Antitrust and the Meatpacking Industry
The case is In re Cattle Antitrust Litigation, Civil No. 19-cv-1222 (D. Minn. 2019).
Last month, the attorneys general for eleven different states petitioned the U.S. Department of Justice (DOJ) to investigate potential anticompetitive practices in the cattle industry. The letter to the DOJ expressed concern over the concentration of meat packers in the cattle industry as well as the difference between the low live cattle price and the healthy price of beef products.
A group of senators also wrote to the DOJ requesting an investigation of alleged price manipulation and anticompetitive behavior. Under federal law, this type of behavior is prohibited.[i] In April, USDA announced an expansion of the meat packer price manipulation investigation it began last August.
R-CALF Proposed Class Action
The meatpacking industry has been the target of price fixing allegations since well before the COVID-19 pandemic. On April 23, 2019, the Ranchers-Cattlemen Action Legal Fund United Stockgrowers of America (R-CALF) and several cattle producers filed a lawsuit in the Northern District of Illinois against Tyson Foods, JBS, Cargill, and National Beef—the four largest meat packing companies in the country—alleging that the defendants had conspired to suppress the price of fed cattle purchased in the United States from at least January 1, 2015 through the present.[ii] The case was voluntarily dismissed without prejudice on May 7, 2019, but refiled in Minnesota federal court, where it was consolidated with two other cases on July 10.
In addition to including the four “Packing Defendants,” a second amended complaint filed in October of 2019 also brings allegations against so-called “John Doe Defendants.” These are packing firms, financial institutions, and trading firms who trade Chicago Mercantile Exchange (CME) futures and options, but cannot currently be identified by the plaintiffs without discovery of CME trading records. The plaintiffs claim the Packing Defendants’ coordinated conduct caused a steep decline in fed cattle prices starting in 2015. The plaintiffs also assert that the Packing Defendants and John Doe Defendants manipulated the price of live cattle futures and options, causing them injury.
The plaintiffs seek class action status for a “Producer Class”—all persons or entities within the United States that directly sold to a Defendant one or more fed cattle for slaughter during the Class Period other than on a cost-plus basis—and an “Exchange Class”—all persons who transacted in live cattle futures and/or options traded on the CME or another U.S. exchange during the Class Period. The plaintiffs claim to be able to prove their case through witness accounts, trade records, and economic evidence.
Factual Allegations against Packing Defendants
The Packing Defendants are meat packers responsible for purchasing and slaughtering a majority of all fed cattle in the United States. The Packing Defendants derive profit from the “meat margin,” which is the difference in the price paid by packers for fed cattle and the price of the beef products sold. The plaintiffs are producers, or organizations who represent producers, who sell cattle to the Packing Defendants through the cash cattle market.
First, the plaintiffs claim the Packing Defendants coordinated their conduct to reduce purchasing and slaughter volumes of cash cattle. The plaintiffs allege that, excluding some seasonal variation, the supply of fed cattle remains relatively stable due to the length of time for cattle to reach market weight and the perishable nature of livestock. When less beef products are available, consumers are generally willing to pay a higher price due to the higher demand. Therefore, the plaintiffs argue that the controlled, industry-wide reduction in purchasing of cash cattle and slaughter volumes could allow a meat packer to drive the price of fed cattle down while simultaneously maintaining a healthy meat margin due to the higher beef price.
Second, the plaintiffs allege that the Packing Defendants used “anticompetitive procurement measures,” such as conducting almost all of their weekly cash cattle procurement during a 30 to 60-minute window on Fridays using an antiquated “queuing protocol.” In a queuing convention, once a producer receives a bid from a packer, the producer may either accept or reject the offer. If the producer rejects the offer, he must inform the other packers of the offer and may only accept a higher offer. If the second packer is not willing to pay the new, higher price, the producer must return to the original packer who has the right-of-first refusal. If the original packer declines to purchase, then the producer may offer to sell at a different price point, but the second packer is under no obligation to buy.
Next, the plaintiffs claim the Packing Defendants choose to import cattle from Canada and far away locations in the United States—despite it being uneconomical to do so—in order to reduce the demand for local cattle. The plaintiffs claimed the Packing Defendants would not have paid these extra costs unless the other major packers would do the same to curtail domestic cash cattle purchases.
Finally, plaintiffs also point to several plant closures as evidence of a conspiracy to manipulate the fed cattle market. All four packing defendants have closed processing plants since 2015. This, they allege, gives cattle producers fewer options when selling their cattle.
Factual Allegations against John Doe Defendants
Slaughter-weight fed cattle is a commodity underlying CME live cattle futures and options. Futures are used to set the price of live cattle under forward contracts. The plaintiffs allege that by manipulating fed cattle prices, the Packing Defendants also were able to manipulate cattle futures and options. However, CME does not disclose the trade data of its customers. Without discovery, the plaintiffs cannot identify what trades or open interests the Packing Defendants have or if any John Doe Defendants assisted in these actions.
