The Co-operative Movement of the Russian Far East

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2.8. Antitrust provisions - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

The success of cooperative enterprises depends not only on how they observe the fundamental cooperative principles, or how they are able to develop sophisticated policy and to accept advanced methods of doing business, but also on how they can harmonize their activities with antitrust legislation. Antitrust laws preserve free and open market competition by prohibiting and controlling concentrations of market power [Miller & Gossman, p.236-glossary]. These laws apply to all business organizations, but they have a special consideration for farmer cooperatives. Historically, the origins of antitrust laws were connected with the development of trusts (early version of holding companies) after the Civil War, which seriously challenged free competition. As early as 1890, the first Federal antitrust law, the Sherman Act, was adopted. According to this fundamental document:

1) "Every contact, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce ... is declared illegal";
2) "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce ... shall be deemed guilty of a felony..." [Butler, p.838].

After more than a century, the Sherman Act still remains an important foundation of antitrust policy. Two more antitrust laws, the Federal Trade Commission Act and the Clayton Act (both of 1914), detailed the basic ideas of the Sherman Act and added some important provisions for farmer cooperatives. The Federal Trade Commission Act created an independent regulatory commission to eliminate unfair methods of competition and unfair deceptive practices in commerce [Butler, p.843]. The main emphasis of the Clayton Act was to prevent mergers or the acquisition of assets of one company by another if the effect would be a lessening of competition or creating a monopoly. The Clayton Act also authorizes private persons injured by any violation of the antitrust laws to sue and recover treble damages, and holds directors and officers responsible for their corporation's violation of criminal provisions of any antitrust laws. Section 6 of the Clayton Act was addressed to farmer organizations:

"Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural, or horticultural organizations, instituted for the purpose of mutual help, and not having capital stock or conducted for profit, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects there of; nor shall such organizations, or the members thereof, be held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws" [Howell, et al., p.639].

However, it was not enough for agricultural producers because the exception does not cover cooperatives that issued stock and doesn't sanction any self-help activity by farmers once an association is formed [Frederick 1990, p.259].

These shortcomings were eliminated with enactment of the Capper-Volstead Act in 1922. This law provides associations of producers a limited exemption from antitrust liability for cooperative marketing activities. It allows for producers to develop a broad range of agricultural marketing businesses that can enhance their profit opportunities as farmers. The Capper-Volstead Act has two sections. Section 1 sets out who is covered by the act, activities protected from antitrust liability, and requirements an organizational structure to receive its protection:

"Section 1. ... That person engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations, corporate or otherwise, with or without capital stock, in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce such products of persons so engaged. Such associations may have marketing agencies in common and such associations and their members may make the necessary contracts and agreements to effect such purposes: provided, however, that such associations are operated for the mutual benefit of the members thereof as such producers and conform to one or both of the following requirement:

First: That no members of the association is allowed more than one vote because of the amount of stock or membership capital he may own therein, or
Second: That the association does not pay dividends on stock or membership capital in excess of 8 per centum per annum.

And in any case to the following:

Third: That the association shall not deal in the products of non-members to an amount greater in value than such as are handled by it for members"
[McBride, p.80].

Section 2 of the Capper-Volstead Act protects the public from harmful conduct by cooperatives. It says that if the Secretary of Agriculture has reason to believe that the price of any agricultural product has been unduly enhanced because a cooperative monopolizes or restrains trade, legal action can be taken against that producer association [Baarda 1983, p.222].

The protection of the Capper-Volstead Act is available only for organizations which are able to meet some qualified criteria. One part of the criteria concerns who can be a member of cooperatives, and another part explains organizational requirement for cooperatives in order to be protected by the act. It is required that members of cooperatives must be agricultural producers or associations of producers. An agricultural producer is a person performing traditional farming activities such as tilling the soil and tending to animals. Marketing cooperatives should react cautiously whenever they receive a membership application from someone who does not clearly conform to this standard [Frederick 1989, p.12]. A situation that requires a special attention is the application for membership by persons engaged in packing or processing of agricultural products. If any cooperative members do not meet the requirements of the act, it may be a violation of antitrust law (Box 17).

