Source: https://www.scribd.com/document/303365/US-Department-of-Justice-Antitrust-Case-Brief-00864-200972
Timestamp: 2018-07-17 10:10:10
Document Index: 653084395

Matched Legal Cases: ['§ 25', '§ 26', '§ 18', '§ 367', '§ 22', '§ 1331', '§ 22', '§ 1391', '§ 18', '§ 367', '§ 18', '§ 367']

US Department of Justice Antitrust Case Brief - 00864-200972 | Milk | Clayton Antitrust Act
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY LONDON DIVISION
UNITED STATES OF AMERICA, and COMMONWEALTH OF KENTUCKY, Plaintiffs, v. DAIRY FARMERS OF AMERICA, INC., and SOUTHERN BELLE DAIRY CO., LLC, Defendants.
Civil Action No.:6:03-206 Judge: Reeves_______________
Filed:April 24, 2003 Eastern District of Kentucky
COMPLAINT The United States of America, acting under the direction of the Attorney General of the United States, and the Commonwealth of Kentucky, by and through its Attorney General, bring this civil action to obtain equitable relief against defendants, including compelling the Dairy Farmers of America, Inc. ("DFA") to divest its interests in the Southern Belle dairy located in Somerset, Kentucky, and allege as follows: I Nature of the Action 1. Up until February 2002, DFA, through its subsidiaries, operated the Flav-O-Rich
dairy in London, Kentucky (“Flav-O-Rich”) and competed vigorously against the Southern Belle dairy, located thirty miles away in Somerset, Kentucky (“Southern Belle”), to supply milk to
school districts located in Kentucky and Tennessee. That competition resulted in lower prices and better service for school districts that provide milk to students. 2. In February 2002, DFA, through another subsidiary, acquired control of Southern
Belle, eliminating that important competition. When it made that acquisition, DFA understood that the Department of Justice had in September 1998 successfully challenged a merger involving the very same dairies, under different ownership, because it would have substantially lessened competition in violation of Section 7 of the Clayton Act. 3. Southern Belle and Flav-O-Rich are the only two dairies or two of only a few
dairies that bid to supply school milk in many parts of Kentucky and Tennessee. In 47 school districts, the acquisition has created a monopoly. In 54 other districts, the number of bidders has effectively declined from three to two, reducing competition substantially. 4. History in this region has demonstrated that less competition results in higher
prices. Many school districts in this area previously had to pay higher prices as victims of a criminal bid-rigging conspiracy involving school milk. The former owners of Southern Belle and Flav-O-Rich engaged in that conspiracy and pled guilty to conspiring with each other for more than a decade to rig school milk bids. 5. Because many of the affected school districts are small or rural districts, often in
the mountains, it is unlikely that other dairies will enter or expand into these markets to eliminate the anticompetitive effects of the acquisition. Indeed, Southern Belle’s former owner, in the course of debarment proceedings following the criminal conviction, explained that entry was unlikely in many of these very districts, and that the elimination of Southern Belle as a competitor would reduce competition and cause prices to rise.
