Opinion ID: 2972927
Heading Depth: 3
Heading Rank: 2

Heading: The Entities Involved

Text: DFA, a Kansas corporation with its principal place of business in Kansas City, Missouri, is a milk marketing organization and the largest dairy farmer cooperative in the nation. DFA’s primary purpose is marketing the raw, unprocessed milk of its dairy farmers to dairy processors. DFA also invests in dairy processors in order to allow DFA’s farmer members to participate in the profits earned from the sale of the finished dairy-based products, and to secure an outlet for its members’ raw milk.
Southern Belle is a limited liability company formed in February 2002. Southern Belle owns a milk processing plant in Somerset, Kentucky, that bids on school milk contracts. Under the initial ownership structure of the company, fifty percent of the voting interests in Southern Belle was owned by the Allen Family Limited Partnership (“AFLP”), which is managed by Robert Allen (“Allen”), and fifty percent was owned by DFA. Allen had previously been an advisor to DFA’s corporate board. In addition, Allen had earlier participated in another joint venture with DFA, in which he made a $21.7 million profit on a $1 million investment. According to Gary Hanman, the CEO of DFA, DFA partnered with Allen on Southern Belle because “we knew him, our experience has been great, our relationship has been perfect through the years.” J.A. 1061. No. 04-6318 United States, et al. v. Dairy Farmers of Am., et al. Page 3 The original agreement gave AFLP a “put option” that entitled it to sell its interests to DFA after three years at a price sufficient to recover its initial contribution. Although DFA asserts that AFLP has always had exclusive responsibility for the day-to-day operations of the plant and the sale and marketing of the products from the plant, including the sale of milk to schools, the initial agreement provided for the business and affairs of the company to be managed by the “Common Members,” i.e., by DFA and AFLP. On July 14, 2004, six days before DFA filed a motion for summary judgment in this case, DFA and AFLP agreed that DFA would exchange its common member interests in Southern Belle for non-voting preferred capital interests, thus eliminating DFA’s right to vote on any matter or to sit on the Southern Belle Representative Committee. Pursuant to this revised agreement, AFLP no longer has a “put option,” and can sell Southern Belle at its option at any time, and require DFA’s interests to be sold. Southern Belle, including its plant in Somerset, is managed by AFLP, which, as noted, is managed by Allen. DFA does not have any ownership interest in AFLP, and AFLP does not have any ownership interest in DFA. With respect to day-to-day responsibilities, Southern Belle’s school milk bidding and pricing decisions are made at levels below Allen.
National Dairy Holding, L.P. (“National Dairy”), owns the Flav-O-Rich milk processing plant in London, Kentucky, which bids for school milk contracts in many of the same school districts as Southern Belle. National Dairy was formed in March 2001 by Tracy Noll (“Noll”), Allen Meyer (“Meyer”), Cletes Beshears (“Beshears”), the Cletes Beshears Family Trust (“Beshears Family Trust”), and DFA. In February 2004, Noll, Beshears, and Beshears Family Trust sold their interest in National Dairy. Consequently, Meyer now holds fifty percent of the voting interest in National Dairy, and DFA holds the other fifty percent. Meyer and DFA have participated in three other joint ventures, one of which enabled Meyer to turn an investment of several hundred thousand dollars into a gain of approximately seventy million dollars. As a limited partnership, National Dairy has a general partner responsible for its operations and limited partners. The general partner is Dairy Management L.L.C., which, like National Dairy itself, is fifty percent owned by Meyer and fifty percent owned by DFA. Meyer is also the manager of Dairy Management. National Dairy is operated and controlled solely by its manager. While DFA owns fifty percent of the voting interest in National Dairy, which in turn owns Flav-O-Rich, DFA does not participate in any of Flav-O-Rich’s school milk business decisions. Indeed, even National Dairy has limited involvement in the day-to-day operations of Flav-O-Rich, and no involvement in the school milk bidding process or knowledge about the schools to which Flav-O-Rich submits bids, the prices of the bids, or the product mix offered. C. Evidence Relating to the Structure of School Milk Markets The government retained three expert witnesses in