injunctive relief

under general antitrust standards, without examining the CapperVolstead issue.

STATE ANTITRUST ENFORCEMENT

While most of this paper focuses on Federal antitrust policy,

cooperatives must remember that they are also subject to State antitrust

laws and enforcement. Two older cases, coincidentally decided only

a week apart, illustr ate this.

In one case, a cooperative and several non-cooperative corporations and business units, who together distributed 94 percent of the

fluid milk sold in Milwaukee County, were successfully sued by the

State of Wisconsin for conspiring to control and fix the price of milk

in violation of the State's antitrust laws. 839 In the second, an Ohio

court held that a cooperative did not violate the State antitrust law

when it refused to provide milk to a purchaser who offered a

discounted price to its customers who bought large amounts of milk

during each month.840

Sometimes a State's antitrust law will contain a blanket exemption

for cooperatives. For example, Section 340(3) of New York's
841 N. Y. G en. Bus. Law, Art. 22, M onopolies § 340(3).

842 Margrove, Inc. v. Upstate Milk Cooperative, 1974-2 Trade Cases

(CCH ) ¶ 75,268 (N .Y. Sup. Ct. 1974).

843 Texas v. Associated Milk Producers, Inc. , 1974-2 Trade Cases (CCH)

¶ 75, 269 (Tex. D .C . Tr avis County 1974).

844 Wisconsin v. U nited Wild Rice, 1981-1 Trade Cases (CCH ) ¶ 63,940

(Minn. 9th D.C . 1981).

311

Donnelly Antitrust Act reads:

The provisions of this article shall not apply to

cooperative associations, corpor ate or otherwise, of farmers,

gardeners, or dairymen, including live stock farmers and

fruit growers, nor to contracts, agreements or arrangements

made by such associations,.. ..

841

The New York State courts have recognized that this is a broader

exemption than contained in Federal law. It bars them from

entertaining actions under the State's Donnelly Antitrust Act against

agricultural cooperatives and also against third parties, such as a

grocery store that purchases from a cooperative, based on its contracts

with a protected cooperative.842

When State law doesn't contain such a broad cooperative

exemption, State attorneys general can be just as aggressive as the

U.S. Department of Justice in pursuing cooperatives. They can

negotiate consent decrees that include both restraints on future conduct

and substantial fines. This is true whether the defendant cooperative

is large dairy association843 or a small, niche market association.844

These cases illustrates that producer associations need to include

compliance with the antitrust law of the State or states within which

they operate in their overall risk management planning.

DISRUPTIVE STATE REGULATION

One case reviewed during the pr eparation of this report is worth

noting, even though it doesn' t involve any great economic or legal
845 Knuth v. Er ie-Crawfor d Dairy Cooper ative Association, 395 F. 2d 420

(3rd Cir. 1967), on remand, 326 F . Supp. 48 (W. D. Pa. 1971), aff' d in part,

rev'd in part, and remanded, 463 F .2d 470 (3rd C ir. 1972).

312

issues such as "what is a producer?" In fact, Capper-Volstead isn't an

issue at all. Rather it involves a cooperative caught in a vicious

crossfire among some of its members, well intended but misguided

state regulators, hard business realities, and the antitrust law. 845

Sometime prior to 1957, the State of Pennsylvania created the

State Milk Control Commission (commission) to set the price of milk

produced in Pennsylvania sold (1) by producers and cooperatives to

processors and (2) by retail establishments to consumers. However,

the jurisdiction of the commission did not apply to sales of

Pennsylvania milk out-of-state or to out-of-state milk sold into

Pennsylvania. Beginning around 1957, the price set by the

commission for milk sold by Ohio producers and their cooperatives to

handlers in Ohio was well above the market price in the neighboring

states of Ohio and New York.

Erie-Crawford Dairy Cooperative Assn consisted of about 1,200

dairy farmers serving the Pittsburgh and Erie markets. In the mid1950s it lost two major customers when they could import milk from

neighboring states for less total cost than buying Pennsylvania milk

under the State-mandated price structure. To meet this competition,

which threatened to drive it out of business, Erie-Crawford began

making price adjustments when asked by its customers. Erie-Crawford

charged them the State mandated price and then returned an agreed

upon amount to meet prices being offered to Pennsylvania dairies by

cooperatives in Ohio and New York.

Erie-Crawford also purchased some milk from out-of-State

producers and resold it in Pennsylvania for less than it was compelled

to charge for in-State milk. All proceeds received by Erie-Crawford

were placed in a company-wide milk price pool and all farmerproducers were paid an equal amount per hundredweight for milk

supplied regardless of the amount actually received from buyers for

that producer's milk.

Two key facts were not contested throughout the litigation. ErieCrawford did pay "rebates" to selected buyers and the price received

by Pennsylvania farmers for their milk was less than it would have
846 Knuth v. Er ie-Crawfor d Dairy Cooper ative Ass' n, 395 F.2d 420 (3rd

Cir. 1968). One inter esting point made by the co urt her e and picked up again

in its second opinion is that even assum ing the reb ate payments violated a state

law, that did not mean they were a violation of Federal antitrust law. 395

F. 2d at 424. See, a lso, 463 F .2d 470, 476.

847 Knuth v. Er ie-Crawfor d Dairy Cooperative Ass' n, 326 F . Supp. 48

(W.D. Pa. 1971); aff'd in part, rev'd in part, and remanded, 463 F .2d 470

(3rd Cir. 1972). Plaintiffs w ere allow ed to go to the jur y and pre vailed on

313

been had Erie-Crawford been able to sell all milk received at the

commission prices.

Apparently, the arrangements between Erie-Crawford and its

customers remained r elatively secret until the mid-1960s. Then Robert

Knuth, a producer-member of Erie-Crawford, initiated litigation on

behalf of perhaps 300 members against their cooperative, various

officers and directors, and its customers, to recover losses resulting

from alleged underpayments for their milk. Among the various

charges were three counts alleging conspiracies to restrain trade and

monopolize:

1. To fix the price of milk shipped within Pennsylvania through

the payment of rebates.

2. To suppress and eliminate competition by causing Pennsylvania

milk to be shipped to Ohio and then shipped back to Pennsylvania for

sale to processors at prices below those set by the Milk Commission.

3. To suppress and eliminate competition through agreements that

processors would only purchase milk through Erie-Crawford.

When the case was first heard in Federal district court, the judge

dismissed the complaint with prejudice for failure to state a claim.

Plaintiff appealed and the U.S. Court of Appeals for the Third Cir cuit

reversed the district court and remanded the case for trial. The

appellate court reasoned plaintiffs should be given the opportunity to

prove the alleged violations. 846

At the time of trial, plaintiffs abandoned their second and third

arguments, so only the legality of the "rebates" was at issue. After

plaintiffs presented their evidence, the trial court judge (a different

judge than the one who first dismissed the suit) granted defendants'

motion to dismiss the antitrust allegations and the Third Circuit

affirmed that portion of the opinion.847
charges of illegal conversion of their property under Pennsylvania state law.

The district court judge granted a motion notwithstanding the verdict that

relieved directors of liability who knew of and approved, but did not

participate in, the rebate ne gotiations. The appe llate court reversed this

ruling, among others concerning the conversion allegations, and remanded the

case for retrial on this state law issue.

848 463 F. 2d at 473.

849 326 F. Supp. at 52-53.

314

The opinions supporting the dismissal might be recommended

reading for any legislator or regulator who attempts to set prices by

Government fiat for only a selected segment of an otherwise

competitive market. While the temptation to quote at length has been

resisted, a few key points are worthy of emphasis.

First, the appellate court had the boldness to say what the trial

court only felt comfortable insinuating, that the dispute arose out of

"persistent and largely futile efforts of the Pennsylvania Milk Control

Commission...acting under a statutory mandate to insulate the

Pennsylvania dairy industry from price competition."848

Second, the trial judge noted that the commission scheme left

Erie-Crawford in an untenable position. If it followed the letter of the

State law, it would quickly go out of business. As the judge phrased

it:

In a fact situation like this, to hold that a seller is helpless

and must stand by watching its business being destroyed

would be a perversion of the result sought to be obtained by

the Sherman Act. The antitrust laws were designed to

encourage competition and to prevent predatory action. To

outlaw the action of the Co-op in defending its markets by

the time-honored and legally sanctioned method of meeting

competition would be to turn the shelter of the antitrust

legislation into a weapon which would kill free enterprise

instead of protecting and promoting it. 849

Third, the judge noted and the appellate court agreed that

plaintiffs had utterly failed to establish that any illegal price fixing had

occurred. Rather, the evidence showed that Erie-Crawford granted

selective concessions only when asked, on a case-by-case basis, at the
850 326 F. Supp. at 52-53, 463 F. 2d at 475-476.

851 326 F. Supp. at 52, 463 F. 2d at 476.

852 326 F. Supp. at 53, 463 F. 2d at 475. 

853 326 F. Supp. at 54, 463 F. 2d at 475.

315

lowest amount necessary to keep an individual customer. Further, no

evidence was introduced that the concessions ever went beyond

meeting competition to undercut a competitor's prices. 850

Next, the courts held that merely paying rebates is not a per se

violation of antitrust law. 851

The courts further found that an agreement between an individual

seller and an individual buyer is not illegal price fixing under the

antitrust laws. The law only limits collusion among multiple firms in

horizontal or vertical competition.852

Finally, both courts expressed some wonderment at why the

plaintiffs sued at all. The judges strongly suggested that the

cooperative's actions seemed to clearly be in the best interest of their

members, as it was unlikely that all member milk would have been

sold at all at the unrealistically high prices set by the commission.853

The Pennsylvania legislature undoubtedly thought it was doing 

a good thing when it enacted a minimum price law. However, since

the rest of the market was unregulated, about all the law really

produced was a need for cooperatives to develop tools to circumvent

it or perish and unfounded expectations among producers that they

would receive a certain level of guaranteed income for their

production.

MARKETING ORDERS AND CAPPER-VOLSTEAD

In a decision virtually devoid of facts, the plaintiff milk marketing

cooperative alleged predatory and manipulative commercial activity by

the defendant, a competing milk marketing cooperative. The

defendant cooperative raised several affirmative defenses, including an

argument that it was shielded from liability because, at the time of the

alleged misdeeds, it was participating in the Federal milk program. A

Federal district court judge denied a request of the defendant milk

cooperative to dismiss the complaint of a competing milk cooperative
854 Marketing Assistance Plan v. Associated Milk Producers, Inc., 338 F.

