SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC67334
ANTITRUST ENFORCEMENT IMPROVEMENT
ACT OF 2000
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SEPTEMBER 12, 2000
Serial No. 117
Printed for the use of the Committee on the Judiciary
Page 2 PREV PAGE TOP OF DOC
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
Page 3 PREV PAGE TOP OF DOCDAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
Page 4 PREV PAGE TOP OF DOC September 12, 2000
TEXT OF BILL
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary
Foer, Albert A., president, the American Antitrust Institute
Metzenbaum, Hon. Howard, a former United States Senator From the State of Ohio
Minge, Hon. David, a Representative in Congress From the State of Minnesota
Swenson, Leland, president, National Farmers Union
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Page 5 PREV PAGE TOP OF DOC Conyers, Hon. John, Jr., a Representative in Congress From the State of Michigan: Prepared statement
Foer, Albert A., president, the American Antitrust Institute: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary: Prepared statement
Metzenbaum, Hon. Howard, a former United States Senator From the State of Ohio: Prepared statement
Minge, Hon. David, a Representative in Congress From the State of Minnesota: Prepared statement
Swenson, Leland, president, National Farmers Union: Prepared statement
Material submitted for the record
ANTITRUST ENFORCEMENT IMPROVEMENT ACT OF 2000
TUESDAY, SEPTEMBER 12, 2000
House of Representatives,
Page 6 PREV PAGE TOP OF DOCCommittee on the Judiciary,
The committee met, pursuant to call, at 2:05 p.m., in Room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble, Bob Goodlatte, Asa Hutchinson, Edward A. Pease, John Conyers, Jr., and Robert C. Scott.
Staff present: Thomas E. Mooney, Sr., general counsel-chief of staff; Joseph Gibson, chief antitrust counsel; Peter Levinson, counsel; Amy Rutkowski, staff assistant, Terry Shawn, deputy press secretary; James B. Farr, financial clerk; and Cori F. Flam, minority counsel.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The committee will come to order.
Today the committee holds a hearing on H.R. 4321, the Antitrust Enforcement Improvement Act of 2000, introduced by Congressman Minge of Minnesota. The bill deals with a variety of antitrust issues, some of which are quite controversial.
[The bill, H.R. 4321, follows:]
Page 7 PREV PAGE TOP OF DOC106TH CONGRESS
H. R. 4321
To amend the Sherman Act, the Clayton Act, and the Packers and Stockyards Act, 1921 with respect of competition among wholesale purchasers; to establish a commission to review large agriculture mergers, concentration, and market power, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
APRIL 13, 2000
Mr. MINGE (for himself, Mr. DEFAZIO, and Mr. HINCHEY) introduced the following bill; which was referred to the Committee on the Judiciary, and in addition to the Committee on Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned
To amend the Sherman Act, the Clayton Act, and the Packers and Stockyards Act, 1921 with respect of competition among wholesale purchasers; to establish a commission to review large agriculture mergers, concentration, and market power, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ''Antitrust Enforcement Improvement Act of 2000''.
Page 8 PREV PAGE TOP OF DOCSEC. 2. AMENDMENTS TO THE SHERMAN ACT.
(a) TRADE OR COMMERCE.Sections 1 and 3 of the Sherman Act (15 U.S.C. 1, 3) are amended by inserting ''(which may include trade or commerce of sellers, trade or commerce of wholesale purchasers, or trade or commerce of both)'' after ''or commerce''.
(b) FINES.Sections 1 and 3 of the Sherman Act (15 U.S.C. 1, 3) are amended by striking ''$10,000,000'' and inserting ''$100,000,000''.
SEC. 3. AMENDMENTS TO THE CLAYTON ACT.
(a) CAUSE OF ACTION.Section 7 of the Clayton Act (15 U.S.C. 18) is amended by adding at the end the following:
''For purposes of this section, the term 'competition' may include competition among sellers, competition among wholesale purchasers, or competition among both.''.