II Defendants 6. Defendant Dairy Farmers of America, Inc. (“DFA”) is a Kansas corporation with
its headquarters and principal place of business in Kansas City, Missouri. DFA is the largest dairy farmer cooperative in the world. In 2001, it had approximately 25,500 members in 48 states, and sold approximately 45.6 billion pounds of raw milk. DFA had over $7.9 billion in revenues in 2001. 7. DFA owns a 50% common equity interest and approximately 92% preferred
equity interest (around $500,000,000) in National Dairy Holdings, L.P. (“NDH”). It also has a 50% interest in Dairy Management LLC, which is the managing arm of NDH. Based on its financial interests in NDH, DFA has the rights to between 50% and 75% or more of NDH’s profits. In forming NDH, DFA and its partners in NDH agreed, among other things, that DFA must approve any decision to commit NDH to any contracts or expenditures exceeding $50,000, to appoint new NDH officers, or change the compensation (e.g., increase the salary) of NDH’s officers. 8. DFA is the sole supplier of raw milk and is the contractually preferred supplier of
raw milk to Flav-O-Rich and other NDH dairies. DFA also sells more raw, unprocessed milk to dairies in Kentucky and Tennessee than does any other entity. 9. In addition to its controlling interests in Flav-O-Rich, DFA also owns financial
interests in several other dairies that sell school milk in parts of Kentucky and Tennessee, including five additional NDH dairies, three Turner Holdings dairies, and one Ideal American
dairy. Until February 2002, when the instant acquisition was consummated, Southern Belle competed with a number of these dairies in addition to NDH dairies such as Flav-O-Rich. 10. In December 2001, DFA, through NDH, acquired control and influence over all
significant business decisions of Flav-O-Rich and other NDH dairies. Flav-O-Rich processes approximately 30 million gallons of fluid milk per year and had annual revenues of approximately $70 million in 2001. Flav-O-Rich distributes and sells school milk primarily in the eastern two-thirds of Kentucky and Tennessee. 11. In February 2002, DFA, through its partially owned subsidiary, Southern Belle
Dairy Co., LLC, (“Southern Belle subsidiary”), acquired control and influence over all significant business decisions of Southern Belle. DFA and subsidiaries controlled in whole or in part by DFA contributed approximately $18 million of the $19 million purchase price for Southern Belle. The Allen Family Limited Partnership (“AFLP”) contributed the remaining $1 million, which DFA guaranteed AFLP could recover any time after February 26, 2005. DFA and its subsidiaries own a 50% common equity interest and almost 100% preferred equity interest (around $4,000,000), and 100% credit interest (around $13,000,000) in Southern Belle. 12. DFA formed its Southern Belle subsidiary to acquire the Southern Belle dairy
after it became clear that its NDH subsidiary could not acquire the dairy based on the Department of Justice’s September 1998 challenge. 13. In planning how DFA would control the Southern Belle subsidiary after they
formed it, DFA and AFLP agreed, among other things, that DFA must approve any decision to commit Southern Belle to any contracts or expenditures exceeding $150,000, as well as hiring and compensation decisions for Southern Belle’s officers. DFA also gained the right to control
the supply of raw milk to the dairy and, based on its debt and equity holdings, the rights to between 50% and 75% of the dairy’s profits. 14. Defendant Southern Belle Dairy Co., LLC, is a Delaware limited liability
company with its headquarters and principal place of business in Somerset, Kentucky, where it owns and operates the Southern Belle dairy. Southern Belle processes approximately 25 million gallons of fluid milk per year and had annual revenues of approximately $65 million in 2001. Southern Belle distributes and sells school milk primarily in the eastern two-thirds of Kentucky and Tennessee. III Jurisdiction and Venue 15. This Complaint is filed under Section 15 of the Clayton Act, as amended, 15
U.S.C. § 25, and by the Commonwealth of Kentucky under 15 U.S.C. § 26, to prevent and restrain defendants from continuing to violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and under the provisions of K.R.S. § 367.110 et seq. 16. Defendants, on their own or through their subsidiaries, transport and sell school
and other milk in the flow of interstate commerce in Kentucky and Tennessee and are engaged in interstate commerce and in activities substantially affecting interstate commerce. Defendant DFA also buys and sells raw milk in interstate commerce. This Court has jurisdiction over the subject matter of this action and the parties pursuant to Section 12 of the Clayton Act, 15 U.S.C. § 22, and 28 U.S.C. §§ 1331, 1337(a) and 1345.