Supp. 1019 (S. D. Tex. 1972).

855 United States v. Borden, 308 U. S. 188, 201-202 (1939).

856 Sec. 20 of the Feder al Trade Com mission Improvements Act of 1980,

Pub. L. 96-252, 94 Stat. 374, 393 (1980).

316

for failure to state a claim under the antitrust laws. 854 The court ruled

that coercive and manipulative conduct of the type alleged, undertaken

to achieve a monopoly position, is not shielded from potential antitrust

liability by the milk marketing order pr ogram.

This decision is consistent with United States v. Borden, in which

the U.S. Supreme Court held conduct approved by the Secretary of

Agriculture in a valid marketing order is shielded from antitrust attack

by the Agricultural Marketing Act of 1937, but not any other

conduct. 855

LIMITS ON FTC JURISDICTION

Historically, the Federal Trade Commission (FTC) had deferred

to the Department of Justice on issues involving cooperatives and the

Capper-Volstead Act. However, in the 1970s, FTC economists

conducted exhaustive investigations of potential anticompetitive

impacts from cooperative marketing and from USDA-administered

agricultural marketing order. Cooperatives felt the FTC's requests for

information were unreasonably broad and compliance needlessly costly

and time consuming. They also complained that the reports issued by

FTC staff didn't indicate the authors had even read the material

provided by the cooperatives.

Cooperatives then successfully lobbied Congress to secure the

inclusion of an amendment in the Federal Trade Commission

Improvements Act of 1980 that barred FTC from using any

appropriated funds for fiscal 1980, 1981, or 1982 to (1) conduct any

study, investigation, or prosecution of any agricultural cooperative for

any conduct which, because of the Capper-Volstead Act, is not a

violation of any Federal antitrust law or the Federal Trade Commission

Act; or, (2) conduct any study or investigation of any agricultural

marketing order.856 When the original 3-year ban expired,

cooperatives succeeded in attaching language to a succession of annual
857 Sec. 2 of the Federal Tra de Comm ission Act Amendments of 1994,

Pub. L. 103-312, 108 Stat. 1691 (1994), codified at 15 U. C. S. § 57b-5.

317

appropriations bills covering the FTC barring the use of any of its

funds for these purposes.

Finally, in 1994, Congress approved a permanent amendment to

the Federal Trade Commission Act that provided the commission

"shall not have any authority" to study, investigate, or prosecute any

agricultural cooperative for conduct protected by Capper-Volstead or

to study or investigate marketing orders. 857

MARKETING AGREEMENTS

Some marketing cooperatives accept and attempt to resell at a

profit whatever the members produce and deliver. Others require their

members to sign contracts, usually referred to as marketing

agreements, binding the members to deliver some or all of their

production to the cooperative. Cooperatives with marketing

agreements consider them essential to gathering both sufficient product

and market power to achieve their objective of enhancing member

income.

The seeds of litigation testing the validity of such contr acts were

sown in 1982. An early frost damaged the sugar beet crop in Goshen

County, Wyoming. Holly Sugar Corporation, apparently the only

processor of sugar beets in the area, refused to renegotiate its contract

with the Goshen County Cooperative Beet Growers Assn., a

bargaining association representing the local growers who were the

only practical source of sugar beets for Holly's plant. The association

believed Holly Sugar's position led to substantial losses for its

members.

In 1983, the association sought to recoup the losses suffered by its

members in 1982. The members voted to reject each of Holly's

contract offers and not to release grower-members from their

marketing agreements which precluded them from contracting

individually with Holly.

Holly and two grower-members of the association brought suit in

Federal district court seeking to enjoin the association from enforcing
858 The exact nature of the charges isn' t clear. The district court opinion

is not reported and the appellate opinion only describes them in a general

manner.

859 Holly Sugar v. G oshen County Cooperative Beet Growers A ssociation,

725 F. 2d 564, 569 (10th Cir. 1984).

860 The marke ting agreement provided for liquidated damages of $2.00 per

ton of beets wrongfully sold.

861 Goshen County Cooper ative Beet Association v. Pearson, 70 6 P. 2d

1121, 1125 (W yoming 1985).

318

its marketing agreements. Plaintiffs alleged the contracts violated

antitrust law. 858

The trial court found that the association was acting unreasonably

in refusing to sign a contract accepted by several other associations

dealing with Holly. It also found that if the impasse was not broken,

both Holly and the local economy would suffer irrepar able harm. The

judge issued a permanent injunction barring the association from

interfering with members who wanted to negotiate on their own with

Holly.

Goshen County Beet Growers appealed the injunction to the U.S.

Court of Appeals for the 10th Circuit. The appellate court found,

"...as a matter of law, neither the complaint nor the record establish

any violation by the association of the antitrust laws of the United

States." 859

The sanctity of the marketing agreement was reinforced by a

subsequent state court decision arising out of the same facts. Several

members of the association, relying on the district court decision, did

sign contracts with Holly outside of the bargaining association process.

After the 10th Circuit reversed the district court's granting of the

injunction, Goshen County Beet Growers brought a breach of contract

action in State court to recover damages from those growers. 860

A county judge entered summary judgment for the dissident

growers, holding they were legally protected by the injunction in place

at the time they signed contracts with Holly. But the Supreme Court

of Wyoming reversed that decision. It found that the appellate court

reversal of the original county court decision "... abrogated the decree

as though it had never been entered."861
319

These cases suggest that marketing agreements freely entered into

between cooperative marketing associations and their members are not

a violation of the antitrust law. And even if a court should enjoin a

cooperative from enforcing such a contr act, a member who agrees to

deliver product to a buyer outside of the association machinery may be

liable for damages for breach of contr act if that injunction is later held

invalid.
862 The Guidelines are published at Trade Regulation Reporter (CC H) ¶

13,161.

863 The Department of Justice first issued Merger Guidelines in 1968.

They were revised in 1984 and in 1992. In 1982, the Federal Trade

Comm ission (FTC) issued a Statement Concerning Horizontal Merger

Guidelines. On April 8, 1997, the two Agencies released new joint

Horizontal Merger Guidelines. These M erger Gui delines are published at

Trade Regulation Reports (CC H) ¶ 13, 104.

The Agencie s state collabor ations are likely to be less anti-competitive

than mergers because (1) participants in a collaboration may remain

competitors on other fronts while a merger eliminates all inter-firm

competition and (2) mergers tend to be permanent while a collaboratio n is

typically of limited duration. However, the Collaboration Guidelines

incorpo rate tests from the Me rger Guidelines in key assessment areas such as

marke t concentration and the ease of e ntry of new com petitors.

320

CHAPTER 8: IN CONCLUSION,

A LOOK TO THE FUTURE

One difficulty with any research r eport is that it has to end at a

specific point in time. As the drafting of this report concludes, it is

mid-2002. Two developments have already occurred in the early 21st

century that may portend how antitrust enforcement will impact

cooperatives in the year ahead.

GUIDELINES FOR COLLABORATION

AMONG COMPETITORS

On April 7, 2000, the Federal Trade Commission and the

Department of Justice Antitrust Division (the agencies) jointly released

the final version of their "Antitrust Guidelines for Collaborations

Among Competitors. "

862

The phrase "competitor collaboration" is defined broadly to

include any agreement between or among competitors to engage in

economic activity, and the economic activity itself, that falls short of

a merger.863 In the preamble, the agencies recognize that horizontal

collaborations are often not only benign but pro-competitive. They say

that the purpose of the Guidelines is provide an analytical framework
864 Trade Regulation Reporter (C CH) ¶ 13,161, p. 20, 863-20,864.

321

businesses can use to access the antitrust implications of collaborations

with competitors and, more specifically, whether the agencies will

challenge a specific proposed collaboration.

The guidelines are important to cooperatives because of the

frequency with which cooperatives are entering into collaborations

with other cooperatives and non-cooperative firms. When assessing

the antitrust risk of joint ventures and other collaborations in the

future, it may be prudent analyze whether the agreement is likely to

stimulate an enforcement action from the agencies. If the answer is

yes, then the parties need to examine whether the Capper-Volstead Act

or other exemptions provide an effective shield against liability.

The guidelines focus on the potential anticompetitive harm of

collaborations being examined under a rule of reason analysis. The

agencies state that if a collaboration appears to be illegal per se, it will

be challenged under the applicable per se rule(s). They also indicate

the pro-competitive benefits of a collaboration will only be examined

if the initial review reveals potential anticompetitive harm.

In close cases, the agencies will weigh whether the magnitude and

likelihood of anticompetitive harm is greater than that of procompetitive benefits. Anticompetitive harm is accessed using standard

antitrust analysis that focuses on reducing competition and enabling

price and output controls to the detriment of consumers. Procompetitive benefit will be measur ed in terms of "cognizable

efficiencies, " which the agencies describe as efficiencies that are

verifiable, not the result of anticompetitive reductions in output or

services, and that cannot be achieved through practical, significantly

less restrictive means. 864

The guidelines also establish two "safety zones" wherein

collaborations are presumed legal under antitrust law. The first is a

limited market share situation where the participants and the

collaborative effort have a combined market share of not more than 20

percent in each relevant market in which competition will be impacted

by the collaboration. This shelter is not available to shield action

illegal per se.

The second safety zone covers research and development ventures

where three or mor e other entities are capable of successfully
865 Id. at 20, 864-20,865.

866 15 U. S.C . § 18.

322

commercializing innovations on at least the same scale as the

collaboration under review. 865

The guidelines are by no means a series of bright line tests

eliminating all uncertainty as to the possibility a collaboration among

competitors will be challenged by Federal antitrust enforcers. But they

do provide a framework cooperative advisers and leaders can use to

weigh that risk as they consider whether to enter into collaborative

agreements in the future.

BUTTER SETTLEMENT: THE FUTURE OF

ANTITRUST ENFORCEMENT?

The rash of consolidations taking place throughout the food

industry is placing pressure on all participants, including cooperatives,

to become both more efficient and more effective in protecting and

enhancing their market position. Public documents concerning a

negotiated settlement between a major dairy marketing cooperative and

the U.S. Department of Justice provide insight into how some

cooperatives are dealing with changes in food marketing and how

antitrust enforcement officials may react when cooperatives become

the dominant players in a particular line of business.