(b) DISCLOSURE OF INFORMATION REGARDING MERGERS.Section 7A of the Clayton Act (15 U.S.C. 18a) is amended
(1) in subsection (e)(2)
(A) by striking ''20 days'' and inserting ''30 days'', and
(B) by striking ''10 days'' and inserting ''15 days'', and
(2) in the 1st sentence of subsection (h) by inserting ''or as may be requested by the State attorney general (as defined in section 4G)'' before the period.
(c) FEES REQUIRED TO FILE NOTIFICATIONS OF MERGERS.
(1) AMENDMENT.Section 7A of the Clayton Act (15 U.S.C. 18a) is amended by adding at the end the following:
''(k)(1) To file a notification required by subsection (a), a person shall pay a filing fee to be assessed and collected by the Federal Trade Commission as follows:
''(A) $25,000 if the aggregate total amount determined under subsection (a)(3)(B) is less than $100,000,000.
Page 9 PREV PAGE TOP OF DOC ''(B) $50,000 if the aggregate total amount determined under subsection (a)(3)(B) is less than $250,000,000 but not less than $100,000,000.
''(C) $100,000 if the aggregate total amount determined under subsection (a)(3)(B) is less than $1,000,000,000 but not less than $250,000,000.
''(D) $150,000 if the aggregate total amount determined under subsection (a)(3)(B) is not less than $1,000,000,000.
''(2) Filing fees collected under this subsection shall be divided equally between, and credited to, the then current appropriations for the salaries and expenses of the Federal Trade Commission and the then current appropriations for the salaries and expenses of the Antitrust Division of the Department of Justice. Collected fees in excess of such appropriations shall be deposited in the Treasury as general receipts.''.
(2) CONFORMING AMENDMENT.Section 605 of Public Law 101162 (103 Stat. 1031; 15 U.S.C. 18a note) is repealed.
(3) EFFECTIVE DATE AND APPLICATION OF AMENDMENTS.The amendments made by this subsection shall take effect on the 1st day of the 1st fiscal year beginning after the date of the enactment of this Act and shall apply with respect to notifications filed under section 7A of the Clayton Act on or after the date such amendments take effect.
(d) RECOVERY OF OVERCHARGES.(1) The Clayton Act (15 U.S.C. 12 et seq.) is amended by inserting after section 4H the following:
''SEC. 4I. (a) Any indirect purchaser in the chain of manufacture, production, or distribution of goods or services shall, upon proof of payment of all or any part of any overcharge for such goods or services, be deemed to be injured within the meaning of section 4, 4A, or 4C, except that such indirect purchaser may recover damages only with respect to the amount of the initial overcharge proved to be passed on to him.
Page 10 PREV PAGE TOP OF DOC ''(b) Any indirect seller in the chain of manufacture, production, or distribution of goods or services shall, upon proof of receipt of all or any part of any underpayment for such goods or services, be deemed to be injured within the meaning of section 4, 4A, or 4C, except that such indirect seller may recover damages only with respect to the amount of the initial underpayment proved to be passed on to him.
''(c) In any action under section 4 or 4A, any defendant, as a partial or complete defense against a damage claim, shall be entitled to prove that
''(1) a purchaser in the chain who paid any overcharge passed on all or any part of such overcharge to another purchaser in such chain; or
''(2) a seller in the chain who received any underpayment passed on all or any part of such underpayment to another seller in such chain.
''(d)(1) In any class action brought under section 4 by purchasers or sellers, the fact of injury and the amount of damages sustained by or passed-on to or by the members of the class may be proven on a class-wide basis, without requiring proof of such matters by each individual member of the class. The percentage of total damages attributable to a member of such class shall be the same as the ratio of such member's purchases or sales to the purchases or sales of the class as a whole.
''(2) In any action under section 4C, the fact of injury and the amount of damages sustained by or passed-on to or by purchasers or sellers may be proven on a class-wide basis, without requiring proof of such matters with respect to each individual purchaser or seller. The percentage of total damages attributable to a member of a class shall be the same as the ratio of such member's purchases or sales to the purchases or sales of the class as a whole.
