Summary of a Recent
Judicial Development in
Cooperatives

Partial Acquisition Raises Presumption of
Illegality Under the Clayton Act

Amy K. Miller
National AgLaw Center Graduate Assistant

In United States v. Dairy Farmers of Am., Inc., 426 F.3d 850, (6th Cir. 2005), the court addressed whether anticompetitive effects of a partial acquisition amounted to a presumption of illegality under Section 7 of the Clayton Act, 15 U.S.C. § 18. The court emphasized that "even without control or influence, an acquisition may still lessen competition . . . [because] Section 7 prescribes acquisition of 'any part' of a company's stock where the 'effect' may be substantially to lessen competition, or tend to create a monopoly." Id. at 860 (emphasis in original).

Dairy Farmers of America ("DFA"), the largest dairy cooperative in the nation, had an interest in Flav-O-Rich, a milk processing plant that bid on school milk contracts in many Tennessee and Kentucky school districts. Id. at 853. The cooperative later acquired an interest in Southern Belle, another milk processing plant that bid for school milk contracts in many of the same districts. Id. Under the original agreement, DFA acquired fifty percent of the voting rights and the authority to co-manage the business and affairs of Southern Belle. Id. The Allen Family Limited Partnership ("AFLP"), an organization managed by a former DFA corporate board advisor who was a joint venture participant,: (1) owned the other fifty percent of the voting rights, (2) managed Southern Belle's day-to-day activities, and (3) retained an interest allowing the organization to sell its interests to DFA in three years. Id. DFA later exchanged its interest for non-voting preferred capital interests pursuant to a revised agreement drafted to avoid litigation. Id. at 853. The court analyzed the anti-competitive effects of both agreements because the revised agreement allowed the parties' to revert to the original agreement. Id. at 857.

The court concluded that the original agreement established a presumption of illegality because it provided DFA with voting rights and management authority enabling the cooperative to exercise control over the business activities of Southern Belle. and thus, "control[ ] an undue percentage of the relevant market." Id. at 861. Additionally, the court found the agreement resulted in a "significant increase in the concentration of firms in the market." Id. at 861. The court also found that in light of DFA's ability to use its financing and personal connections to influence Southern Belle's decisions, "a genuine issue of material fact exists as to whether there is a reasonable probability that the revised agreement would substantially lessen competition through DFA control." Id. at 862.

The case was decided on October 25, 2005; this summary was posted October 24, 2006.