In December, 1999, Dairy Farmers of America (DFA) entered

into a letter agreement to purchase SODIAAL North American

Corporation (SODIAAL). DFA and SODIAAL were two of the three

firms who accounted for over 90 percent of branded butter sales in the

Philadelphia and New York metropolitan areas. The third firm in the

market is Land O'Lakes Inc (LOL). DFA and LOL are the two largest

U.S. dairy marketing cooperatives (as measured by sales). SODIAAL

is a privately held subsidiary of a French cooperative.

In March 2000, the U.S. Department of Justice filed a civil

antitrust action to block the proposed acquisition. The Justice

Department alleged that DFA's purchase of SODIAAL would

substantially lessen competition in branded-butter markets in

Philadelphia and New York and therefore violate Section 7 of the

Clayton Act. 866
867 United States v. Dair y Farmers of America, 2001-1 Trade Cases

(CCH ) ¶ 73,136 at 89, 450 (E.D . Pa . 2000).

323

As part of the settlement process, Justice published a Competitive

Impact Statement summarizing its case.867 When reviewing the

proposed acquisition, Justice gave special emphasis to two legal

standards for interpreting Capper-Volstead. First, it noted that if the

purchase went through as proposed, DFA and LOL would control

more than 90 percent of the branded butter market in Philadelphia and

New York. Since both DFA and LOL are agricultural cooperatives,

they could agree on the price and other terms of sale for their butter

in these areas free from antitrust scrutiny.

Second, Justice noted that SODIAAL, as a private subsidiary of

a French cooperative, is not covered by Capper-Volstead. Thus the

Government was free to challenge its purchase by DFA under Section

7 of Clayton.

The United States (with the acquiescence of DFA) asked the court

to approve a final judgment in the case that permits DFA to complete

its acquisition of SODIAAL but prohibits DFA from joining with LOL

in any joint effort to market branded butter. Procedural rules that

apply to settling antitrust cases require a 60-day period for public

comment after the Proposed Final Judgment and Competitive Impact

Statement are published in the Federal Register. No comments were

filed. In November 2000, the judge signed an order implementing the

proposed final judgment.

Under the settlement, DFA agrees to transfer all of its assets

necessary to manufacture and market its branded butter on the East

coast, including DFA's interest in the "Breakstone's" brand, and all of

the assets acquired from SODIAAL, including the "Keller's" and

"Hotel Bar" brands, into a new limited liability company to be called

Keller's Creamery, LLC. The key provision requires DFA to transfer

partial ownership in Keller' s to persons who are not agricultural

producers. The purchasers are members of the pre-merger SODIAAL

management team. This non-producer ownership interest deprives

Keller's of cooperative status and the right to engage in common

marketing activity with cooperatives (including LOL) under the

protection of the Capper-Volstead Act.
868 2001-1 Trade Cases ¶ 73,136 at 89, 453.

324

The agreement enjoins DFA and Keller's from entering into any

collaborative marketing effort of branded butter with LOL and from

disclosing any competitively sensitive information regarding branded

butter to LOL. The agreement also contains several provisions to

prevent DFA or Keller's from circumventing the judgment by

restructuring themselves or selling any assets to another firm,

particularly LOL, without the court's permission.

In essence, DFA agreed to forfeit its Capper-Volstead status with

regard to marketing branded butter in the relevant markets in exchange

for permission to purchase a major non-cooperative competitor in those

markets. The acquisition gives DFA members an additional market for

their milk that will be used to produce the butter manufactured at the

former SODIAAL's plant and increases the amount of value-added

processing by their cooperative. But in return, DFA losses the ability

to collaborate with LOL to improve the economic return to all of their

farmer-members.

Marketing cooperatives are reassured by Justice's acknowledgment that "explicit collusion" between large agricultural cooperatives

with a dominant position in the marketplace "would be legal and could

not be challenged under the antitrust laws. "

868

As the trend toward fewer but larger firms continues in many

product lines in the food (and other) industries, cooperatives also feel

pressure to grow. When this growth is accomplished by simply

signing up new members or through working agreements or

combinations with other cooperatives, antitrust concerns may be

minimal. However, when deals involve joint ventures with, or

acquisitions of, non-cooperative firms, the Capper-Volstead shield will

not be available. The proposal will be subject to challenge under the

same standards as an agreement between two non-cooperative firms.

The agreement accepted by DFA in this case consummates the

acquisition but restructures it to negate future access to CapperVolstead protection in the relevant market (branded butter). Whether

this will become a model for Department of Justice response to future

actions that reduce competitors in a market with a strong cooperative

presence is unclear. And like any approach to resolving complex

conflicts, what operates in the best interests of producers in one
325

instance may not in another. But as cooperatives adjust to the

changing competitiveenvironment of agri-business, antitrust issues and

the attitude of Federal and state enforcement officials will remain

important parts of the planning and implementation process.
326

Appendix A. Cooperative Antitrust Cases

This table lists only cases cited in the report that involved or

directly impacted the legal status of cooperatives. This is consistent

with the purpose of the paper, to provide a thorough but easy-to-use

resource on the antitrust status of producer marketing associations. To

keep the list manageable, the table also excludes numerous State court

decisions, most issued during the 1920s, upholding State laws

authorizing cooperatives. These cases are found in footnotes 396-399.

Pages

Agmax v. Countrymark Cooperative

795 F. Supp. 888 (S. D. Ind. 1992) ................ 309-310

Agritronics Corp. v. National Dairy Herd Ass' n, 1994-2 Tr ade

Cases (CC H) ¶ 70, 758 (N. D. N. Y. 1994);

914 F. Supp. 814 (N. D. N. Y. 1996) ...... 170-172, 202-203, 219

Alexander v. National Farmers Organization

687 F. 2d 1173 (8th Cir. 1982), aff'g in pa rt, rev' g in part,

In re Midwest Milk Monopolization Litigation,

510 F. Supp. 381 (W. D. Mo. 1981), cert. denied,

461 U. S. 937 (1983) .................. 185-186, 217, 218,

219, 233, 253, 272-276, 290-291

Alexander v. National Farmers Organization

614 F. Supp. 745 (W. D. Mo. 1985), aff' d in part,

rev'd in part, and remanded, N FO v. AMP I,

850 F. 2d 1286 (8th Cir. 1988) ...................... 276

April v. National Cranberry Ass' n

168 F. Supp. 919 (D. C. Mass. 1958) ................... 85

Associated Milk Produ cers Inc.; U nited States v.

394 F. Supp. 29 (W. D. MO. 1975), aff' d,

534 F. 2d 113 (8th Cir. 1976), cert. denied,

437 U. S. 905 (1978) ...................... 243, 255-257
327

Pages

Associated Press; United States v.

52 F. Supp. 362 (S. D. NY 1943), aff' d,

326 U. S. 1 (1945) ............................. 53-55

Ex parte Baldwin County Producers' C orporation

83 So. 69 (Ala. 1919) ............................. 70

Bascom Food Products v. Ree se Finer Foods

715 F. Supp. 612 (D. N.J. 1989) ................... 50, 57

Bell v. Fur Breeders Agricultural Cooperative

3 F. Supp. 2d 1941 (D. Utah 1998) ................ 146-147

Bergjans Farm Da iry Co. v . Sanitary M ilk Producers

241 F. Supp. 476 (E. D. Mo. 1965), aff' d,

Sanitary Milk Producers v. Bergjans Farm Dairy ,

368 F. 2d 679 (8th Cir. 1966) ............. 146, 222, 230-231,

237-238, 289

Borden; United States v .

28 F. Supp. 177 (N. D. Ill. 1939), rev'd ,

308 U. S. 188 (1939) ............... 85, 155-162, 209, 222,

243-244, 283-284, 316

Bullville Milk Producers Ass'n v. Armstrong

178 N. Y.S. 612 (1919) ............................ 70

Burley Tobacco Society v. Gillaspy, 100 N .E . 89 (Ind. 1912) ....... 70

Cape Cod Food P roducts v. National Cranberry Ass' n

119 F. Supp. 900 (D. Mass. 1954) .......... 245-246, 288-289

Carleton v. Vermont Da iry Herd Improvem ent Ass' n

1992-1 Trade Cases (C CH) ¶ 69,761 (D. Vt. 1991) .......... 58

Case-Swayne v . Sunkist G rowers

369 F. 2d 449 (9th Cir. 1966), rev'd ,

389 U.S. 384 (1967); also,

355 F. Supp. 408 (C. D. Cal. 1971) ......... 169, 171, 172-176,

190-191, 247-248
328

Pages

Castorland M ilk & Che ese Co. v. S hantz

179 N. Y.S. 131 (1919) ............................ 70

In re Central California Lettuce Producers Cooperative

F. T.C. Docket No. 8970 (Mar. 13, 1975),

90 F. T.C. 18 (1977) ................... 186-187, 198-201

Cincinnati M ilk Sales Ass' n v. NFO, 1967 Trade Cases (CCH)

¶ 72, 092 (S.D. Ohio 1967) ........................ 284

Columbia River Packers Ass' n v. Hinton

34 F. Supp. 970 (D. Ore. 1939), rev'd ,

117 F. 2d 310 (1941), rev'd ,

315 U.S. 143 (1942); also,

131 F. 2d 88 (9th Cir. 1942). ................. 292-295, 296

Connolly v. Union Sewer Pipe Co. , 184 U .S. 540 (1902) .......... 69

Dairy Cooperative Ass'n; United States v.