''(3) Except as provided in sections 4D and 4E, damages shall not be assessed in the aggregate against a defendant but shall be assessed only on behalf of any person who makes a valid damage claim.
Page 11 PREV PAGE TOP OF DOC ''(e)(1) Except as provided in paragraph (2), any damage award in a final judgment heretofore or hereafter rendered against any defendant in any action under section 4, 4A, or 4C shall be admissible as
''(A) prima facie evidence against any plaintiff, and
''(B) conclusive evidence against such defendant,
in any other action under section 4, 4A, or 4C brought against such defendant, as to all fully and fairly litigated matters regarding the amount of damages passed on which would be an estoppel as between the parties thereto.
''(2) This subsection shall not apply to consent judgments or decrees.
''(f) In any action by purchasers or sellers under section 4 which is brought or maintained as a class action, the court, before it approves a settlement of such action, shall, in the interests of justice, determine what portion of the settlement shall be distributed to the persons on whose behalf the action was brought or maintained and what portion shall be distributed to their attorneys, and in making such determination the court shall act as a fiduciary for those persons on whose behalf the action was brought or maintained.
''(g) In any action under section 4
''(1) by, or on behalf of, any purchaser in the chain of manufacture, production, or distribution of goods or services alleging any overcharge for such goods or services, or
''(2) by, or on behalf of, any seller in the chain of manufacture, production, or distribution of goods or services alleging any underpayment for such goods or services,
the court may in its discretion award a reasonable attorney's fee to the prevailing defendant upon a finding that such purchaser or seller or his attorney acted in bad faith, vexatiously, wantonly, or for oppressive reasons.''.
Page 12 PREV PAGE TOP OF DOC (2) The Clayton Act is amended by inserting before the period in section 4 the following: '', except that this section shall not authorize suits by a foreign sovereign government, a department or agency thereof''.
(3) Section 1407(h) of title 28, United States Code, is amended by striking ''section 4C of''.
SEC. 4. AMENDMENTS TO THE PACKERS AND STOCKYARDS ACT, 1921.
(a) DEFINITIONS.Section 2 of the Packers and Stockyards Act, 1921 (7 U.S.C. 182) is amended by adding at the end the following:
''(12) The term 'undue or unreasonable preference or advantage'
''(A) except as provided in subparagraph (B), includes using any practice or device to purchase or acquire, directly or indirectly, livestock from a producer of livestock on terms that are not offered to producers of smaller volumes of similar livestock but excludes a purchase or acquisition that occurs less than 2 weeks before slaughter and in a public market based on a competitive bidding process; and
''(B) does not include the payment of
''(i) a price premium based on standards for product grade and quality, or for a production method, that enhance the value of the meat
if such premium is offered in a manner that does not discriminate against producers of smaller volumes of similar livestock who meet such standards; or
''(ii) different prices to reflect differences in the cost of handling livestock.
''(13) The term 'public market based on a competitive bidding process' means a market in which
''(A) potential buyers and sellers have access;
''(B) multiple blind bids can be made; and
Page 13 PREV PAGE TOP OF DOC ''(C) there is contemporaneous transparency.''.
(b) COMMERCE.Section 202(e) of the Packers and Stockyards Act, 1921 (7 U.S.C. 192(e)) is amended by inserting ''(which may include trade or commerce of sellers, trade or commerce of wholesale purchasers, or trade or commerce of both)'' after ''commerce''.
SEC. 5. ESTABLISHMENT OF COMMISSION.
(a) ESTABLISHMENT.There is established a commission to be known as the Agriculture Concentration and Market Power Review Commission (hereafter in this section referred to as the ''Commission'').
(b) PURPOSES.The purpose of the Commission is to
(1) study the nature and consequences of concentration and vertical integration in America's agricultural economy; and
(2) make recommendations on how to change underlying antitrust laws and other Federal laws and regulations to keep a fair and competitive agriculture marketplace for family farmers, other small and medium sized agriculture producers, generally, and the communities of which they are a part.
