I ,- United States Managing, Agriculture Agricultural ...

1 I,- United States049 Department ofAgricultureAgriculturalCooperativeServ iceCooperativeInformationReport 38 Managing, CooperativeAntitrust RiskABSTRACTM anaging cooperative Antitrust RiskDonald A. FrederickAttorney-AdviserCooperative Service DivisionAgricultural cooperative Department of AgricultureThis report explains the essentials of antitrust law andwhy limited antitrust protection granted in the Capper-Volstead Act is critical to cooperative marketing by agricul-tural producers. It outlines who is covered by Capper-Volstead, how a cooperative must be organized to qualifyfor limited antitrust protection, and what types of activity areprotected.

2 It also discusses several areas that pose specialantitrust risks for farmer cooperatives and other points oflaw cooperative leaders must be aware of to successfullymanage their antitrust Words: cooperative , antitrust, Capper-Volstead Act,law, management, riskCooperative Information Report Number 38 May 1989 PREFACEW hile an antitrust problem is not inherent in everydecision made by a cooperative s management team, onemistake can cause a cooperative to become embroiled inexhausting, costly, and embarrassing litigation.

3 Ideally,every cooperative would have an antitrust expert on handto review the exposure associated with each importantmanagement decision. But in the real world, a limited num-ber of antitrust experts are available and their time can report will help cooperative directors, managers,and advisers with limited experience in antitrust problemscope with the issue of managing antitrust risk. It is notintended to help them handle major antitrust problems, butto help them avoid inadvertent violations of the antitrustlaw, recognize conduct that poses an antitrust risk, andmake decisions that limit antitrust author gratefully acknowledges the contributionsof four experts in cooperative law--James Baarda, DaleCunningham, Donald Graham, and Wayne Hoecker.

4 Manyof the real insights are from their ..VAN ACCEPTABLE LEVEL OF RISK..2 DEVELOPMENT OF ANTITRUST LAW..4 The Sherman Act..5 The Federal Trade Commission and Clayton Acts ..5 INTERPRETATIONOF ANTITRUSTLAWS .. ,..6 The Rule of Rule of Per Se ANTITRUST PROTECTION -BACKGROUND..9 CAPPER-VOLSTEADACT .. 10 Who Is .. 15 Agreements onPrice and Terms of Price Market and on Quantities ..IIISUPPLYCOOPERATIVES .. 25 OTHER POINTS TO REMEMBER..26 PersonalLiability for Leaders and Treble-Damage Review.

5 ~ .. 29 APPENDIXA -CAPPER-VOLSTEADACT .. 30 APPENDIX B - OTHER IMPORTANT STATUTES .. 32 HIGHLIGHTSE very management decision carries with it some riskof legal action. Open access to the courts is a fundamentalright in this country, and all cooperative leadership can dois discourage litigation by positioning their association towin any suit as swiftly and decisively as law poses a special litigation risk to agricultur-al marketing cooperatives. The courts have held that cer-tain conduct by independent businessmen--agreeing onprices, terms of sale, and whom to sell to--amounts to a perse violation of the Sherman Antitrust Act.

6 And this is theconduct that farmers undertake through their marketingassociations,The Capper-Volstead Act provides a limited antitrustexemption for Agricultural marketing associations. Capper-Volstead protection is available only to associations that(1) limit membership to bona fide Agricultural producers,(2) either limit members to not more than one vote becauseof the amount of stock owned or limit dividends on member-ship capital to 8 percent per year, (3) do a majority of theirmarketing for association members, and (4)

7 Operate for themutual benefit of their members as whose cooperative meets these require-ments can agree on prices and terms of sale, select theextent of their joint marketing activity through their associa-tion, agree on common marketing practices with othercooperatives, and achieve substantial market share Capper-Volstead does not provide totalantitrust exemption, cooperative managers, directors, andadvisers must make decisions that sometimes expose theorganization to antitrust risk. Risk is usually greatest whenthe decision involves business arrangements with personsand firms that are neither Agricultural producers nor cooper-ative associations of arrangements that pose special antitrust riskfor cooperatives include agreements on prices and terms ofVsale, undue price enhancements, reaching for substantialmarket share, merger and acquisition activity, customerselection, member selection, transportation, limitations onquantity of product handled.

8 And predatory supply cooperatives may not qualify for Capper-Volstead protection, they have avoided the types ofrestraints of trade that courts find unreasonable and assessing the antitrust risk of a business deci-sion, cooperative leaders should keep certain considera-tions in mind. These include the fact that leaders and advis-ers can be personally liable if the association is found guiltyof an antitrust violation. Also, private parties injured by ille-gal anticompetitive conduct can recover three times theextent of their injury.

9 State antitrust laws may also risk can neither be ignored nor permitted toparalyze business planning. It must be understood andmanaged if cooperatives are to fulfill their objective ofassisting producers to enhance their overall farming COOPERATIVEANTITRUST RISKD onald A. FrederickAttorney-Adviser It has been the law for centuries that a man may set up abusiness in a small country town, too small to supportmore than one, although thereby he expects and intendsto ruin some one already there, and succeeds in hisintent.

10 In such a case he is not held to act unlawfullyand without justifiable cause. The reason, of course, is that the doctrine generally hasbeen accepted that free competition is worth more tosociety than it costs, and that on this ground the inflictionof the damage is privileged l/The above statement, by famous jurist Oliver WendellHolmes, captures the essence of the relationship between ruralAmerica and our antitrust policy. It is relatively easy to start mostbusinesses that serve rural areas. The emergence of a new competi-tor, or the possibility that a new competitor will be started if exist-ing businesses act inefficiently or irresponsibly, is the primary pro-tection for the development of Agricultural cooperatives is naturallycompatible with this policy.