49 F. Supp. 475 (D. C. Ore. 1943) .................... 85

Dairy Farmers of America; United States v., 2001-1 Tr ade

 Cases (CC H) ¶ 73, 136 (E.D . Pa . 2000) ............. 322-324

Dairymen, Inc., United States v., 1978-1 Trade Cases (CCH)

¶ 62,053 (W.D. Ky. 1978), 1978-2 Trade Cases (CCH)

¶ 62, 186 (W. D. Ky. 1978), aff'd in pa rt, rev' d in part

and remanded, 660 F .2d 192 (6th Cir. 1981), cert. denied,

106 S. Ct. 73 (1985); 1985-1 Trades Cases

(CCH ) ¶ 66,638 (6th C ir. 1985) ........ 202, 215, 250, 258-260,

264, 270-272, 273, 277

Ewald Bros. v. M id-America Dairymen

877 F. 2d 1384, (8th Cir. 1989) .................. 216-217

Fairdale Farms v . Ya nkee M ilk, 1980-1 Trade Cases (CCH)

¶ 63, 029 (D. Vt. 1979), aff' d in part, vacated in part,

and remanded, 635 F .2d 1037 (2d Cir . 1980), cert. denied,

454 U. S. 818 (1981); 715 F .2d 30, (2d Cir. 1983),

cert. denied, 464 U .S. 1043 (1984) . . 201-202, 214, 215, 233, 246,

260-264, 266, 268, 271, 273
329

Pages

Farmland Dairies v. New York Farm Bureau , 1996-1 Tr ade

Cases (CC H) ¶ 71, 423 (N. D. N. Y. 1996) ............ 223-224

Farmers' Livestock Commission Co. v. United States

54 F. 2d 375 (E.D . Ill. 1931) ....................... 211

Ford v. Chicago Milk Shippers Ass' n

39 N. E. 651 (Ill. 1895) ............................ 68

GVC Cannery v. California Tomato Grow ers Ass' n

511 F. Supp. 711 (N. D. Cal. 1981) .......... 214-215, 269-270

Georgia Fruit Exchange v. Turnipseed

62 So. 542 (Ala. 1913) ............................ 70

Golden Guernsey Dairy Cooperative; State v.

43 N. W. 2d 31 (Wis. 1950) ........................ 310

Goshen County Cooperative Beet Ass' n v. Pearson

706 P.2d 1121 (W yoming 1985) ..................... 318

Green v. Associated Milk Producers, Inc.

1981-2 Trade Cases (C CH) ¶ 64,346 ( D. Minn. 1981),

aff' d, 692 F .2d 1153 (8th Cir. 1982) ............... 285-287

In re Grice, 79 F . 627 (N. D. Tex. Cir. 1897),

rev'd on other grounds, 169 U .S. 284 (1898) .............. 67

Gulf Coast Shrimpers and Oystermans Ass'n v. United States

236 F. 2d 658 (5th Cir. 1956), cert. denied,

352 U. S. 927 (1956) ................ 231, 232-234, 295-297

Hinote; United States v .

823 F. Supp. 1350 (S. D. Miss. 1993) ........... 188-189, 193

Holly Sugar v. Goshen County Cooperative Beet Grow ers

Ass' n, 725 F .2d 564 (10th Cir. 1984) ............ 274, 317-318

Hudson's Bay Co. v. American Legend Cooperative

651 F. Supp. 819 (D. N.J. 1986) .................... 210
330

Pages

Isaly Dairy Comp any v. United Dairy Farmers

250 F. Supp. 99 (W. D. Pa. 1966) ................. 238-239

Johnson v. Pacific Lighting Land Co.

817 F. 2d 601 (9th Cir. 1987) .................... 291-292

King; United States v., 229 F . 275 (D. C. Mass. 1915) ..... 83-84, 232

King; United States v., 250 F . 908 (D. C. Mass. 1916) ..... 84-85, 232

Kinnett Dairies v. Dairymen, Inc.

512 F. Supp. 608 (M .D . Ga. 1981), aff'd,

715 F. 2d 520 (11th Cir. 1983), cert. denied,

465 U. S. 1051 (1984) ............... 217, 246, 264-269, 277

Knuth v. Erie-Crawford D airy Cooperative Ass' n

395 F. 2d 420 (3rd Cir. 1968), on remand,

326 F. Supp. 48 (N. D. Pa. 1971), aff'd in pa rt

and rev' d in part, 463 F .2d 470 (3rd C ir. 1972) ........ 311-315

L. & . L. Howell v. Cincinnati Cooperative Milk Sales A ss' n

1983-2 Trade Cases (C CH) ¶ 65,595 (6th Cir. 1983) ..... 287-288

Liberty Warehouse Co. v. Burley Tobacco G rowers

Co-op Ass' n, 271 S. W. 695 (Ky. 1925), aff' d,

276 U. S. 71 (1928) .......................... 150-151

Lone Star Milk Producers v. Dairy Farmers of America

2001-2 Trade Cases (C CH) ¶ 73,509 (E. D. Tex. 2001) ...... 167

Manaka v. Monterey Sardine Industries

41 F. Supp. 531 (N. D. Cal. 1941) .............. 162, 244-245

Margrove, Inc. v. Upstate Milk Cooperative, 1974-2 Tr ade

Cases (CC H) ¶ 75, 268 (N. Y. Sup. Ct. 1974) ............. 311

Marketing Assistance Plan v. AMPI

338 F. Supp. 1019 (S. D. Tex. 1972) ............ 221, 315-316
331

Pages

Maryland & Virginia Milk Producers; U nited States v.

179 F. 2d 426 (D.C . Cir. 1949), cert. denied,

338 U. S. 831 (1949), on remand,

90 F. Supp. 681 (D. D. C. 1950), rev'd ,

193 F. 2d 907 (D.C . Cir. 1951) ................ 162-167, 218

Maryland & Virginia Milk Producers v. United States

167 F. Supp. 45 (D. D. C. 1958), rev'd ,

362 U. S. 458(1960);

167 F. Supp. 799 (D. D. C. 1958), aff' d,

362 U. S. 458 (1960);

168 F. Supp. 880 (D. D. C. 1959), aff' d,

362 U. S. 458 (1960) .......... 85-86, 168-171, 206, 207, 209,

218, 219, 221, 224-230, 231, 234, 274

Maryland Cooperative Milk Producers; United States v.

145 F. Supp. 151 (D. D. C. 1956) ................. 212-213

Midland Cooperative Wholesale v. Ickes

125 F. 2d 618 (8th Cir. 1942) .................... 299-300

Mid-America Dairymen, Inc.; United States v., 1977-1

Trade Cases (CCH ) ¶ 61,508 (W .D . M o. 1977) ........ 257-258

Mid-West Theatres v. Co-O perative Theatres of Michigan

43 F. Supp. 216 (E. D. Mich. 1941) ............... 300-301

National Board of Fur Farm Org anizations; United States v.

395 F. Supp. 56 (E. D. Wis. 1975) ................... 154

National Broiler Marketing Ass'n; United States v.

1975-2 Trade Cases (C CH) ¶ 60,509 (N. D. Ga. 1975),

rev'd , 550 F .2d 1380 (5th Cir. 1977), aff' d,

436 U. S. 816 (1978) ................. 91-92, 176-184, 222

North Texas Producers Ass'n v. Metzger Dairies, Inc.

348 F. 2d 189 (5th Cir. 1965), cert. denied,

382 U. S. 977 (1966) ......................... 235-236
332

Pages

North Texas Producers Ass'n v. Young

308 F. 2d 235 (5th Cir. 1962), cert. denied,

372 U. S. 929 (1963) ............................ 223

Northern California Superm arkets v. Central Califor nia

Lettuce Producers Cooperative

413 F. Supp. 984 (N. D. Cal. 1976), aff'd per curium,

580 F. 2d 369 (9th Cir. 1978), cert. denied,

 439 U. S. 1090 (1979) ..................... 187, 198-202

Oregon v. Mulkey, 1997-1 Trade Cases (CCH)

¶ 71, 859 (D. Ore. 1997) ....................... 192, 291

Otto Milk Co. v. U nited Dairy Farmers Coop erative Ass' n

261 F. Supp. 381 (W. D. Pa. 1966), aff' d,

388 F. 2d 789 (3rd Cir. 1967) .................... 239-242

Pacific Coast Agricultural Export A ss' n v. Sun kist Growers

526 F. 2d 1196 (9th Cir. 1975), cert. denied,

425 U. S. 959 (1976) ......................... 297-298

Pacific Statione ry & Prin ting Co. v. Northwest W holesale

Stationers, 715 F . 2d 1393 (9th Cir. 1983), rev'd ,

472 U. S. 284 (1985) ........................... 55-57

Reeves v . D ecorah Farm ers' Co-operativ e Society

140 N. W. 844 (Iowa 1913) ......................... 69

Rice Growers A ss' n of California; United States v.

1986-2 Trade Cases (C CH) ¶ 67,287 and ¶ 67,288

(E.D . Cal. 1986) ............................... 231

Ripplemeyer v. National Grape Coop erative Ass' n

807 F. Supp. 1439 (W. D. Ark. 1992) ....... 189-191, 210, 286

Sewell Plastics v. Coca-Cola

720 F. Supp. 1186 (W. D. N.C. 1988),

720 F. Supp. 1198 (W. D. N.C. 1989). both aff' d,

1990-2 Trade Cases (C CH) ¶ 69,165 (4th Cir. 1990) ..... 301-309
333

Pages

Shoenberg Farms v. Denver Milk P roducers

231 F. Supp. 260 (D. C. Colo. 1964) .................. 246

Sunkist Growers v. FTC

464 F. Supp. 302 (C. D. Cal. 1979) ................ 283-284

Sunkist Grow ers v. Winckler & Smith Citrus P roducts

284 F. 2d 1 (9th Cir. 1960), rev'd ,

370 U. S. 19 (1962) ................... 172, 191, 204-209

Superior Dairy v. Stark County Milk Prod ucers Ass' n

100 N. E. 2d 695 (Ct. A pp. Stark C o., Ohio 1950) .......... 310

Texas v. Associated Milk Producers, Inc., 1974-2 Trade Cases

(CCH ) ¶ 75,269 (T ex. D .C . Tr avis County 1974) .......... 311

Tigner v. Texas

132 S.W .2d 885 (Texas 1939), aff' d,

310 U. S. 141 (1940) ......................... 151-152

Tillamook C heese and D airy Ass' n v. Tillamook C ounty

Creamery A ss' n, 358 F .2d 115 (9th Cir. 1966) ............ 289

Topco Associates; Un ited States v.

319 F. Supp. 1031 (N. D. Ill. 1970), rev'd ,

405 U. S. 596 (1972) ........................... 48-50

Treasure Valley Potato Bargaining Ass'n v. Ore-Ida Foods,Inc.

1973-1 Trade Cases (C CH) ¶ 74,315 (D. C. Id. 1971), aff' d,

497 F. 2d 203 (9th Cir. 1974), cert. denied,

419 U. S. 999 (1974) ............ 194-198, 202, 203, 213-214

United Egg Prod ucers v. B auer International Corp.

