Dairy Co-Op Acquisition Does Not Violate Antitrust Law
Carson, Marlis, Rural Cooperatives
Section 7 of the Clayton Antitrust Act makes it illegal for one business to acquire, directly or indirectly, the stock of another business, where the effect of the acquisition may be to substantially lessen competition or tend to create a monopoly. A U.S. District Court in Kentucky has ruled that Dairy Farmers of America (DFA) did not violate this provision when it purchased 50 percent of the voting interest in the company that controlled one fluid milk processing plant and a 50-percent non-voting, non-managerial interest in another company that operated a competing fluid milk processing plant.
DFA, a milk marketing cooperative, markets raw, unprocessed milk to dairy processors. It invests in downstream dairy companies that process milk for consumption. Such investments help DFA secure outlets for its members' raw milk and allow its members to share in the earnings from the sale of finished dairy products.
In 2001, DFA joined with several individuals to form National Dairy Holding, L.P. (NDH), which owns the Flay-O-Rich dairy bottling plant in London, KY. The individuals collectively owned 50 percent of the voting interests in NDH; the remaining 50 percent was held by DFA.
In 2002, DFA and a family-owned limited partnership formed Southern Belle Dairy Company, LLC (Southern Belle). Southern Belle owns a fluid milk processing plant in Somerset, KY. DFA owned 50 percent of the voting interests in Southern Belle and the family limited partnership owned the other 50 percent.
In 2003, the U.S. Department of Justice and the State of Kentucky filed a civil antitrust lawsuit against DFA and Southern Belle to compel DFA to divest its interest in Southern Belle. The complaint alleged that DFA's purchase of its interest in Southern Belle, after it had secured the 50-percent interest in NDH, would substantially lessen future competition for the sale of milk to schools in Kentucky and Tennessee.
In 2004, the ownership and control of both joint ventures was restructured. In February 2004, one of the individual owners of NDH, Allen Meyer, acquired the interests of the other individual owners. Now Meyer and DFA each owned 50 percent of NDH. They each also owned 50 percent of another joint venture, Dairy Management LLC, that served as the managing partner for NDH, with Meyer and DFA as limited partners. Meyer was clearly identified as the manager of Dairy Management LLC, and thus of NDH. Furthermore, the operating agreement of NDH was modified to ensure the NDH was operated and controlled solely by its manager, Meyer.
In July 2004, DFA exchanged its voting interests in Southern Belle for nonvoting preferred capital interests. DFA no longer had the right to vote on any matter and did not have a seat on the governing board of Southern Belle. The family limited partnership had the right to sell Southern Belle at any time, including DFA's interests. Southern Belle, and hence the Somerset plant, were managed by a member of the family partnership. The family partnership did not own any interest in DFA and DFA did not own any interest in the partnership.
The court issued its opinion in late August 2004, holding that as the ventures are now structured, DFA is not in a position to control the sale of milk to schools in the area. …