conjunction with this case, each of whom prepared a written report. Frank Scott (“Professor Scott”) is the Gatton Professor of Economics at the University of Kentucky. John P. Johnson (“Johnson”) is a former president of Johnson’s Dairy, Inc., in Ashland, Kentucky, with over twenty years of experience in the Kentucky dairy industry. Edward B. Rock (“Professor Rock”) is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School. According to the expert reports of Johnson and Professor Scott, the school districts at issue in this case purchase milk in half-pint cartons through a sealed bid process and award one-year contracts to the lowest bidder. There is a separate competition and bidding process in each school district. Southern Belle and Flav-O-Rich are the only bidders in forty-two school districts, and two of only three bidders in forty-nine additional districts. No. 04-6318 United States, et al. v. Dairy Farmers of Am., et al. Page 4 Professor Scott found that the school districts have no practical alternatives to purchasing milk from these suppliers, and would continue to buy milk even if there were a fairly large price increase. D. Evidence of Anticompetitive Effects of DFA’s Partial Acquisition of Southern Belle The government’s experts offered testimony and submitted reports regarding alleged anticompetitive effects of DFA’s partial acquisition of Southern Belle. Professor Scott’s report of March 2004 asserts that it is in DFA’s interest to reduce or eliminate competition between Flav-O- Rich and Southern Belle, because DFA receives fifty percent of the profits from both dairies, regardless of which supplies a particular school district; in other words, it would not benefit DFA for the two dairies to compete and drive down prices and profits. In a deposition in June 2004, Professor Rock testified that Meyer and Allen have a strong incentive to manage Flav-O-Rich and Southern Belle in a manner that furthers DFA’s interest in suppressing competition, because DFA, National Dairy and Southern Belle all profit from the elimination of competition between the dairies, and because Allen and Meyer have both profited from lucrative joint ventures with DFA in the past, creating “an incredibly strong incentive” for them to “keep DFA happy.” J.A. at 1035, 1044. Rock wrote in his March 2004 report that [b]y installing joint venture partners who have proved their loyalty, who have economic incentives to achieve the high price outcome and to further DFA’s interests, and who have an expectation of future profitable joint ventures with DFA, DFA has made it extremely unlikely that that any competition will break out among its group of dairies. The rational desire of the joint venture partners to participate in highly profitable business opportunities with DFA ensures that they will act in ways consistent with DFA’s interests. J.A. at 934. Professor Scott asserted in his report that DFA’s arrangements were likely to lead to decreased competition comparable to that which resulted from the Southern Belle/Flav-O-Rich bidrigging conspiracy of the 1970s and ‘80s. In a rebuttal report responding to an expert report submitted by DFA, Scott also presented an analysis of school bidding data that he concluded was consistent with significant anticompetitive effects. According to his econometric model, before DFA’s acquisition of Southern Belle, prices in districts where Southern Belle and Flav-O-Rich were the only bidders on school milk contracts were not significantly different from prices in other districts with only two bidders. Afterwards, districts receiving bids only from Southern Belle and Flav-O-Rich paid more than other districts with only two bidders. “Prices in school districts where only Southern Belle and Flav-O-Rich bid were almost .9 cents higher in 2002 after the transaction than in other districts and in other years.” J.A. at 1148. Scott also testified as the government’s representative in a deposition pursuant to Federal Rule of Civil Procedure 30(b)(6). In that deposition, he testified that the government could not identify any “specific instances where a specific price in a specific school district can be linked to an explicit action by DFA,” and that the government had no evidence of any specific price increases of milk sold to schools. J.A. at 1791. He also stated that there was no evidence that Flav-O-Rich representatives had communicated with Southern Belle representatives regarding the pricing of bids for school milk contracts, or in which school districts to place bids. No. 04-6318 United States, et al. v. Dairy Farmers of Am., et al. Page 5