(c) MEMBERSHIP OF COMMISSION.
(1) COMPOSITION.The Commission shall be composed of 12 members as follows:
(A) Three persons, one of whom shall be a person currently engaged in farming or ranching, shall be appointed by the President pro tempore of the Senate upon the recommendation of the Majority Leader of the Senate, after consultation with the Chairman of the Committee on Agriculture, Nutrition, and Forestry.
Page 14 PREV PAGE TOP OF DOC (B) Three persons, one of whom shall be a person currently engaged in farming or ranching, shall be appointed by the President pro tempore of the Senate upon the recommendation of the Minority Leader of the Senate, after consultation with the ranking minority member of the Committee on Agriculture, Nutrition, and Forestry.
(C) Three persons, one of whom shall be a person currently engaged in farming or ranching, shall be appointed by the Speaker of the House of Representatives, after consultation with the Chairman of the Committee on Agriculture.
(D) Three persons, one of whom shall be a person currently engaged in farming or ranching, shall be appointed by the Minority Leader of the House of Representatives, after consultation with the ranking minority member of the Committee on Agriculture.
(2) QUALIFICATIONS OF MEMBERS.
(A) APPOINTMENTS.Persons who are appointed under paragraph (1) shall be persons who
(i) have experience in farming or ranching, expertise in agricultural economics and antitrust, or have other pertinent qualifications or experience relating to agriculture and agriculture industries; and
(ii) are not officers or employees of the United States.
(B) OTHER CONSIDERATION.In appointing Commission members, every effort shall be made to ensure that the members
(i) are representative of a broad cross sector of agriculture and antitrust perspectives within the United States; and
(ii) provide fresh insights to analyzing the causes and impacts of concentration in agriculture industries and sectors.
(d) PERIOD OF APPOINTMENT; VACANCIES.
(1) IN GENERAL.Members shall be appointed not later than 60 days after the date of enactment of this Act and the appointment shall be for the life of the Commission.
Page 15 PREV PAGE TOP OF DOC (2) VACANCIES.Any vacancy in the Commission shall not affect its powers, but shall be filled in the same manner as the original appointment.
(e) INITIAL MEETING.Not later than 30 days after the date on which all members of the Commission have been appointed, the Commission shall hold its first meeting.
(f) MEETINGS.The Commission shall meet at the call of the Chairperson.
(g) CHAIRPERSON AND VICE CHAIRPERSON.The members of the Commission shall elect a chairperson and vice chairperson from among the members of the Commission.
(h) QUORUM.A majority of the members of the Commission shall constitute a quorum for the transaction of business.
(i) VOTING.Each member of the Commission shall be entitled to 1 vote, which shall be equal to the vote of every other member of the Commission.
(j) DUTIES OF THE COMMISSION.The Commission shall be responsible for examining the nature, the causes, and consequences concentration in America's agricultural economy in the broadest possible terms.
(k) ISSUES TO BE ADDRESSED.The study shall include an examination of the following matters:
(1) The nature and extent of concentration in the agricultural sector, including food production, transportation, processing, distribution and marketing, and farm inputs such as machinery, fertilizer, and seeds.
(2) Current trends in concentration of the agricultural sector and what this sector is likely to look like in the near and longer term future.
(3) The effect of this concentration on farmer income.
Page 16 PREV PAGE TOP OF DOC (4) The impacts of this concentration upon rural communities, rural economic development, and the natural environment.
(5) The impacts of this concentration upon food shoppers, including the reasons that Depression-level farm prices have not resulted in corresponding drops in supermarket prices.
(6) The productivity of family-based farm units, compared with corporate based agriculture, and whether farming is approaching a scale that is larger than necessary from the standpoint of productivity.
(7) The effect of current laws and administrative practices in supporting and encouraging this concentration.
(8) Whether the existing antitrust laws provide adequate safeguards against, and remedies for, the impacts of concentration upon family-based agriculture, the communities they comprise, and the food shoppers of this Nation.
