What It Means to "Market" Milk

Article excerpt

An Arizona State Court of Appeals decision in a complex litigation brought by former members against a milk marketing cooperative discusses two issues of interest to cooperative leaders. One concerns whether "dumping" member milk during a contract dispute with buyers meets the legal definition of "marketing" that milk. The other involves whether certain relationships between a cooperative and a non-cooperative broker amount to an illegal agreement to restrain trade. United Dairymen of Arizona v. Schugg, 1 CACV 04-0611 (Ariz. Ct. App., Div. 1, filed Feb. 9, 2006).

Case facts

United Dairymen of Arizona (UDA) is a milk marketing cooperative with roughly 90 members whose average herd size is 1,200 cows. UDA markets about 90 percent of the milk produced in Arizona.

Michael and Debra Schugg were producer members of UDA and signed a contract giving UDA the exclusive right to market their milk. That contract provided that UDA would "use its best efforts to market the member's milk in such manner as the association shall deem to be to the best advantage of the member and all other members of the association ...." (court's emphasis)

In an effort to enhance revenues, UDA entered into agreements with milk marketing cooperatives in other states not to sell milk to fluid milk bottlers until they agreed to pay a substantial premium above the federally established minimum price. When two major buyers of UDA milk refused to pay the requested premiums, UDA was unable to sell millions of pounds of Grade A milk produced by its members. As a result, the Schuggs were forced to "dump" a substantial quantity of their milk.

UDA treated the milk dumped by its members as if it had been sold when computing its payments to members. To make these payments, UDA incurred substantial debt. To minimize that debt and allocate its costs among all members on a patronage basis, UDA imposed an assessment on its members' milk production. The amount assessed against the Schuggs' milk production was in excess of $232,000.

The Schuggs took certain actions which they claimed freed them from their contract to market through UDA and began selling their milk to another cooperative. UDA responded by suing the Schuggs for alleged breach of that contract. The Schuggs filed two counterclaims regarding UDNs strategies for marketing their milk, which are the focus of this article.

Is "dumping" a form of "marketing?"

First, the Schuggs alleged that UDA breached its contractual obligation to market its members' milk when it effectively forced members to dump their milk, rather than deliver it to UDA's primary customers. They claimed their damages from this action included the amount of the assessment and other financial losses.

The court described the argument of the Schuggs as equating "market" with an obligation to "sell" member milk to the cooperative's customers. The court rejected this assertion.

The court said that: "UDNs contractual duty to 'market' milk reasonably includes taking actions to protect its long-term ability to sell at prices beneficial to its members. UDA attempted to obtain long-term contracts and premiums from its primary customers by limiting the supply of milk from its members and from members of other cooperatives. In doing so, it was exercising its authority to 'market' in a manner it deemed to be to the best advantage of its members. …