Box 17

The Case of National Broiler Marketing Association vs.
United States (1978)

This was an action by the United States (Plaintiff/Respondent) against the National Broiler Marketing Association or NBMA (Defendant/Petitioner) for antitrust violations. The activities of Defendant were of a nature that, if Defendant was a cooperative within the Capper-Volstead Act, Defendant was exempt from antitrust prosecution, as provided in the act. The United States contended that Defendant was not exempt because some of its members, who were packers and processors sometimes in addition to being producers, were ineligible because they were not "farmers" within the meaning of Capper-Volstead Act. According to the Act to avoid liability, all members of farm producers' association must be qualified to act collectively. NBMA argued that the Act was meant to protect those that must be bear the costs and risks of fluctuating, and all of its members, because they are exposed to those costs and risks and must make decision affected thereby. These are eligible to organize in exempt cooperative associations. However, U.S. legislation did not intend to extend the benefit of the Act to the processors and packers to whom the farmers sold their goods, even when the relationship was such that the processor and packer bore a part of the risk. Thus, in spite of the fact that the district court dismissed the action, holding that Defendant was exempt, the government appealed. The Court of Appeals reversed the decision, and the U.S. Supreme Court upheald the decision [Miller & Gossman, p.947-948].

As for organizational principles, the most important requirement is that the association is an organization for the mutual benefit of agricultural producers. Although the word "cooperative" was not mentioned in the Capper-Volstead Act, requirements for one-member, one-vote or limited return on capital, which are in fact fundamental cooperative principles, make it clear the kind of organizations that may be an exempt from antitrust laws. Patronage-based voting also is not prohibited by the act. But what is absolutely clear is that typical corporate voting, based on the number of shares owned, is not permitted for protected associations [Baarda 1989, p.403]. Most cooperatives meet both voting and limited dividends requirements. As for nonmember business, the Capper-Volstead Act provides quite flexible possibilities limiting the amount to fifty percent.

Due to the Capper-Volstead Act, agricultural producers were given an opportunity to act together in collectively processing, preparing for market, handing, and marketing of their products. It is legal to organize marketing cooperatives with the certainty that they do not violate any antitrust laws so long as they do not unduly enhance price. Cooperative associations are authorized to have common marketing agents and to make the necessary contracts and agreements to carry out permissible marketing and related activities. Producers who are members of one cooperative can agree on marketing practices with farmer members of another cooperative by having their cooperatives use a common marketing agency, form a federation, or simply work together on an informal basis to accomplish their legitimate marketing objectives [Frederick 1990, p.26o].

The Capper-Volstead Act offers agricultural producers a legal ground to enhance their marketing power, but does not totally exempt them from antitrust laws. It is possible to find three groups of cases when cooperatives are not within legitimate objects of the Capper-Volstead Act:

1. Activities with noncooperatives. For example, price agreements with noncooperative firms may be considered as the most objectionable violation of the antitrust laws. Cooperative representatives can agree on prices with a single buyer, but any discussion of price with a noncooperative competitor, or a group of buyers, are forbidden by law.

2. Combinations with nonproducers (the reason for restriction and an example were mentioned above).

3. Predatory practices. Generally, predatory practices are actions having no legitimate business purpose and are intended to monopolize or restrain trade [Baarda 1989, p.409]. For instance, farmers through their cooperatives can obtain substantial market power, but only when it happens due to natural growth or federation without using anticompetitive practices. Any agreement with noncooperative firms to monopolize any part of trade or commerce is illegal. Mergers and acquisitions may result in violations of the antitrust law when they are used to be further restrain and suppress competition. But cooperatives are subject to the same rules as noncooperative firms when they merge with or acquire a noncooperative business (Box 18). The Act does not prevent price increases, but undue price rises might invite prohibitory action of the Secretary of Agriculture. It also does not permit members of producer association to buy products and then sell them through the association as dealers or speculators
[Abrahamsen 1976, p.196].