311 F. Supp. 1375 (S. D. N. Y. 1970);

312 F. Supp. 319 (S. D. N. Y. 1970) ............... 209-210

In re Washington Crab A ss' n, 66 F .T .C . 45 (1964) ............ 290

Waters v. National Farmers Organization

328 F. Supp. 1229 (S. D. Ind. 1971) ........... 146, 219, 253
334

Pages

Whitney v. National Grape Coop erative Ass' n

No. 87-3854 (9th Cir. M arch 14, 1988), noted as

unpublished at 842 F.2d 336 ...................... 57-58

Wisconsin v. United Wild Rice, 1981-1 Trade Cases (CCH)

¶ 63, 940 (Minn. 9th D.C . 1981) ..................... 311
335

Appendix B. Cases by Circuits

This table arranges the cases listed in Appendix A by Federal Judicial

Circuits.

Pages

DISTRIC T OF COLU MBIA CIRCUIT

Maryland & Virginia Milk Producers; U nited States v.

179 F. 2d 426 (D.C . Cir. 1949), cert. denied,

338 U. S. 831 (1949), on remand,

90 F. Supp. 681 (D. D. C. 1950), rev'd ,

193 F. 2d 907 (D.C . Cir. 1951) ................ 162-167, 218

Maryland & Virginia Milk Producers v. United States

167 F. Supp. 45 (D. D. C. 1958), rev'd ,

362 U. S. 458(1960);

167 F. Supp. 799 (D. D. C. 1958), aff' d,

362 U. S. 458 (1960);

168 F. Supp. 880 (D. D. C. 1959), aff' d,

362 U. S. 458 (1960) .......... 85-86, 168-171, 206, 207, 209,

218, 219, 221, 224-230, 231, 234, 274

Maryland Cooperative Milk Producers; United States v.

145 F. Supp. 151 (D. D. C. 1956) ................. 212-213

FIRST C IRCUIT

April v. National Cranberry Ass' n

168 F. Supp. 919 (D. C. Mass. 1958) ................... 85

Cape Cod Food P roducts v. National Cranberry Ass' n

119 F. Supp. 900 (D. Mass. 1954) .......... 245-246, 288-289

King; United States v., 229 F . 275 (D. C. Mass. 1915) ..... 83-84, 232

King; United States v., 250 F . 908 (D. C. Mass. 1916) ..... 84-85, 232
336

Pages

SECON D CIRC UIT

Agritronics Corp. v. National Dairy Herd Ass' n, 1994-2 Tr ade

Cases (CC H) ¶ 70, 758 (N. D. N. Y. 1994);

914 F. Supp. 814 (N. D. N. Y. 1996) ...... 170-172, 202-203, 219

Associated Press; United States v.

52 F. Supp. 362 (S. D. NY 1943), aff' d,

326 U. S. 1 (1945) ............................. 53-55

Bullville Milk Producers Ass'n v. Armstrong

178 N. Y.S. 612 (1919) ............................ 70

Carleton v. Vermont Da iry Herd Improvem ent Ass' n

1992-1 Trade Cases (C CH) ¶ 69,761 (D. Vt. 1991) .......... 58

Castorland M ilk & Che ese Co. v. S hantz

179 N. Y.S. 131 (1919) ............................ 70

Fairdale Farms v . Ya nkee M ilk, 1980-1 Trade Cases (CCH)

¶ 63, 029 (D. Vt. 1979), aff' d in part, vacated in part,

and remanded, 635 F .2d 1037 (2d Cir . 1980), cert. denied,

454 U. S. 818 (1981); 715 F .2d 30, (2d Cir. 1983),

cert. denied, 464 U .S. 1043 (1984) . . 201-202, 214, 215, 233, 246,

260-264, 266, 268, 271, 273

Farmland Dairies v. New York Farm Bureau , 1996-1 Tr ade

Cases (CC H) ¶ 71, 423 (N. D. N. Y. 1996) ............ 223-224

United Egg Prod ucers v. B auer International Corp.

311 F. Supp. 1375 (S. D. N. Y. 1970);

312 F. Supp. 319 (S. D. N. Y. 1970) ............... 209-210

THIRD CIRCU IT

Bascom Food Products v. Ree se Finer Foods

715 F. Supp. 612 (D. N.J. 1989) ................... 50, 57

Dairy Farmers of America; United States v., 2001-1 Tr ade

 Cases (CC H) ¶ 73, 136 (E.D . Pa . 2000) ............. 322-324
337

Pages

Hudson's Bay Co. v. American Legend Cooperative

651 F. Supp. 819 (D. N.J. 1986) .................... 210

Isaly Dairy Comp any v. United Dairy Farmers

250 F. Supp. 99 (W. D. Pa. 1966) ................. 238-239

Knuth v. Erie-Crawford D airy Cooperative Ass' n

395 F. 2d 420 (3rd Cir. 1968), on remand,

326 F. Supp. 48 (N. D. Pa. 1971), aff'd in pa rt

and rev' d in part, 463 F .2d 470 (3rd C ir. 1972) ........ 311-315

Otto Milk Co. v. U nited Dairy Farmers Coop erative Ass' n

261 F. Supp. 381 (W. D. Pa. 1966), aff' d,

388 F. 2d 789 (3rd Cir. 1967) .................... 239-242

FOU RTH C IRCUIT

Sewell Plastics v. Coca-Cola

720 F. Supp. 1186 (W. D. N.C. 1988),

720 F. Supp. 1198 (W. D. N.C. 1989). both aff' d,

1990-2 Trade Cases (C CH) ¶ 69,165 (4th Cir. 1990) ..... 301-309

FIFT H CIRC UIT

In re Grice, 79 F . 627 (N. D. Tex. Cir. 1897),

rev'd on other grounds, 169 U .S. 284 (1898) .............. 67

Gulf Coast Shrimpers and Oystermans Ass'n v. United States

236 F. 2d 658 (5th Cir. 1956), cert. denied,

352 U. S. 927 (1956) ................ 231, 232-234, 295-297

Hinote; United States v .

823 F. Supp. 1350 (S. D. Miss. 1993) ........... 188-189, 193

Lone Star Milk Producers v. Dairy Farmers of America

2001-2 Trade Cases (C CH) ¶ 73,509 (E. D. Tex. 2001) ...... 167

Marketing Assistance Plan v. AMPI

338 F. Supp. 1019 (S. D. Tex. 1972) ............ 221, 315-316
338

Pages

National Broiler Marketing Ass'n; United States v.

1975-2 Trade Cases (C CH) ¶ 60,509 (N. D. Ga. 1975),

rev'd , 550 F .2d 1380 (5th Cir. 1977), aff' d,

436 U. S. 816 (1978) ................. 91-92, 176-184, 222

North Texas Producers Ass'n v. Metzger Dairies, Inc.

348 F. 2d 189 (5th Cir. 1965), cert. denied,

382 U. S. 977 (1966) ......................... 235-236

North Texas Producers Ass'n v. Young

308 F. 2d 235 (5th Cir. 1962), cert. denied,

372 U. S. 929 (1963) ............................ 223

Texas v. Associated Milk Producers, Inc., 1974-2 Trade Cases

(CCH ) ¶ 75,269 (T ex. D .C . Tr avis County 1974) .......... 311

Tigner v. Texas

132 S.W .2d 885 (Texas 1939), aff' d,

310 U. S. 141 (1940) ......................... 151-152

SIXTH C IRCUIT

Cincinnati M ilk Sales Ass' n v. NFO, 1967 Trade Cases (CCH)

¶ 72, 092 (S.D. Ohio 1967) ........................ 284

Dairymen, Inc., United States v., 1978-1 Trade Cases (CCH)

¶ 62,053 (W.D. Ky. 1978), 1978-2 Trade Cases (CCH)

¶ 62, 186 (W. D. Ky. 1978), aff'd in pa rt, rev' d in part

and remanded, 660 F .2d 192 (6th Cir. 1981), cert. denied,

106 S. Ct. 73 (1985); 1985-1 Trades Cases

(CCH ) ¶ 66,638 (6th C ir. 1985) ........ 202, 215, 250, 258-260,

264, 270-272, 273, 277

L. & . L. Howell v. Cincinnati Cooperative Milk Sales A ss' n

1983-2 Trade Cases (C CH) ¶ 65,595 (6th Cir. 1983) ..... 287-288

Liberty Warehouse Co. v. Burley Tobacco G rowers

Co-op Ass' n, 271 S. W. 695 (Ky. 1925), aff' d,

276 U. S. 71 (1928) .......................... 150-151
339

Pages

Mid-West Theatres v. Co-O perative Theatres of Michigan

43 F. Supp. 216 (E. D. Mich. 1941) ............... 300-301

Superior Dairy v. Stark County Milk Prod ucers Ass' n

100 N. E. 2d 695 (Ct. A pp. Stark C o., Ohio 1950) .......... 310

SEVEN TH C IRCUIT

Agmax v. Countrymark Cooperative

795 F. Supp. 888 (S. D. Ind. 1992) ................ 309-310

Borden; United States v .

28 F. Supp. 177 (N. D. Ill. 1939), rev'd ,

308 U. S. 188 (1939) ............... 85, 155-162, 209, 222,

243-244, 283-284, 316

Burley Tobacco Society v. Gillaspy, 100 N .E . 89 (Ind. 1912) ....... 70

Connolly v. Union Sewer Pipe Co. , 184 U .S. 540 (1902) .......... 69

Farmers' Livestock Commission Co. v. United States

54 F. 2d 375 (E.D . Ill. 1931) ....................... 211

Ford v. Chicago Milk Shippers Ass' n

39 N. E. 651 (Ill. 1895) ............................ 68

Golden Guernsey Dairy Cooperative; State v.

43 N. W. 2d 31 (Wis. 1950) ........................ 310

National Board of Fur Farm Org anizations; United States v.

395 F. Supp. 56 (E. D. Wis. 1975) ................... 154

Topco Associates; Un ited States v.

