Author: Aaron Gott
The federal antitrust laws are a decisive proclamation that competition is the best policy—competition leads to better products and services, the greatest value at the lowest price. But, just like with anything else, there are exceptions. Congress and the courts have carved out numerous exceptions from antitrust liability—or as we’ll call them, exemptions. There’s an insurance exemption, a labor exemption, a baseball exemption, a state-action exemption, and many others. And they exist for a variety of reasons. Without the labor exemption, for example, union activity would be a felony. And we have a baseball exemption because, well, America likes baseball.
Today we’re going to talk about one important exemption for the agriculture industry: the farm cooperative exemption. Created by the Capper-Volstead Co-operative Marketing Associations Act (7 U.S.C. §§ 291–92), the farm cooperative exemption provides associations of persons or entities who produce agricultural products a limited exemption from antitrust liability relating to the production, handling, and marketing of farm products.
The farm cooperative exemption has some personal significance to me: I grew up across the street from one in my small Iowa town. And that co-op sponsored one of my little league teams.
At Bona Law, we regularly deal with antitrust exemptions. In fact, we have argued state-action exemption issues before the U.S. Supreme Court several times. As with any other exemption—and this is very important—the farm cooperative exemption is limited, disfavored, and narrowly applied. So it can easily become a trap. Like anything with antitrust, there are plenty of nuances and exceptions. We’re going to address some of those, but you should contact an antitrust lawyer if you really need to know whether the antitrust laws could apply, you’re being sued, or you want to consider suing.
The farm cooperative exemption allows a group of farmers—each of which is a competitor in the market—to come together and essentially act as one farmer. Through a cooperative, farmers pool their output together, agree on a price, and ultimately have more bargaining power in dealing with buyers—who historically were much bigger outfits than the individual farmers competing for their business.
The exemption also allows cooperatives to join together under a common marketing agency.
The exemption is overseen by the USDA, and the act gives direct oversight power to the Secretary of Agriculture. The secretary can, on his own volition, hold hearings, find facts, and issue orders to prevent cooperatives from monopolizing or restraining trade “to such an extent that the price of any agricultural product is unduly enhanced” as a result. But litigation—whether enforcement by the Department of Justice Antitrust Division or private civil lawsuits—is where a cooperative’s fate is usually decided.
Without the exemption, this sort of arrangement would be analytically indistinguishable from a price-fixing cartel, except that price-fixing cartels typically do not operate out in the open, since it is a serious felony. In fact, before 1922 when the act went into effect, farmers who acted together to market their products were sometimes prosecuted under the Sherman Act.
Conditions for the Antitrust Exemption
The Capper-Volstead Act establishes several conditions for the exemption to apply. There are two universal conditions:
- The cooperative must be operated for the mutual benefit of its members insofar as they are producers of agricultural products in that they are farmers, planters, ranchmen, dairymen, nut or fruit growers.
- The cooperative must not deal in the products of nonmembers in an amount greater than the value of the products it handles for its members.
Cooperatives must also follow one of the following conditions (or it can follow both):
- No member of the cooperative is allowed more than one vote because of the amount of stock or membership capital the member owns.
- The association does not pay dividends on stock or membership capital in excess of 8 percent per year.
Every Member Must Qualify—Or You Could All Lose the Antitrust Exemption
The requirements of the statute may seem simple enough, but it is important to tread carefully: to assert the exemption, a cooperative must show not only that it was entitled to the exemption, but that each of its members also qualify under the terms of the act. That is, every member must be a person or entity “engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”
In National Broiler Marketing Association v. United States (1978), the U.S. Supreme Court considered whether a “producer” of broiler chickens that did not grow chickens itself, but rather employed independent contractors to grow them, could be part a cooperative exempt from the Sherman Act. The “producer” was not a farmer, but a processor and packer—an important distinction. Processors and packers certainly play roles in the agricultural products supply chain, but stand apart from the “farmers, planters, ranchmen, dairymen, nut or fruit growers” expressly mentioned by the act. The Supreme Court held that the Capper-Volstead Act did not extend to processors and packers, so the association at issue was not entitled to the exemption.
Much more recently, in 2009, a federal district court held that a mushroom marketing cooperative and its members were not entitled to the farm cooperative exemption because of what may have been an inadvertent mistake in signing up the wrong entity as a member. In In re Mushroom Direct Purchaser Antitrust Litigation, one family mushroom farming business that was vertically integrated but organized into multiple entities—including one for growing and one for packing—apparently “inadvertently” signed up the packing entity for membership to the mushroom cooperative. The result was that the cooperative—and, consequently, its members—were not entitled to the exemption and instead faced ruinous antitrust liability.
Not All Conduct is Exempt
The Capper-Volstead Act allows cooperatives and their members to act together “in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce” their agricultural products. The exemption is limited to these activities, and for good reason. When a group of competitors has market power, they can harm competition in numerous ways that would not advance the congressional goal of giving farmers more bargaining power in the marketing and sale of their products.
Thus, a cooperative is not exempt when it engages in other types of anticompetitive conduct. For example, a cooperative cannot engage in predatory practices or price discrimination; it cannot restrict its members’ agricultural output, coerce competitors or customers, collude with third parties to fix prices, combine with other firms to substantially lessen competition, or engage in boycotts of anyone else in the market.
Compliance is Key
As the above pitfalls demonstrate, every cooperative should have an antitrust lawyer to oversee its continued compliance with the conditions to qualify for the exemption. If a member of the cooperative is deemed unqualified to participate, then the cooperative and each of its members could lose the exemption. The worst-case scenario is that the cooperative and each of its members must face an antitrust blizzard in which they find themselves accused of conspiring to fix prices. The process itself is extremely expensive, and the potential liability ruinous.
Every cooperative should retain an antitrust lawyer who regularly audits the cooperative’s membership and activities to ensure that the exemption will be available. And every cooperative should have an antitrust compliance program in place to prevent it and its members from going beyond the bounds of the exemption. Just like other types of trade associations, cooperatives bring competitors together, and there is always antitrust risk when competitors are in the same room.
If you’re a member of a cooperative, it may ultimately be you who pays the price if your cooperative loses its exemption. Whether you’re a farmer or a cooperative, you have antitrust risk that should be regularly assessed and managed. Contact us today to review your cooperative.
You can listen to Aaron Gott’s radio interview with KVRN 880 on antitrust issues in the agricultural industry via podcast here.