Both of the defendants transact business and are found in the Eastern District of
Kentucky. Defendant Southern Belle’s principal place of business is in this district. Venue is proper in this judicial district pursuant to 15 U.S.C. § 22 and 28 U.S.C. § 1391. IV History of Collusion on School Milk Sales in the Relevant Markets 18. In late 1992, Southern Belle and Flav-O-Rich pled guilty to the felony of
conspiring to raise the price of school milk by agreeing on which dairy would submit the lowest bid for which school district. The conspiracy existed from at least the late 1970s through July 1989, and resulted in substantial harm to over thirty school districts. Southern Belle paid a $375,000 criminal fine; Flav-O-Rich paid $1,000,000. No others were charged with participating in this conspiracy. The current acquisition recreates the effect of this conspiracy in many of those same school districts harmed by the conspiracy for over a decade. See United States v. Southern Belle Dairy Co., [1988-1996 Transfer Binder] Trade Reg. Rep. (CCH) ¶ 45,092, at 44,599 (E.D. Ky. Nov. 13, 1992); United States v. Flav-O-Rich, Inc., [1988-1996 Transfer Binder] Trade Reg. Rep. (CCH) ¶ 45,092, at 44,605 (N.D. Ga. Dec. 22, 1992). V The Manufacture, Distribution, and Sale of School Milk Is a Relevant Product Market 19. Dairies purchase raw milk from dairy farmers and agricultural cooperatives,
pasteurize and package the milk, and distribute and sell the processed product. Fluid milk (“fluid milk”) is raw milk that has been processed for human consumption, may be unflavored or flavored with chocolate or fruit flavorings, and does not include extended shelf life (ESL) milk or ultra high temperature (UHT) milk, which are produced by different manufacturing processes,
generally cost significantly more than fluid milk, and have numerous significant physical differences compared with fluid milk, such as shelf stability, and a significantly different taste, among other attributes. 20. School milk is fluid milk that is processed, distributed, and sold to school
districts, usually in half pint containers, pursuant to contracts with school districts. While these contracts may also include other products, school milk accounts for the vast majority of the dollar value of these contracts. 21. The U.S. Department of Agriculture (“USDA”) sponsors several programs to
reimburse schools for meals and snacks served to students from lower income families. To qualify, schools must offer milk to every student, regardless of the income of that student’s family. If schools want to receive the federal reimbursements, they cannot substitute other products for school milk, regardless of the milk’s cost. 22. Individual school districts generally solicit bids from dairies to supply them with
school milk. Sometimes, groups of school districts solicit bids to supply school milk to some or all of the school districts in the group, but each individual school district usually chooses (even if it solicited bids as part of a group) the dairy to which it will award its business. 23. Schools require many important services in connection with the supply of school
milk. These services often include frequent delivery (usually every day or every other day because schools generally cannot store more than a limited amount of milk); delivery to all or almost all schools in a district; reordering of milk; stocking milk in the coolers; rotating products; retrieving spoiled and damaged products; providing quick emergency shipments (to guarantee a school has enough milk on hand so it will not lose school meal reimbursements); the
return of milk before holidays; specific times of delivery (e.g., early morning so as not to conflict with times when students are present); specific access requirements (e.g., providing keys to drivers); allotting credit for retrieved products; cleaning and maintaining coolers; and other requirements. 24. School districts would not switch to alternative products or delivery methods in
the event of a small but significant increase in the price of school milk. 25. The manufacture, distribution, and sale of school milk constitutes a relevant
product market or line of commerce within the meaning of Section 7 of the Clayton Act. VI Each School District is a Relevant Geographic Market 26. The relevant markets for school milk consist of individual school districts.
Individual school districts generally solicit bids for school milk, although sometimes groups of school districts solicit bids for school milk for some or all of the school districts in the group. Individual school districts ultimately decide (regardless of whether they solicit bids individually or as part of a group) which dairy to award with a school milk contract. Each school district typically requires its school milk supplier to deliver to each school within the school district. School districts vary with respect to how many schools must be served, the distance between the schools, the size of the schools in the school district, and other attributes. Each school district has its own requirements with respect to the frequency of deliveries (typically every day or every other day, because schools generally cannot store more than a limited amount of milk), the time of deliveries, the quantity of deliveries, products included, cooler requirements, and specific or individual service requirements.
Due to the high level of service requirements of schools, the high frequency of
delivery required, the small volume delivered at each stop, the seasonal nature of the business, and other factors, the viable suppliers of school milk are generally limited to those dairies that already have significant local distribution in the area. Dairies that do not currently have nearby routes are generally not viable suppliers of school milk to such school districts. These factors limit school districts' choice of suppliers. 28. Dairies charge different prices to different school districts (“price discriminate”),
based on, among other things, the number of competing dairies in the area, the strength of competition in these localized school milk markets, and the unique service and other requirements of schools. 29. Accordingly, each school district constitutes a relevant geographic market or
section of the country within the meaning of Section 7 of the Clayton Act. School districts harmed by the acquisition include those, among others, listed in Attachment A (“Merger-toMonopoly Markets”) and Attachment B (“Merger-to-Duopoly Markets”). VII Harm to Consumers 30. Competition between Southern Belle and Flav-O-Rich (or other dairies in which
DFA has financial interests) resulted in lower prices and better service for many school milk customers in Kentucky and Tennessee. Southern Belle’s competitive presence forced these other dairies to lower their respective bid prices for school milk contracts.