319 F. Supp. 1031 (N. D. Ill. 1970), rev'd ,

405 U. S. 596 (1972) ........................... 48-50

Waters v. National Farmers Organization

328 F. Supp. 1229 (S. D. Ind. 1971) ........... 146, 219, 253
340

Pages

EIGHT H CIRC UIT

Alexander v. National Farmers Organization

687 F. 2d 1173 (8th Cir. 1982), aff'g in pa rt, rev' g in part,

In re Midwest Milk Monopolization Litigation,

510 F. Supp. 381 (W. D. Mo. 1981), cert. denied,

461 U. S. 937 (1983) .................. 185-186, 217, 218,

219, 233, 253, 272-276, 290-291

Alexander v. National Farmers Organization

614 F. Supp. 745 (W. D. Mo. 1985), aff' d in part,

rev'd in part, and remanded, N FO v. AMP I,

850 F. 2d 1286 (8th Cir. 1988) ...................... 276

Associated Milk Produ cers Inc.; U nited States v.

394 F. Supp. 29 (W. D. MO. 1975), aff' d,

534 F. 2d 113 (8th Cir. 1976), cert. denied,

437 U. S. 905 (1978) ...................... 243, 255-257

Bergjans Farm Da iry Co. v . Sanitary M ilk Producers

241 F. Supp. 476 (E. D. Mo. 1965), aff' d,

Sanitary Milk Producers v. Bergjans Farm Dairy ,

368 F. 2d 679 (8th Cir. 1966) ............. 146, 222, 230-231,

237-238, 289

Ewald Bros. v. M id-America Dairymen

877 F. 2d 1384, (8th Cir. 1989) .................. 216-217

Green v. Associated Milk Producers, Inc.

1981-2 Trade Cases (C CH) ¶ 64,346 ( D. Minn. 1981),

aff' d, 692 F .2d 1153 (8th Cir. 1982) ............... 285-287

Midland Cooperative Wholesale v. Ickes

125 F. 2d 618 (8th Cir. 1942) .................... 299-300

Mid-America Dairymen, Inc.; United States v., 1977-1

Trade Cases (CCH ) ¶ 61,508 (W .D . M o. 1977) ........ 257-258

Reeves v . D ecorah Farm ers' Co-operativ e Society

140 N. W. 844 (Iowa 1913) ......................... 69
341

Pages

Ripplemeyer v. National Grape Coop erative Ass' n

807 F. Supp. 1439 (W. D. Ark. 1992) ....... 189-191, 210, 286

Wisconsin v. United Wild Rice, 1981-1 Trade Cases (CCH)

¶ 63, 940 (Minn. 9th D.C . 1981) ..................... 311

NINT H CIRC UIT

Case-Swayne v . Sunkist G rowers

369 F. 2d 449 (9th Cir. 1966), rev'd ,

389 U.S. 384 (1967); also,

355 F. Supp. 408 (C. D. Cal. 1971) ......... 169, 171, 172-176,

190-191, 247-248

In re Central California Lettuce Producers Cooperative

F. T.C. Docket No. 8970 (Mar. 13, 1975),

90 F. T.C. 18 (1977) ................... 186-187, 198-201

Columbia River Packers Ass' n v. Hinton

34 F. Supp. 970 (D. Ore. 1939), rev'd ,

117 F. 2d 310 (1941), rev'd ,

315 U.S. 143 (1942); also,

131 F. 2d 88 (9th Cir. 1942). ................. 292-295, 296

Dairy Cooperative Ass'n; United States v.

49 F. Supp. 475 (D. C. Ore. 1943) .................... 85

GVC Cannery v. California Tomato Grow ers Ass' n

511 F. Supp. 711 (N. D. Cal. 1981) .......... 214-215, 269-270

Johnson v. Pacific Lighting Land Co.

817 F. 2d 601 (9th Cir. 1987) .................... 291-292

Manaka v. Monterey Sardine Industries

41 F. Supp. 531 (N. D. Cal. 1941) .............. 162, 244-245
342

Pages

Northern California Superm arkets v. Central Califor nia

Lettuce Producers Cooperative

413 F. Supp. 984 (N. D. Cal. 1976), aff'd per curium,

580 F. 2d 369 (9th Cir. 1978), cert. denied,

 439 U. S. 1090 (1979) ..................... 187, 198-202

Oregon v. Mulkey, 1997-1 Trade Cases (CCH)

¶ 71, 859 (D. Ore. 1997) ....................... 192, 291

Pacific Coast Agricultural Export A ss' n v. Sun kist Growers

526 F. 2d 1196 (9th Cir. 1975), cert. denied,

425 U. S. 959 (1976) ......................... 297-298

Pacific Statione ry & Prin ting Co. v. Northwest W holesale

Stationers, 715 F . 2d 1393 (9th Cir. 1983), rev'd ,

472 U. S. 284 (1985) ........................... 55-57

Rice Growers A ss' n of California; United States v.

1986-2 Trade Cases (C CH) ¶ 67,287 and ¶ 67,288

(E.D . Cal. 1986) ............................... 231

Sunkist Growers v. FTC

464 F. Supp. 302 (C. D. Cal. 1979) ................ 283-284

Sunkist Grow ers v. Winckler & Smith Citrus P roducts

284 F. 2d 1 (9th Cir. 1960), rev'd ,

370 U. S. 19 (1962) ................... 172, 191, 204-209

Tillamook C heese and D airy Ass' n v. Tillamook C ounty

Creamery A ss' n, 358 F .2d 115 (9th Cir. 1966) ............ 289

Treasure Valley Potato Bargaining Ass'n v. Ore-Ida Foods,Inc.

1973-1 Trade Cases (C CH) ¶ 74,315 (D. C. Id. 1971), aff' d,

497 F. 2d 203 (9th Cir. 1974), cert. denied,

419 U. S. 999 (1974) ............ 194-198, 202, 203, 213-214

In re Washington Crab A ss' n, 66 F .T .C . 45 (1964) ............ 290

Whitney v. National Grape Coop erative Ass' n

No. 87-3854 (9th Cir. M arch 14, 1988), noted as

unpublished at 842 F.2d 336 ...................... 57-58
343

Pages

TEN TH C IRCUIT

Bell v. Fur Breeders Agricultural Cooperative

3 F. Supp. 2d 1941 (D. Utah 1998) ................ 146-147

Goshen County Cooperative Beet Ass' n v. Pearson

706 P.2d 1121 (W yoming 1985) ..................... 318

Holly Sugar v. Goshen County Cooperative Beet Grow ers

Ass' n, 725 F .2d 564 (10th Cir. 1984) ............ 274, 317-318

Shoenberg Farms v. Denver Milk P roducers

231 F. Supp. 260 (D. C. Colo. 1964) .................. 246

ELEV ENT H CIRC UIT

Ex parte Baldwin County Producers' C orporation

83 So. 69 (Ala. 1919) ............................. 70

Georgia Fruit Exchange v. Turnipseed

62 So. 542 (Ala. 1913) ............................ 70

Kinnett Dairies v. Dairymen, Inc.

512 F. Supp. 608 (M .D . Ga. 1981), aff'd,

715 F. 2d 520 (11th Cir. 1983), cert. denied,

465 U. S. 1051 (1984) ............... 217, 246, 264-269, 277
344

Appendix C. Federal Antitrust Statutes

The key portions of the Federal antitrust laws applicable to

producer marketing associations are reproduced below, in order of

enactment.

SHERMAN ACT

26 Stat. 209 (1890), as amended

§ 1. Trusts, etc., in restraint of trade illegal; penalty

(15 U.S.C. § 1)

Every contract, combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the several States,

or with foreign nations, is hereby declared to be illegal. Every person

who shall make any contract or engage in any combination or

conspiracy hereby declared to be illegal shall be deemed guilty of a

felony and, on conviction thereof, shall be punished by fine not

exceeding ten million dollars if a corporation, or, if any other person,

three hundred fifty thousand dollars, or by imprisonment not exceeding

three years, or by both said punishments, in the discretion of the court.

§ 2. Monopolizing trade a felony; penalty (15 U.S.C. § 2)

Every person who shall monopolize, or attempt to monopolize, or

combine or conspire with any other person or persons, to monopolize

any part of the trade or commer ce among the several States, or with

foreign nations, shall be deemed guilty of a felony, and, on conviction

thereof, shall be punished by fine not exceeding ten million dollars if

a corporation, or, if any other person, three hundred fifty thousand

dollars, or by imprisonment not exceeding three years, or by both said

punishments, in the discretion of the court.
345

FEDERAL TRADE COMMISSION ACT

38 Stat. 717 (1914), as amended, cooperative provision at

108 Stat. 1691 (1994)

§ 5. Unfair methods of competition unlawful; prevention by

Commission (15 U.S.C. § 45)

(a)(1) Unfair methods of competition in or affecting commerce,

and unfair or deceptive acts or practices in or affecting commerce, are

hereby declared unlawful.

(2) The Commission is empowered and directed to prevent

persons, partnerships, or corporation, except banks, savings and loan

institutions described in section 57a(f)(3) of this title, Federal cr edit

unions described in section 57a(f)(4) of this title, common carriers

subject to the Acts to regulate commerce, air carriers and foreign air

carriers subject to the Federal Aviation Act of 1958 [49 App. U.S.C.

1301 et seq.], and persons, partnerships, or corpor ations insofar as

they are subject to the Packers and Stockyards Act, 1921, as amended

[7 U.S.C. 181 et seq.], except as provided in section 406(b) of said

Act [7 U.S.C. 227(b)], from using unfair methods of competition in or

affecting commerce and unfair or deceptive acts or practices in or

affecting commerce.

. . .

(b) Whenever the Commission shall have reason to believe that

any such person, partnership, or corporation has been or is using any

unfair method of competition or unfair or deceptive act or practice in

or affecting commerce, and if it shall appear to the Commission that

a proceeding by it in respect thereof would be to the interest of the

public, it shall issue and serve upon such person, partnership, or

corporation a complaint stating its charges in that respect and

containing a notice of a hearing upon a day and at a place therein fixed

at least thirty days after the service of said complaint. The person,

partnership, or corpor ation so complained of shall have the right to

appear at the place and time so fixed and show cause why an order
346

should not be entered by the Commission requiring such person,

partnership, or corporation to cease and desist from the violation of the

law so charged in said complaint. .. . .

§ 6. Additional powers of Commission (15 U.S.C. § 46)

The Commission shall also have power --

(a) To gather and compile information concerning, and to

investigate from time to time the organization, business, conduct,

practices and management of any person, partnership, or corporation

engaged in or whose business affects commerce, excepting banks,

savings and loan institutions described in section 57a(f)(3) of this title,

Federal credit unions described in section 57a(f)(4) of this title, and

common carriers subject to the Act to regulate commerce, and its

relation to other persons, partnerships, and corporations.

