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From Antitrust Law Daily, January 3, 2014

Retailers’ claims of conspiracy to restrict milk supply may proceed

By Linda O’Brien, J.D., LL.M.

Claims by two processed milk retailers in a class action against a milk bottler, raw milk supplier, and milk processor for their participation in a conspiracy to restrict the supply of raw milk in violation of Section 1 of the Sherman Act may proceed, the U.S. Court of Appeals in Cincinnati has ruled (In re Southeastern Milk Antitrust Litigation, January 3, 2014, Van Tatenhove). Thus, the granting of the defendants’ motion for summary judgment was reversed.

Dean Foods Company and Suiza Food Corp., the largest bottlers of processed milk in the United States, merged in 2001 under the name of Dean Foods. To avoid antitrust issues, as part of the merger, Dean Foods sold or divested 11 dairy processing plants to Dairy Farmers of America (DFA), a dairy farmer cooperative and former business partner of Suiza. DFA transferred the processing plants to National Dairy Holdings (NDH), a partnership formed to compete with Dean Foods, and retained an equity interest in NDH. NDH operated the plants at a loss and eventually closed some of them. Food Lion LLC and Fidel Breto, two retailers of processed milk, filed suit against Dean Foods, DFA, and NDH, alleging a conspiracy to divide the market and restrict the output of raw milk. The federal district court in Greeneville granted the defendants’ motion for summary judgment.

To successfully bring an antitrust claim under Section 1 of the Sherman Act, the plaintiff must establish that the defendant’s actions constituted an unreasonable restraint of trade and that the illegal conspiracy caused injury to the plaintiff. A restraint may be determined unreasonable if it fits within a class of restraints that has been held to be “per se” unreasonable or if it violates the “rule of reason.” If the rule of reason is used, the plaintiffs must additionally show that the restraint produced anticompetitive effects within the relevant product and geographic markets.

The appellate court determined that the alleged conspiracy between Dean, DFA, and NDH appeared to involve a vertical relationship and the plaintiff alleged no facts to show that the trade restraint was “so unreasonably anticompetitive” as to present a clear cut case for a per se violation. Moreover, the defendants produced evidence that the agreement between Dean Foods and DFA to supply raw milk may have had procompetitive aspects, indicating that the agreement was not a per se unreasonable restraint of trade. Since there was no obvious anticompetitive trade restraint, the district court correctly applied the rule of reason standard.

However, the district court erred in excluding the plaintiff’s expert testimony regarding the relevant geographic market as unreliable. The determination of a geographic market entails the mapping of an area within which the defendant’s customers affected by the challenged practice can practicably turn to alternative suppliers if the defendant were to raise prices or restrict output. The process focuses on the “commercial realities of the industry.” The appellate court found that the district court misconstrued the plaintiff’s expert’s testimony to mean that he defined the geographic market by reference to solely Food Lion’s locations. Rather, the expert had defined the markets differently for the monopoly and conspiracy claims and expanded the market area to encompass processing plants owned by all of the defendants. Additionally, the expert extensively cited facts from record, government studies, and academic publications to support his opinion of the geographic market, and his unconventional application of the hypothetical monopolist test did not render his opinion unreliable.

The district court also erred in excluding the plaintiff’s injury expert by improperly concluding that his price analysis revealed only the effect of the merger between Dean Foods and Suiza. The expert’s multiple regression analysis showed that post-merger prices had increased by 7.9% above natural cost price increases and indicated that the plaintiffs were charged more for milk after the merger. The court concluded that the evidence created genuine issues of material fact as to whether the defendants entered into an anticompetitive agreement to limit competition which resulted in higher consumer prices.

Thus, summary judgment was not warranted based on either the plaintiffs’ failure to establish the relevant antitrust geographic market or lack of antitrust injury.

The case is No. 12-5457.

Attorneys: Neil K. Gilman (Hunton & Williams LLP) for Food Lion, LLC and Fidel Breto. Paul H. Friedman (Dechert LLP) for Dean Foods Company, National Dairy Holdings, L.P., Dairy Farmers of America, Inc., Diary Marketing Services, LLC, and Southern Marketing Agency, Inc.

Companies: Dean Foods Company; National Dairy Holdings, L.P.; Dairy Farmers of America, Inc.; Diary Marketing Services, LLC; Southern Marketing Agency, Inc.

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