Before DFA’s acquisition of Southern Belle, school milk markets in Kentucky
and Tennessee had very few competitors and thus were already highly concentrated. These markets have become much more concentrated as a result of the acquisition. 32. In many of these markets, Southern Belle and Flav-O-Rich (or other dairies in
which DFA has financial interests) are clearly the two dairies able to supply school milk most economically, and would benefit (at the expense of consumers) by acting together at DFA’s direction to raise one or both of their bids. Because it shares each dairy’s profits, DFA has a financial incentive to encourage, facilitate, or enforce such cooperation. And, with DFA’s control or influence over critical business decisions of the dairies, the dairies are likely to cooperate. Reducing the number of independent bidders from two to one in these markets makes it very likely that prices will rise or the level of service will decrease for these districts. 33. In a number of other school districts, Southern Belle and Flav-O-Rich (or other
dairies in which DFA has financial interests) are two of only three likely bidders. Reducing the number of independent bidders from three to two in these markets makes it very likely that prices will rise or the level of service will decrease for these districts. 34. The effect of DFA’s acquisition of control and influence over Southern Belle is to
substantially lessen competition, or to tend to create a monopoly in violation of Section 7 of the Clayton Act.
VIII Entry is Difficult 35. To maintain its ability to sell school milk, the former owner of Southern Belle
told the USDA during debarment proceedings in 1998 that competition would decrease and prices would rise if it could not bid. It said that Southern Belle was an “important supplier to very small school districts in Kentucky and Tennessee,” especially in the “rural districts in the mountains of eastern Kentucky.” (Letter from Joseph L. Ruby, Wiley Rein & Fielding, to Yvette Jackson, Acting Administrator, Food and Consumer Service, USDA, Jan. 23, 1998, at 2, copy provided in Attachment C.) It also said that those school districts would be unlikely to find any new school milk entrants to replace the lost competition if it could not bid. 36. Entry by new competitors or expansion by existing dairies in the manufacture,
distribution, and sale of school milk will not be timely, likely, or sufficient to defeat any increase in prices or decrease in the level of services in the affected school milk markets. A dairy is unlikely to enter a school milk market, even after a small but significant price increase, unless it already services a substantial number of existing commercial fluid milk customers from its route trucks in the school district. This is true because school milk business is usually used to “fill out” a dairy’s existing commercial fluid milk route truck business, as schools require the regular (e.g., every day or every other day) delivery of school milk along with a number of important labor-intensive and time-consuming services, which would not be economical but for the existing fluid milk customer accounts. Thus, only dairies with existing straight truck delivery routes in an area can compete efficiently for school milk business in that area. Entry or expansion into the school milk business also requires substantial investment in specialized
manufacturing assets and infrastructure, including the high cost of installing a dedicated half pint filler. 37. Neither entry nor expansion prevented Southern Belle and Flav-O-Rich from
successfully carrying out a decade-long criminal bid rigging conspiracy against many of these same school milk districts. Such long-lasting collusion would not have been possible if higher prices easily attracted new competitors. IX Violations Alleged 38. DFA’s acquisition of Southern Belle through its partially owned Southern Belle
subsidiary will likely have the following effects, among others: a. Competition generally in the manufacture, distribution, and sale of school milk in the relevant geographic markets will be substantially lessened; b. Actual and potential competition between Southern Belle and Flav-O-Rich (or other dairies in which DFA has financial interests) in the manufacture, distribution, and sale of school milk in the relevant geographic markets will be substantially lessened; and c. Prices for school milk in the relevant geographic markets will likely increase. 39. DFA’s partial acquisition of Southern Belle violates Section 7 of the Clayton Act,
as amended, 15 U.S.C. § 18, and K.R.S. § 367.110 et seq.
