Saturday, November 11, 2006

Does the Capper-Volstead Act permit farmers to monopolize? (Part II)

Dairy counterFairdale Farms v. Yankee Milk, 635 F.2d 1037 (2d Cir. 1980) and Maryland and Virginia Milk Producers Association v. United States, 362 U.S. 458 (1960) seem to be in direct conflict with one another with respect to this issue. (See previous essay.) In Fairdale, the Second Circuit Court held that the Capper-Volstead Act permits agricultural cooperatives to engage in monopolization, in violation of the Sherman Act § 2. Fairdale, 635 F.2d at 1040. In Maryland, the Supreme Court held that the Capper-Volstead Act does not permit agricultural cooperatives to engage in monopolization. Maryland, 362 U.S. at 463. Both courts agreed that the mere formation of agricultural cooperatives is not unlawful.

Fairdale and Maryland are reconcilable if and only if the mere formation of agricultural cooperatives necessarily violates the Sherman Act § 2. The elements of a Sherman Act § 2 monopolization claim are 1) possession of monopoly power, and 2) willful acquisition or maintainance of that monopoly power. United States v. Grinnell Corp., 384 U.S. 563 (1966). (Monopoly power is the power to control prices and exclude competitors. Proof that a firm has monopoly power requires more than proof that the firm has market power, the capacity to act differently from a perfectly competitive firm.) In Fairdale, the Second Circuit Court argued that the mere formation of agricultural cooperatives, of the type envisioned by Congress, violates the Sherman Act § 2. According to the Fairdale court, the mere formation of such cooperatives involves the willful acquisition of monopoly power.

Maryland and Fairdale are not reconcilable because the mere formation of agricultural cooperatives does not necessarily involve the acquisition of monopoly power. Agricultural cooperatives can benefit farmers without acquiring monopoly power. Agricultural cooperatives that lack monopoly power can protect farmers from "predatory middlemen." When farmers sell products to farmer owned and operated cooperatives, rather than to corporate packers and processors, farmers are more likely to receive fair prices and fair terms. Agricultural cooperatives that lack monopoly power can raise the prices received by farmers even if they lack the power to raise the prices charged to consumers. Furthermore, agricultural cooperatives that lack monopoly power ensure that farmers have willing buyers and sellers to deal with.

There is insufficient evidence to support the Fairdale court's argument that Congress intended to permit farmers to form agricultural cooperatives with monopoly power. To the contrary, the text and legislative history of the Capper-Volstead Act as well as past Supreme Court precedent suggest that Fairdale was wrongly decided. First, the text of the Capper-Volstead Act suggests that agricultural cooperatives are not immunized from all antitrust claims. If Congress had intended to provide farmers with complete immunization from federal antitrust claims, it could have and presumably would have stated this intent much more clearly than it did. Instead, the Capper-Volstead Act authorizes agricultural cooperatives to engage in a limited number of activities, enumerated in the act: "processing, preparing for market, handling and marketing."

Second, the legislative history of the Capper-Volstead Act suggests that agricultural cooperatives are to be held to the same standards as corporations for purposes of determining whether agricultural cooperatives have violated the Sherman Act. The House Committee Report stated:
Instead of granting a class privilege, [the Capper-Volstead Act] aims to equalize existing privileges by changing the law applicable to the ordinary business corporations so that farmers can take advantage of it.

In the event that associations authorized by this bill do anything forbidden by the Sherman Antitrust Act, they will be subject to the penalties imposed by the law.
H.R.Rep. No. 24, 67th Cong., 1st Sess. 2. According to the Fairdale court, a proposed amendment that would have prohibited agricultural cooperatives from acquiring monopoly power was defeated. While this tends to support the Fairdale court's view, the meaning of the proposed amendment's defeat is ambiguous; the amendment could have been defeated for any number of reasons. The House Committee Report provides clearer evidence of Congress's intent when passing the Capper-Volstead Act.

Third, Supreme Court precedent supports the Maryland court's view rather than the Fairdale court's view. In United States v. Borden Co., 308 U.S. 188 (1939), the Supreme Court rejected a lower court's decision that the Capper-Volstead Act permits agricultural cooperatives to monopolize or restrain trade as long they do not unduly enhance the prices of agricultural products. To the contrary, the Borden court held that the Capper-Volstead Act does not give farmers immunity from the Sherman Act; the Capper-Volstead Act merely permits producers to engage in those activities enumerated in Capper-Volstead Act § 1.

In Tigner v. Texas, 310 U.S. 141 (1940), the Supreme Court suggested that the purpose of the Capper-Volstead Act was not to permit farmers to monopolize. According to the Tigner court, Congress may have passed the Capper-Volstead Act, explicitly permitting farmers to form agricultural cooperative, because they believed that agricultural cooperatives posed no anti-competitive threat (or no anti-competitive threat on the order of the threat posed by industry). The Tigner court noted: "These large sections of the population - those who labored with their hands and those who worked the soil - were as a matter of economic fact in a different relation to the community from that occupied by industrial combinations. Farmers were widely scattered and inured to habits of individualism; their economic fate was in large measure dependent on contingencies beyond their control."

In short, contrary to Fairdale, the Capper-Volstead Act does not permit farmers to monopolize. In Fairdale, the Second Circuit Court impermissibly deviated from Supreme Court precedent established by Maryland and Borden.

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