(9) Accurate and reliable data on the national and international markets shares of multinational
agribusinesses, and the portion of their sales attributable to exports.
(10) Barriers that inhibit entry of new competitors into markets for the processing of agricultural commodities, such as the meat packing industry.
(11) The extent to which developments, such as formula pricing, marketing agreements, and forward contracting tend to give processors, agribusinesses, and other buyers of agricultural commodities additional market power over producers and suppliers in local markets.
(12) Such related matters as the Commission determines to be important.
(l) FINAL REPORT.(1) Not later than 12 months after the date of the initial meeting of the Commission, the Commission shall submit to the President and Congress a final report which contains
Page 17 PREV PAGE TOP OF DOC (A) the findings and conclusions of the Commission described in subsection (b); and
(B) recommendations for addressing the problems identified as part of the Commission's analysis.
(2) Any member of the Commission may submit additional findings and recommendations as part of the final report.
(m) POWERS OF COMMISSION.
(1) HEARINGS.The Commission may hold such hearings, sit and act at such times and places, take such testimony, and receive such evidence as the Commission may find advisable to fulfill the requirements of this section. The Commission shall hold at least 1 or more hearings in Washington, D.C., and 4 in different agriculture regions of the United States.
(2) INFORMATION FROM FEDERAL AGENCIES.The Commission may secure directly from any Federal department or agency such information as the Commission considers necessary to carry out the provisions of this section. Upon request of the Chairperson of the Commission, the head of such department or agency shall furnish such information to the Commission.
(3) POSTAL SERVICES.The Commission may use the United States mails in the same manner and under the same conditions as other departments and agencies of the Federal Government.
(n) COMMISSION PERSONNEL MATTERS.
(1) COMPENSATION OF MEMBERS.Each member of the Commission shall be compensated at a rate equal to the daily equivalent of the annual rate of basic pay prescribed for level IV of the Executive Schedule under section 5315 of title 5, United States Code, for each day (including travel time) during which such member is engaged in the performance of the duties of the Commission.
Page 18 PREV PAGE TOP OF DOC (2) TRAVEL EXPENSES.The members of the Commission shall be allowed travel expenses, including per diem in lieu of subsistence, at rates authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, while away from their homes or regular places of business in the performance of services for the Commission.
(A) IN GENERAL.The Chairperson of the Commission may, without regard to the civil service laws and regulations, appoint and terminate an executive director and such other additional personnel as may be necessary to enable the Commission to perform its duties. The employment of an executive director shall be subject to confirmation by the Commission.
(B) COMPENSATION.The Chairperson of the Commission may fix the compensation of the executive director and other personnel without regard to the provisions of chapter 51 and subchapter III of chapter 53 of title 5, United States Code, relating to classification of positions and General Schedule pay rates, except that the rate of pay for the executive director and other personnel may not exceed the rate payable for level V of the Executive Schedule under section 5316 of such title.
(4) DETAIL OF GOVERNMENT EMPLOYEES.Any Federal Government employee shall be detailed to the Commission without reimbursement, and such detail shall be without interruption or loss of civil service status or privilege.
(5) PROCUREMENT OF TEMPORARY AND INTERMITTENT SERVICES.The Chairperson of the Commission may procure temporary and intermittent services under section 3109(b) of title 5, United States Code, at rates for individuals which do not exceed the daily equivalent of the annual rate of basic pay prescribed for level V of the Executive Schedule under section 5316 of such title.
Page 19 PREV PAGE TOP OF DOC (o) SUPPORT SERVICES.The Administrator of the General Services Administration shall provide to the Commission on a reimbursable basis such administrative support services as the Commission may request.
(p) AUTHORIZATION OF APPROPRIATIONS.There are authorized to be appropriated $2,000,000 to the Commission as required by this title to carry out this section.
SEC. 6. OFFICE OF SPECIAL COUNSEL FOR AGRICULTURE.
The Attorney General shall establish in the Department of Justice an Office of Special Counsel for Agriculture. The individual appointed by the Attorney General to head such Office shall handle agricultural antitrust issues and related matters, as determined by the Attorney General.