(b) To require, by general or special orders, persons,

partnerships, and corporations engaged in or whose business affects

commerce, excepting banks, savings and loan institutions described in

section 57a(f)(3) of this title, Federal credit unions described in section

57a(f)(4) of this title, and common carriers subject to the Act to

regulate commerce, or any class of them, or any of them, respectively,

to file with the Commission in such form as the Commission may

prescribe annual or special, or both annual and special, reports or

answers in writing to specific questions, furnishing to the Commission

such information as it may require as to the organization, business,

conduct, practices, management, and relation to other corporations,

partnerships, and individuals of the respective persons, partnerships,

and corporations filing such reports or answers in writing. Such

reports and answers shall be made under oath, or otherwise, as the

Commission may prescribe, and shall be filed with the Commission

within such reasonable period as the Commission may prescribe,

unless additional time be granted in any case by the Commission... .
347

§ 12. False advertising; injunctions and restraining orders

(15 U.S.C. § 52)

(a) It shall be unlawful for any person, partnership, or corporation

to disseminate, or cause to be disseminated, any false advertisement --

(1) By United States mails, or in or having an effect upon

commerce, by any means, for the purpose of inducing, or which is

likely to induce, directly or indirectly, the purchase of food, drugs,

devices, or cosmetics; or

(2) By any means, for the purpose of inducing, or which is

likely to induce, directly or indirectly, the purchase in or having an

effect upon commer ce of food, drugs, devices, or cosmetics.

(b) The dissemination or the causing to be disseminated of any

false advertisement within the provisions of subsection (a) of this

section shall be an unfair or deceptive act or practice in or affecting

commerce within the meaning of section 45 of this title.

§ 24. Agricultural cooperatives (15 U.S.C. § 57b-5)

(a) The Commission shall not have any authority to conduct any

study, investigation, or prosecution of any agricultural cooperative for

any conduct which, because of the provisions of the Act entitled 'An

Act to authorize association of producers of agricultural products' ,

approved February 18, 1922 (7 U.S.C. 291, et seq., commonly known

as the Capper-Volstead Act), is not a violation of any of the antitrust

Acts or this Act.

(b) The Commission shall not have any authority to conduct any

study or investigation of any agricultural mar keting orders.
348

CLAYTON ACT

38 Stat. 730 (1914), as amended

§ 3. Sale, etc. on agreement not to use goods of competitor

(15 U.S.C. § 14)

It shall be unlawful for any person engaged in commerce, in the course

of such commerce, to lease or make a sale or contract for sale of

goods, wares, merchandise, machinery, suppliesor other commodities,

whether patented or unpatented, for use, consumption or resale within

the United States or any Territory thereof or the District of Columbia

or any insular possession or other place under the jurisdiction of the

United States, or fix a price charged therefor, or discount from, or

rebate upon, such price, on the condition, agreement or understanding

that the lessee or purchaser thereof shall not use or deal in the goods,

wares, merchandise, machinery, supplies or other commodities of a

competitor or competitors of the lessor or seller, where the effect of

such lease, sale, or contract for sale or such condition, agreement or

understanding may be to substantially lessen competition or tend to

create a monopoly in any line of commerce.

§ 4. Suits by persons injured (15 U.S.C. § 15)

(a) Except as provided in subsection (b) of this section, any person

who shall be injured in his business or property by reason of anything

forbidden in the antitrust laws may sue therefor in any district court of

the United States in the district in which the defendant resides or is

found or has an agent, without respect to the amount in controversy,

and shall recover threefold the damages by him sustained, and the cost

of suit, including a reasonable attorney's fee. The court may award

under this section, pursuant to a motion by such person promptly

made, simple interest on actual damages for the period beginning on

the date of service of such person's pleading setting forth a claim

under the antitrust laws and ending on the date of judgment, or for any

shorter period therein, if the court finds that the award of such interest

for such period is just in the circumstances. . . .
349

§ 4A. Suits by United States; amount of recovery; prejudgment

interest (15 U.S.C. § 15a)

Whenever the United States is hereafter injured in its business or

property by reason of anything forbidden in the antitrust laws it may

sue therefor in the United States district court for the district in which

the defendant resides or is found or has an agent, without respect to the

amount in controversy, and shall recover thr eefold damages by it

sustained and the cost of suit. The court may award under this section,

pursuant to a motion by the United States promptly made, simple

interest on threefold damages for the period beginning on the date of

service of the pleading of the United States setting forth a claim under

the antitrust laws and ending on the date of judgment, or for any

shorter period therein, if the court finds that the award of such interest

for such period is just in the circumstances... .

§ 4B. Limitation of actions (15 U.S.C. § 15b)

Any action to enforce any cause of action under sections 15, 15a, or

15c of this title shall be forever barred unless commenced within four

years after the cause of action accrued....

§ 4C. Actions by State attorneys general (15 U.S.C. § 15c)

(a)(1) Any attorney general of a State may bring a civil action in

the name of such State, as parens patriae on behalf of natural persons

residing in such State, in any district court of the United States having

jurisdiction of the defendant, to secure monetary relief as provided in

this section for injury sustained by such natural persons to their

property by reason of any violation of sections 1 to 7 of this title. The

court shall exclude from the amount of monetary relief awarded inn

such action any amount of monetary relief (A) which duplicates

amounts which have been awarded for the same injury, or (B) which

is properly allocable to (i) natur al persons who have excluded their

claims pursuant to subsection (b)(2) of this section, and (ii) any

business entity.
350

(2) The court shall award the State as monetary relief threefold

the total damage sustained as described in paragraph (1) of this

subsection, and the cost of suit, including a reasonable attorney's fee.

The court may award under this paragraph, pursuant to a motion by

such State promptly made, simple interest on the total damage for the

period beginning on the date of service of such State's pleading setting

forth a claim under the antitrust laws and ending on the date of

judgment, or for any shorter period therein, if the court finds that the

award of such interest for such period is just in the circumstances. .. .

§ 6. Antitrust laws not applicable to labor organizations

(15 U.S.C. § 17)

The labor of a human being is not a commodity or article of

commerce. Nothing contained in the antitrust laws shall be construed

to forbid the existence and operation of labor, agricultural, or

horticultural organizations, instituted for the purposes of mutual help,

and not having capital stock or conducted for profit, or to forbid or

restrain individual members of such organizations from lawfully

carrying out the legitimate objects thereof; nor shall such

organizations, or the members thereof, be held or construed to be

illegal combinations or conspiracies in restraint of trade, under the

antitrust laws.

§ 7. Acquisition by one corporation of stock of another

(15 U.S.C. § 18)

No person engaged in commerce or in any activity affecting commerce

shall acquire, directly or indirectly, the whole or any part of the stock

or other share capital and no person subject to the jurisdiction of the

Federal Trade Commission shall acquire the whole or any part of the

assets of another person engaged also in commerce or in any activity

affecting commerce, where in any line of commerce or in any activity

affecting commerce in any section of the country, the effect of such

acquisition may be substantially to lessen competition, or to tend to

create a monopoly.
351

No person shall acquire, directly or indirectly, the whole or any part

of the stock or other share capital and no person subject to the

jurisdiction of the Federal Trade Commission shall acquire the whole

or any part of the assets of one or more persons engaged in commerce

or in any activity affecting commerce, where in any line of commerce

or in any activity affecting commerce in any section of the country, the

effect of such acquisition, of such stocks or assets, or of the use of

such stock by the voting or granting of proxies or otherwise, may be

substantially to lessen competition, or tend to create a monopoly.

. . .

Nothing contained in this section shall apply to transactions duly

consummated pursuant to authority given by the Secretary of

Transportation, Federal Communications Commission, Federal Power

Commission, Interstate Commerce Commission, the Securities and

Exchange Commission in the exercise of its jurisdiction under section

79j of this title, the United States Maritime Commission, or the

Secretary of Agriculture under any statutory provision vesting such

power in such Commission or Secretary.

§ 14. Liability of directors and agents of corporation

(15 U.S.C. § 24)

Whenever a corporation shall violate any of the penal provisions of the

antitrust laws, such violation shall be deemed to be also that of the

individual directors, officers, or agents of such corporation who shall

have authorized, ordered, or done any of the acts constituting in whole

or in part such violation, and such violation shall be deemed a

misdemeanor, and upon conviction therefor of any such director,

officer, or agent he shall be punished by a fine of not exceeding

$5,000 or by imprisonment for not exceeding one year, or by both, in

the discretion of the court.
352

CAPPER-VOLSTEAD ACT

42 Stat. 388 (1922)

§ 1. Authorization of associations; powers (7 U.S.C. § 291)

Persons engaged in the production of agricultur al products as farmers,

planters, ranchmen, dairymen, nut or fruit growers may act together

in associations, corporate or otherwise, with or without capital stock,

in collectively processing, preparing for market, handling, and

marketing in interstate and foreign commerce, such products of

persons so engaged. Such associations may have marketing agencies

in common; and such associations and their members may make the

necessary contracts and agreements to effect such purposes: Provided,

however, that such association are operated for the mutual benefit of

the members thereof, as such producers, and conform to one or both

of the following requirements:

First. That no member of the association is allowed more than

one vote because of the amount of stock or membership capital he may

own therein, or,

Second. That the association does not pay dividends on stock or

membership capital in excess of 8 per centum per annum.

And in any case to the following:

Third. That the association shall not deal in the products of

nonmembers to an amount greater in value than such as are handled by

it for members.

§ 2. Monopolizing or restraining trade and unduly enhancing

prices prohibited; remedy and procedure (7 U.S.C. 292)

If the Secretary of Agriculture shall have reason to believe that any

such association monopolizes or restrains trade in interstate or foreign

commerce to such an extent that the price of any agricultural product
353

is unduly enhanced by reason thereof, he shall serve upon such

association a complaint stating his charge in that respect, to which

complaint shall be attached, or contained therein, a notice of hearing,

specifying a day and place not less than thirty days after the service

thereof, requiring the association to show cause why an order should

not be made directing it to cease and desist from monopolization or

restraint of trade. An association so complained of may at the time

and place so fixed show cause why such order should not be entered.