Fed Cattle Market
In the United States, cattle are slaughtered between the age of 15 to 24 months or 950 to 1,500 pounds. A majority of fed cattle in the United States are sold to packing plants and processed into various beef products. Meat packers procure a set amount of cattle depending on the plant capacity. Historically, meat packers purchased cattle from the cash cattle trade by going to feedlots and auctions and paying an agreed upon price.
Now, most fed cattle are purchased under a forward contract where the price is set in advance through a formula that is based—among other factors—on the weekly cash cattle trade, USDA AMS Livestock Mandatory Reporting’s (LMR) cattle transaction price summaries, and live cattle futures prices. Live cattle futures are also impacted by cash cattle prices. In that way, while the cash cattle market makes up a smaller portion of cattle procurement, it sets the price for the rest of the fed cattle industry.
Legal Causes of Action
The primary claim by the plaintiffs is that the Packing Defendants coordinated their conduct to suppress cattle prices. The complaint states this type of alleged actions violate the Sherman Act, the Packers and Stockyards Act, and the Commodity Exchange Act. The plaintiffs requested damages, injunctive relief, pre- and post-judgment interest, and attorney fees as well as a jury trial.
The plaintiffs claim that the defendants violated the Sherman Act, 15 U.S.C. section 1, which prohibits agreements that restrict interstate trade or commerce. The plaintiffs allege the defendants entered into an agreement to artificially depress the price of fed cattle which would be an unlawful restraint of trade. The complaint asserts that this harmed the plaintiffs they received lower prices for fed cattle and were deprived of the benefits of free and open competition for their livestock.
To prove there was a Sherman Act violation, the plaintiff must prove “(1) that there was a contract, combination, or conspiracy; (2) that the agreement unreasonably restrained trade under either a per se rule of illegality or a rule of reason analysis; and (3) that the restraint affected interstate commerce.”[iii] Because price fixing is “so inherently anticompetitive” that is per se illegal, plaintiffs must only allege that the defendants acted together in order to survive a motion to dismiss.[iv]
If there is no direct evidence of such an agreement, plaintiffs must show there was parallel action—where the defendants all acted in unison and the behavior “would probably not result from chance, coincidence, independent responses to common stimuli, or mere interdependence unaided by an advance understanding among the parties”[v]—and “plus factors” which show collusion. Plus factors may include: “(1) a shared motive to conspire; (2) action against self-interest; (3) market concentration; and (4) a high-level of interfirm communication exist[ing] in conjunction with the parallel actions…” [vi] However, without both, there is insufficient evidence to establish an inference of an agreement.
Packers and Stockyards Act
The plaintiffs’ second claim involves a violation of the Packers and Stockyards Act (PSA), 7 U.S.C. §§ 192 and 209. This law prohibits packers from participating in any “unfair, unjustly discriminatory, or deceptive trade practice or devise.” However, the law does not define what that means. Packers must conduct operations independent of other packers.[vii] The plaintiffs allege that the defendants entered into an agreement to depress the competition for purchasing fed cattle in violation of the Packers and Stockyards Act.
Congress enacted PSA to prevent packers from forming monopolies and to promote fair competition and practices in the livestock industry. The Eighth Circuit has held that a plaintiff must show the defendants intentionally committed the unlawful act to show a violation of PSA.[viii]
Commodity Exchange Act
The remaining four claims for relief focus on alleged violations of the Commodity Exchange Act (CEA) by both the Packing Defendants and the John Doe Defendants. The CEA prohibits manipulation, deceptive trade practices, and aiding and abetting any part of the CEA. It also holds principals liable for any CEA violation by their agent.[ix] The plaintiffs claim the Packing Defendants and the John Doe Defendants caused artificially low prices in live cattle futures and options.
Defendants’ Motion to Dismiss
In the nearly 200-page complaint, the cattlemen plaintiffs allege several actions which allowed the Packing Defendants to suppress the price of fed cattle. The plaintiffs assert direct evidence of an agreement through two witnesses’ accounts. An anonymous witness, previously employed by a Packing Defendant as a quality assurance officer, reportedly learned of the agreement through his plant’s fabrication manager. The fabrication manager told the first witness that the Packing Defendants reduced the purchase and slaughter of cattle when the purchasing price became too high. A second witness, a former feedlot manager, reported that the Packing Defendants would not work with a feedlot if it did not follow the queuing convention as planned.
The Packing Defendants filed a joint motion to dismiss on January 10, 2020. The Packing Defendants argue that it is impossible to assess the reliability of the witness statements. Because the plaintiffs will not make the witness identities known, there could be many reasons the information is inaccurate.
The plaintiffs allege that the defendants conspired to depress fed cattle prices in order to be more profitable. As stated previously, the plaintiffs claim that the defendants accomplished this through such coordinated, parallel actions as:
- Reducing purchase and slaughter volumes of fed cattle, in particular cash cattle;
- Orchestrating and enforcing anticompetitive procurement practices;
- Continuing to import foreign cattle after it became uneconomical for them to do so; and
- Closing and idling plants.