SEC. 7. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.
(a) EFFECTIVE DATE.Except as provided in subsection (b), this Act and the amendments made by this Act shall take effect on the date of the enactment of this Act.
(b) APPLICATION OF AMENDMENTS.The amendments made by this Act shall not apply with respect to conduct occurring before the date of the enactment of this Act.
Mr. HYDE. Let me say a word about why I have scheduled this hearing. I do not support several aspects of the bill, but I served in the minority in this body and in this committee for 20 years. Many times I experienced the frustration of putting my heart into a legislative effort only to have it die without even getting a hearing. During those long years I vowed to myself that if I ever became chairman, I would treat a member who cared passionately about a bill differently from the way I had been treated.
Page 20 PREV PAGE TOP OF DOC
Mr. Minge convinced me in a series of conversations that he has put in a lot of hours working on H.R. 4321 and that he does indeed care about it very much. So I agreed to give him this hearing in keeping with my promise to myself. No one should take that as any reversal of my long-standing positions on these issues, however.
Let me review a couple of those positions.
With respect to agriculture, I believe that the antitrust laws must be vigorously enforced in that industry as they should be in all other industries. I don't believe that we need to change the antitrust laws in any special way to deal with current problems in agriculture nor do we need to move any antitrust authority or merger review authority to the Department of Agriculture. I understand that Mr. Minge's bill does not call for that, but much of the current debate revolves around those issues.
I believe that antitrust authority ought to reside with the antitrust enforcers at the Department of Justice or the Federal Trade Commission who work on general competition principles that apply to all industries equally. Our experience with antitrust authority placed in the hands of agencies specific to one industry is not a good one. One need look no further than the current situation in the railroad industry, from which farmers have suffered, to see what happens when you place antitrust authority in the hands of agencies specific to a particular industry. I don't say that to impugn the railroad regulators at all, but it is just difficult for regulators to have all the specific expertise necessary to regulate one industry and all the broader expertise necessary to enforce the antitrust laws.
Page 21 PREV PAGE TOP OF DOC Another important issue in Mr. Minge's bill is the legislative reversal of the Supreme Court's 1977 Illinois Brick decision. For those of you who are not antitrust specialists, Illinois Brick held that only the first purchaser in the chain of distribution could sue for damages caused by an antitrust conspiracy. For example, in the recent vitamin price-fixing case, the vitamin companies sold largely to food manufacturers, like cereal companies, rather than consumers. Under Illinois Brick, only the cereal manufacturers can sue the vitamin companies. The ultimate consumers of the cereal cannot bring suit. Mr. Minge proposes we overturn that decision and let the ultimate consumer sue.
At a theoretical level, it is appealing, and it led to a great deal of legislative ferment in the late 1970's and the 1980's. The issue has been relatively quiet in recent years.
My concern is for the practical. Our Federal courts are absolutely choked with litigation, and anyone who has followed our recent struggles with the asbestos issue is well aware of that. Allowing consumers to sue in an Illinois Brick situation would lead to a flood of lawsuits, each of which would present enormously complex problems of proof.
Consider, for example, what would happen if everyone who eats breakfast cereals sued the vitamin manufacturers. No doubt allowing such a right to sue would lead to some just recoveries, but we have to weigh that against the very real possibility that it would simply overwhelm our already overburdened courts. So, for those reasons, I am deeply skeptical of any attempt to overturn Illinois Brick. I am sympathetic to Mr. Minge's desire to see justice done, but in order for that to happen for anyone, the courts have to be able to function.
Page 22 PREV PAGE TOP OF DOC The bill covers a lot of other issues in the antitrust area, and I don't have time to get into all of them now. We can talk about the others as the hearing proceeds.
[The prepared statement of Chairman Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today the Committee holds a hearing on H.R. 4321, the ''Antitrust Enforcement Improvement Act of 2000,'' introduced by Congressman David Minge of Minnesota. The bill deals with a variety of antitrust issues, some of which are quite controversial.