The evidence given on such a hearing shall be taken under such rules

and regulations as the Secretary of Agriculture may prescribe, reduced

to writing, and made a part of the record therein. If upon such hearing

the Secretary of Agriculture shall be of the opinion that such

association monopolizes or restrains trade in interstate or foreign

commerce to such an extent that the price of any agricultural product

is unduly enhanced thereby, he shall issue and cause to be served upon

the association an order reciting the facts found by him, directing such

association to cease and desist from monopolization or restraint of

trade. On the request of such association or if such association fails or

neglects for thirty days to obey such order, the Secretary of

Agriculture shall file in the district court in the judicial district in

which such association has its principal place of business a certified

copy of the order and of all the records in the proceeding, together

with a petition asking that the order be enforced, and shall give notice

to the Attorney General and to said association of such filing. Such

district court shall thereupon have jurisdiction to enter a decree

affirming, modifying, or setting aside said order, or enter such other

decree as the court may deem equitable, and may make rules as to

pleadings and proceedings to be had in considering such order. The

place of trial may, for cause or by consent of parties, be changed as in

other causes.

The facts found by the Secretary of Agriculture and recited or set forth

in said order shall be prima facie evidence of such facts, but either

party may adduce additional evidence. The Department of Justice

shall have charge of the enforcement of such order. After the order is

so filed in such district court and while pending for review therein the

court may issue a temporary writ of injunction forbidding such

association from violating such order or any part thereof. The court

may, upon conclusion of its hearing, enforce its decree by a permanent
354

injunction or other appropriate remedy. Service of such complaint and

of all notices may be made upon such association by service upon any

officer or agent thereof engaged in carrying on its business, or on any

attorney authorized to appear in such proceeding for such association,

and such service shall be binding upon such association, the officers,

and members thereof.
355

COOPERATIVE MARKETING ACT OF 1926

44 Stat. 802 (1926)

§ 1. Agricultural products defined (7 U.S.C. § 451)

When used in this chapter the term "agricultural products" means

agricultural, horticultural, viticultural, and dairy products, livestock

and the products thereof, the products of poultry and bee raising, the

edible products of forestry, and any and all products raised or

produced on farms and processed or manufactured products thereof,

transported or intended to be transported interstate and/or foreign

commerce.

§ 2. Supervision of division of cooperative marketing

(7 U.S.C. § 452)

The division of cooperative marketing shall be under the direction and

supervision of the Secretary of Agriculture.

§ 3. Authority and duties of division (7 U.S.C. § 453)

(a) The division shall render service to associations of producers

of agricultural products, and federations and subsidiaries thereof,

engaged in the cooperative marketing of agricultural products,

including processing, warehousing, manufacturing, storage, the

cooperative purchasing of farm supplies, credit, financing, insurance,

and other cooperative activities.

(b) The division is authorized --

(1) To acquire, analyze, and disseminate economic, statistical,

and historical information regarding the progr ess, organization, and

business methods of cooperative associations in the United States and

foreign countries.
356

(2) To conduct studies of the economic, legal, financial, social,

and other phases of cooperation, and publish the results thereof. Such

studies shall include the analyses of the organization, operation,

financial and mer chandising problems of cooper ative associations.

(3) To make surveys and analyses if deemed advisable of the

accounts and business practices of representative cooperative

associations upon their request; to report to the association so surveyed

the results thereof; and with the consent of the association so surveyed

to publish summaries of the results of such surveys, together with

similar facts, for the guidance of cooperative associations and for the

purpose of assisting cooperative associations in developing methods of

business and market analysis.

(4) To confer and advise with committees or groups of

producers, if deemed advisable, that may by desirous of forming a

cooperative association and to make an economic survey and analysis

of the facts surrounding the production and marketing of the

agricultural product or products which the association, if formed,

would handle or market.

(5) To acquire from all available sources information

concerning crop prospects, supply, demand, current receipts, exports,

imports, and prices of the agricultural products handled or marketed

by cooperative associations, and to employ qualified commodity

marketing specialists to summarize and analyze this information and

disseminate the same among cooperative associations and others.

(6) To promote the knowledge of cooperative principles and

practices and to cooperate, in promoting such knowledge, with

educational and marketing agencies, cooperative associations, and

others.

(7) To make such special studies, in the United States and

foreign countries, and to acquire and disseminate such information and

findings as may be useful in the development and practice of

cooperation.
357

§ 4. Advisers to counsel with Secretary of Agriculture; expenses

and subsistence (7 U.S.C. § 454)

The Secretary of Agriculture is authorized, in his discretion, to call

advisers to counsel with him and/or his representatives relative to

specific problems of cooperative marketing of farm products or any

other cooperative activity. Any person, other than an officer, agent,

or employee of the United States, called into conference, as provided

for in this section, may be paid actual transportation expenses and not

to exceed $10 per diem to cover subsistence and other expenses while

in conference and en route from and to his home.

§ 5. Dissemination of crop, market, etc., information by

cooperative marketing associations (7 U.S.C. § 455)

Persons engaged, as original producers of agricultural products, such

as farmers, planters, ranchmen, dairymen, nut or fruit growers, acting

together in associations, corporate or otherwise, in collectively

processing, preparing for market, handling, and marketing in interstate

and/or foreign commerce such products of persons so engaged, may

acquire, exchange, interpret, and disseminate past, present, and

prospective crop, market, statistical, economic, and other similar

information by direct exchange between such persons, and/or such

associations or federations thereof, and/or by and through a common

agent created or selected by them.
358

FISHERMEN'S COLLECTIVE MARKETING ACT

48 Stat. 1213 (1934)

§ 1. Fishing industry; associations authorized; "aquatic products"

defined; marketing agents; requirements (15 U.S.C. 521)

Persons engaged in the fishery industry, as fishermen, catching,

collecting, or cultivating aquatic products, or as planters of aquatic

products on public or private beds, may act together in associations,

corporate or otherwise, with or without capital stock, in collectively

catching, producing, preparing for market, processing, handling, and

marketing in interstate and foreign commerce, such products of said

persons so engaged.

The term "aquatic products" includes all commercial products of

aquatic life in both fresh and salt water, as carried on in the several

States, the District of Columbia, the several Territories of the United

States, the insular possessions, or other places under the jurisdiction of

the United States.

Such associations may have marketing agencies in common, and such

associations and their members may make the necessary contracts and

agreements to effect such purposes: Provided, however, that such

associations are operated for the mutual benefit of the members

thereof, and conform to one or both of the following requirements:

First. That no member of the association is allowed more than

one vote because of the amount of stock or membership capital he may

own therein; or

Second. That the association does not pay dividends on stock or

membership capital in excess of 8 per centum per annum.

and in any case to the following:
359

Third. That the association shall not deal in the products of

nonmembers to an amount greater in value than such as are handled by

it for members.

§ 2. Monopolies or restraints of trade; service of complaint by

Secretary of Commerce; hearing; order to cease and desist;

jurisdiction of district court (15 U.S.C § 522)

If the Secretary of Commerce shall have reason to believe that any

such association monopolizes or restrains trade in interstate or foreign

commerce to such an extent that the price of any aquatic product is

unduly enhanced by reason thereof, he shall serve upon such

association a complaint stating his charge in that respect, to which

complaint shall be attached, or contained therein, a notice of hearing,

specifying a day and place not less than thirty days after the service

thereof, requiring the association to show cause why an order should

not be made directing it to cease and desist from monopolization or

restraint of trade. An association so complained of may at the time

and place so fixed show cause why such order should not be entered,

The evidence given on such a hearing shall be taken under such rules

and regulations as the Secretary of Commerce may prescribe, reduced

to writing, and made a part of the record therein. If upon such hearing

the Secretary of Commerce shall be of the opinion that such

association monopolizes or restrains trade in interstate or foreign

commerce to such an extent that the price of any aquatic product is

unduly enhanced thereby, he shall issue and cause to be served upon

the association an order reciting the facts found by him, directing such

association to cease and desist from monopolization or restraint of

trade. In the request of such association or if such association fails or

neglects for thirty days to obey such order, the Secretary of Commerce

shall file in the district court in the judicial district in which such

association has its principal place of business a certified copy of the

order and of all the records in the proceedings, together with a petition

asking that the order be enforced, and shall give notice to the Attorney

General and to said association of such filing. Such district court shall

thereupon have jurisdiction to enter a decree affirming, modifying, or

setting aside said order, or enter such other decree as the court may

deem equitable, and may make rules as to pleadings and proceedings
360

to be had in considering such order. the place of trial may, for cause

or by consent of parties, be changed as in other causes.

The facts found by the Secretary of Commerce and recited or set forth

in said order shall be prima facie evidence of such facts, but either

party may adduce additional evidence. The Department of Justice hall

have charge of the enforcement of such order. After the order is so

filed in such district court and while pending for review therein, the

court may issue a temporary writ of injunction forbidding such

association from violating such order or any part thereof. The court

shall, upon conclusion of its hearing, enforce its decree by a

permanent injunction or other appropriate remedy. Service of such

complaint and of all notices may be made upon such association by

service upon any officer, or agent thereof, engaged in carrying on its

business, or on any attorney authorized to appear in such proceeding

for such association and such service shall be binding upon such

association, the officers and members thereof.
361

PRICE DISCRIMINATION ACT (Robinson-Patman)

49 Stat. 1526 (1936)

§ 2. Discrimination in price, services, or facilities

(15 U.S.C. § 13)

(a) Price; selection of customers. It shall be unlawful for any

person engaged in commerce, in the course of such commerce, either

directly or indirectly, to discriminate in price between different

purchasers of commodities of like grade and quality, where either or

any of the purchases involved in such discrimination are in commerce,

where such commodities are sold for use, consumption, or resale

within the United States or any Territory thereof or the District of

Columbia or any insular possession or other place under the

jurisdiction of the United States, and where the effect of such

discrimination may be substantially to lessen competition or tend to

create a monopoly in any line of commerce, or to injure, destroy, or

prevent competition with any person who either grants or knowingly

receives the benefit of such discrimination, or with customers of either

of them: Provided, That nothing herein contained shall prevent

differentials which make only due allowance for differences in the cost

of manufacture, sale, or delivery resulting from the differing methods

or quantities in which such commodities are to such purchasers sold or

delivered.. ..

§ 4. Cooperative association; return of net earnings or surplus

(15 U.S.C. § 13b)

Nothing in this Act shall prevent a cooperative association from

returning to its members, producers, or consumers the whole, or any

part of, the net earnings or surplus resulting from its trading

operations, in proportion to their purchases or sales from, to, or

through the association.