The Packing Defendants deny that the alleged parallel evidence supports the conspiracy theory or that the conduct was unlawful. Much of the data provided by the plaintiffs to show reduction in fed cattle slaughter, cash cattle purchasing, and imported foreign cattle is not defendant-specific, but rather industry-specific. The data regarding slaughter volume reduction is defendant-specific, but the Packing Defendants do not believe it was adequately analyzed.
Throughout the rest of the motion, the Packing Defendants dispute the economic evidence leveled against them, claim that most of the allegations are not defendants-specific, or argue that the actions, such as the queuing convention, are a coincidence based on the history of cattle sales and auctions rather than a conspiracy. The motion to dismiss hearing is set to take place June 8, 2020.
Other Livestock Antitrust Lawsuits
Allegations of antitrust violations have appeared in not just the beef industry, but the pork and poultry industries as well.[x] To plead antitrust violations, plaintiffs must “provide sufficient factual information to provide the grounds on which the claim rests, and to raise a right to relief above a speculative level.”[xi] This can be difficult when trying to prove that a conspiracy existed.
The pork industry is also very concentrated with eight companies controlling 80% of the market. In In re Pork, pork purchasers alleged that several of the largest pork producers and integrators in the United States violated state and federal antitrust laws by conspiring to limit the supply of pork to fix prices.[xii] The plaintiffs alleged that the defendants carried out this conspiracy by aiming public statements at the other companies to reduce production and exchanging non-public, detailed information on pork prices, capacity, sales volume, and demand through a benchmarking company.
The plaintiffs did not have direct evidence of an agreement, but had strong “plus factors” including “the collusive and constricted nature of the industry, the inelasticity of pork demand, trade associations attended by the Defendants, actions taken by some of the Defendants’ against their own self-interests, pricing practices, and the fact that some of these Defendants engaged in similar practices in the chicken industry.”[xiii] However, there was little “parallel evidence” to show that the defendants acted in unison or that any of their actions were more than a coincidence. The plaintiffs claim that the industry-wide reduction in pork production showed the defendants intentionally decreased pork production. The court found this was not specific evidence relating to any of the defendants. Additionally, the court declined to speculate that the defendants did decrease pork production just because they made up a majority of the industry. For these reasons, the court granted the defendants’ motion to dismiss.
The poultry industry has also faced similar allegations. In In re Broiler Chicken Antitrust Litig., plaintiffs alleged the defendants conspired to fix prices broiler prices.[xiv] The defendants controlled nearly 90% of broiler production in the United States. The plaintiffs contended that the defendants used a data benchmarking company to communicate the conspiracy to restrain production and increase prices. The court held the plaintiffs demonstrated plausible parallel conduct that the specific defendants participated in production cuts as well as plus factors. The case is currently ongoing after the DOJ intervened to conduct its own investigation.[xv]
In response to the issues associated with the limited number of packers which is escalated by the COVID-19 pandemic, Senator Chuck Grassley introduced S. 3693 which is a bill “to foster efficient markets and increase competition and transparency among packers that purchase livestock from producers.” The bill requires at least 50% of covered packers beef slaughter volume to come from producers not affiliated with the packer through spot market sales.
The bill, introduced May 12, is still in the very early stages. It would need to pass the Agriculture, Nutrition, and Forestry committee before it could head to the Senate floor.
[i] Anticompetitive behavior is prohibited by the Sherman Act, 15 U.S.C. § 1; the Clayton Act, 15 U.S.C. §§ 12-27; and the Packers and Stockyards Act, 7 U.S.C. §§ 192, 213.
[ii] The plaintiffs consider January 1, 2015 through the present as the “Class Period.”
[iv] See Insulate SB, Inc. v. Advanced Finishing Sys., Inc., 797 F.3d 538, 543 (8th Cir. 2015) (quoting Impro Prods., Inc. v. Herrick, 715 F.2d 1267, 1273 (8th Cir. 1983)).
[v] Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, n. 4 (2007).
[vi] Park Irmat Drug Corp. v. Express Scripts Holding Co., 310 F. Supp. 3d 1002, 1013 (E.D. Mo. 2018); Starr v. Sony BMG Music Entm’t, 592 F.3d 314, 325 (2d Cir. 2010)
[vii] 9 C.F.R. § 201.70.
[viii] Schumacher v. Cargill Meat Solutions Corp., 515 F.3d 867, 872 (8th Cir. 2008).
[ix] 7 U.S.C. §§ 2, 9, 13(a), 25; 17 C.F.R. §§ 1.2, 180.1(a).
[x] See, e.g., In re Pork Antitrust Litigation, 2019 WL 3752497; In re Broiler Chicken Antitrust Litig., 290 F. Supp. 3d 772, 791-92 (N.D. Ill. 2017).
[xi] In re Pre-Filled Propane Tank Antirust Litig., 860 F.3d 1059, 1070 (8th Cir. 2017).
[xii] In re Pork, at *1.
[xiii] In re Pork, at *7.
[xiv] In re Broiler Chicken Antitrust Litig., 290 F. Supp.3d 772, 779 (N.D. Illinois 2017).
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