Development of legal foundations for cooperative marketing was promoted in other Federal statutes. The Cooperative Marketing Act of 1926 authorized farmers, through cooperative associations, to exchange and disseminate market and economic information among themselves. The Agricultural Marketing Act of 1929 defined the essential features of cooperatives, and provided loans for cooperatives [Roy, p.108]. The Robinson-Patman Act of 1936 prohibits any discrimination in prices established by sellers, which can results in substantial lessening of competition or creating monopoly [Smith, Mann & Roberts, p.928]. This act does not apply to patronage refunds paid by cooperatives. The

Box 18

Case of Maryland and Virginia Milk Producers Association vs. United States (1960)

The Maryland and Virginia association controlled about 86% of the milk marketed in the Washington metropolitan area. This cooperative purchased the assets of a competing noncooperative dairy dealer firm, Embassy Dairy, Inc., which represented an additional 10% of the milk sold in the area. Since Embassy was able to purchase local milk on a price basis different from that available to Maryland and Virginia, and since it also purchased some less expensive milk outside the Washington area, it was able to compete aggressively with Maryland and Virginia for the business of governmental installations in the Washington area. The Antitrust Division of the Justice Department contended that the Maryland and Virginia Association had acquired Embassy Dairy in order to eliminate that firm as an outlet for the milk producers who were not cooperative members and thus to monopolize the market. The cooperative was also charged with some predatory trade practices. Maryland and Virginia Milk Producers Association built its defense on the fact that it was a cooperative composed exclusively of dairy farmers, and that is why it was an exempt and immunized by the Capper-Volstead Act. However, the Court denied the Capper-Volstead Act protection for the acquisition with following arguments: "The contract of purchase here, viewed in the context of all the evidence and findings, was not one made merely to advance the Association's own permissible processing and marketing business; it was entered into by both parties, ... because of its usefulness as a weapon to restrain and suppress competitors and competition in the Washington metropolitan area. We hold that the privilege Capper-Volstead grants producers to conduct their affairs collectively does not include a privilege to combine with competitors so as to use a monopoly position as a lever further to suppress competition by and among independent producers and processors" [Owen, pp.46-47; Abrahamsen, pp.208-209; Baarda, 1989, p.408].

Agricultural Marketing Agreement Act of 1937 authorized the Secretary of Agriculture to enter into marketing agreements with producers of certain agricultural products to prevent violations of the antitrust laws. In order to protect farmers' rights to organize joint producer associations, Congress adopted the Agricultural Fair Practices Act of 1967. The reason for this law was to establish standards of fair practice for handlers and processors who deal with farmers, and to protect farmers from discrimination caused by their membership in a cooperative. The Export Trading Company Act of 1982 developed antitrust protection for legitimate foreign market development activity. The Act permits cooperatives engaged in foreign marketing to combine their assets with other businesses, even noncooperative, for strengthening internationally. All these Federal statutes are closely related to the antitrust laws [Frederick 1989, p.33].

Antitrust provisions for cooperatives also is a subject of state legislation. The particularities of antitrust laws in different states caused the existence of antitrust provisions for agricultural producers. In other words, legislation of each state provides protection of agricultural producers from their own antitrust laws. Some state antitrust statutes are similar to Federal laws, and some differ considerably. Most states included antitrust provisions as a part of the cooperative incorporation statute of the state while focusing on two of the most important aspects:

1. The state cooperative incorporation statutes usually say that formation of a cooperative marketing association isn't a violation of the state's antitrust laws, and the marketing contracts and agreements between the association and its members are not to be considered as illegal.

2. The state cooperative incorporation statutes also protects cooperation between cooperatives, providing them opportunity to conclude contracts and agreements, to merger and acquire business, etc.

State antitrust protection for cooperatives, as well as Federal provisions, is not a kind of guarantee of total exemption from antitrust laws. Even when cooperatives were properly organized and incorporated under appropriate state laws, they are prohibited from engaging in certain activities, depending on the antitrust law requirements of the states in which they operate [Baarda 1989, p.4iz]. Because cooperatives are not totally provided antitrust exemption, their directors, managers, and advisers are responsible for consideration of antitrust risk in the decision making process. Their personal liability does not become lesser when they applied for attorneys, accountants, bankers, and other professional business advisers.

Thus, U.S. agricultural producers have exclusive rights to protection from antitrust legislation. This right is realized through creation of their own marketing organization, coordination of marketing activities, and other privileges. Taking into consideration that agriculture has become more complicated business, and also the importance of agriculture's stability for national economy, antitrust protection will be very important for farmers in the future. Agricultural marketing is faced with tremendous challenges: globalization of agrimarketing, expansion of foreign food companies, aggressive market policy of multinational firms, increasing competition, etc. Without special protection independent agricultural producers can have difficulty being competitive in a changing market environment. Hopefully, the solution will again find in a balance between the interests of both farmers and consumers of their products.