X Relief Requested 40. Plaintiffs request that this Court: a. Adjudge the acquisition of Southern Belle by defendant DFA to violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and K.R.S. § 367.110 et seq. b. Compel DFA to divest all of its interests (including common equity, preferred equity, credit interests, raw milk procurement authority, etc.) in Southern Belle, and take any further actions needed to place Southern Belle in the same or comparable competitive position as existed prior to the acquisition; c. Permanently enjoin and restrain DFA, including any of its subsidiaries or joint ventures, and all persons acting on behalf of any of these entities, from acquiring or maintaining, in whole or part, any simultaneous legal or beneficial interests (including common equity, preferred equity, credit interests, or raw milk procurement authority) in both Southern Belle and Flav-O-Rich; d. Compel DFA, including any of its subsidiaries or joint ventures, and all persons acting on behalf of any of these entities, to provide plaintiff United States of America with notification at least 30 calendar days prior to any acquisition, in whole or in part, of any legal or beneficial interests
(including common equity, preferred equity, credit interests, or raw milk procurement authority) in any fluid milk processing operation; e. Allow any school district or school purchasing cooperative to terminate or rescind any contract to supply school milk entered into with defendants on or after February 20, 2002, including but not limited to eliminating any restrictions on or disincentives to terminating or rescinding such contracts and otherwise refunding or returning consideration paid in advance pursuant to such contracts (i.e., making such contracts voidable in the sole discretion of the school districts or purchasing cooperatives); f. g. Award plaintiffs the costs of this action; and Award plaintiffs such other and further relief as is proper.
__/s/________________________ R. Hewitt Pate Acting Assistant Attorney General ___/s/_______________________ Deborah P. Majoras Deputy Assistant Attorney General ____/s/_________________________ Constance K. Robinson Director of Operations ____/s/_________________________ Mark J. Botti Chief, Litigation I Section
_/s/_______________________ John R. Read Assistant Chief, Litigation I Section _/s/_______________________ J.D. Donaldson Jody A. Boudreault N. Christopher Hardee Nora W. Terres Attorneys U.S. Department of Justice Antitrust Division Litigation I Section 1401 H Street, N.W., Suite 4000 Washington, DC 20530 202-307-0001
Dated: April 23, 2003
/s/ David Vandeventer Assistant Attorney General Kentucky Bar No. 72790 Office of the Attorney General of Kentucky 1024 Capital Center Drive Frankfort, KY 40601 502-696-5385 Dated: April _23, 2003
ATTACHMENT A Merger-to-Monopoly Markets Adair County, KY Ashland Independent, KY Bell County, KY Berea Independent, KY Boyd County, KY Boyle County, KY Breathitt County, KY Campbellsville Independent, KY Casey County, KY Clay County, KY Clinton County, KY Cumberland County, KY East Bernstadt Independent, KY Estill County, KY Fairview Independent, KY Garrard County, KY Green County, KY Harlan Independent, KY Harrodsburg Independent, KY Hazard Independent, KY Jackson County, KY Jenkins Independent, KY Jessamine County, KY Laurel County, KY Lee County, KY Leslie County, KY Letcher County, KY Lincoln County, KY Madison County, KY McCreary County, KY Mercer County, KY Montgomery County, KY Oneida Baptist, KY Owsley County, KY Perry County, KY Pineville Independent, KY Pulaski County, KY Rockcastle County, KY Russell County, KY Science Hill Independent, KY Somerset Independent, KY Taylor County, KY Wayne County, KY Whitley County, KY Williamsburg Independent, KY Wolfe County, KY Clay County, TN
ATTACHMENT B Merger-to-Duopoly Markets Allen County, KY Barbourville Independent, KY Barren County, KY Bath County, KY Butler County, KY Carter County, KY Caverna Independent, KY Corbin Independent, KY Fayette County (Lexington), KY Franklin County, KY Glasgow Independent, KY Greenup County, KY Hart County, KY Knox County, KY Larue County, KY Lawrence County, KY Logan County, KY Menifee County, KY Metcalfe County, KY Middlesboro Independent, KY Monticello Independent, KY Morgan County, KY Ohio County, KY Owensboro County, KY Rowan County, KY Russell County, KY Russellville Independent, KY Shelby County, KY Simpson County, KY Alcoa City, TN Anderson County, TN Blount County, TN Bristol City, TN Campbell County, TN Carter County, TN Clinton City, TN Cocke County, TN Elizabethton Independent, TN Greene County, TN Greeneville City, TN Hamblen City, TN Hawkins City, TN Johnson City, TN Johnson County, TN Knox County, TN Macon County, TN Maryville City, TN Metro Davidson (Nashville), TN Rogersville City, TN Sevier County, TN Sullivan County, TN Unicoi County, TN Union County, TN Washington County, TN
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