So, let me say a word about why I scheduled this hearing. I do not support several aspects of the bill. However, I served in the minority in this body for twenty years. Many times I experienced the frustration of putting my heart into a legislative effort only to have it die without ever even getting a hearing. During those long years, I vowed to myself that if I became a chairman, I would try to treat a Member who cared passionately about a bill differently from the way I had been treated.
Mr. Minge convinced me in a series of conversations that he has put in a lot of hours working on H.R. 4321 and that he does indeed care about it very much. So, I have agreed to give him this hearing in keeping with my vow to myself. No one should take that as any reversal of any of my longstanding positions on these issues.
Now let me review a couple of those positions. With respect to agriculture, I believe that the antitrust laws must be vigorously enforced in that industry as they should be in all other industries. I do not believe that we need to change the antitrust laws in any special way to deal with current problems in agriculture nor do we need to move any antitrust authority or merger review authority to the Department of Agriculture. I understand that Mr. Minge's bill does not call for that, but much of the current debate revolves around those issues.
Page 23 PREV PAGE TOP OF DOC
I believe that antitrust authority ought to reside with the antitrust enforcers at the Department of Justice or the Federal Trade Commission who work on general competition principles that apply to all industries equally. Our experience with antitrust authority placed in the hands of agencies specific to one industry is not a good one. One need look no further than the current situation in the railroad industry, from which farmers have suffered, to see what happens when you place antitrust authority in the hands of agencies specific to a particular industry. I do not say that to impugn the railroad regulators at all. But it is just difficult for regulators to have all the specific expertise necessary to regulate one industry and all the broader expertise necessary to enforce the antitrust laws.
Another important issue in Mr. Minge's bill is the legislative reversal of the Supreme Court's 1977 Illinois Brick decision. For those of you who are not antitrust specialists, the Illinois Brick decision held that only the first purchaser in a chain of distribution could sue for damages caused by an antitrust conspiracy. For example, in the recent vitamin price fixing case, the vitamin companies sold largely to food manufacturers, like cereal companies, rather than consumers. Under Illinois Brick, only the cereal manufacturers can sue the vitamin companies. The ultimate consumers of the cereal cannot bring suit. Mr. Minge proposes that we overturn that decision and let the ultimate consumers sue.
At a theoretical level, that is appealing, and it led to a great deal of legislative ferment in the late 1970s and the 1980s. The issue has been relatively quiet in recent years. My concern is for the practical. Our federal courts are absolutely choked with litigation. Anyone who has followed our recent struggles with the asbestos issue is well aware of that. Allowing consumers to sue in an Illinois Brick situation would lead to a flood of lawsuits each of which would present enormously complex problems of proof. Consider, for example, what would happen if everyone who eats breakfast cereal sued the vitamin manufacturers. No doubt allowing such a right to sue would lead to some just recoveries, but we have to weigh that against the very real possibility that it would simply overwhelm our already overburdened courts. So, for those reasons, I am deeply skeptical of any attempt to overturn Illinois Brick. I am sympathetic to Mr. Minge's desire to see justice done, but in order for that to happen for anyone, our courts must be able to function.
Page 24 PREV PAGE TOP OF DOC
The bill covers a lot of other issues in the antitrust area, and I do not have time to get into all of them here. We can talk about others as the hearing proceeds. So, with that, I will stop and turn to Mr. Conyers for his opening statement.
Mr. HYDE. Mr. Conyers is delayed. When he comes, I will yield to him, if he has a statement. And Mr. Scott indicates he has none.
Does anybody else have one?
Mr. PEASE. Mr. Chairman.
Mr. HYDE. Mr. Pease.
Mr. PEASE. Thank you, Mr. Chairman. I do not have a prepared statement, but I wish to affirm from personal experience your observations regarding our colleague Congressman Minge's commitment to this issue.
As you know, earlier this year, thanks to the chairman, several of us had requested hearings on the potential anticompetitive consequences of consolidation in the agriculture industry, and the committee did hold hearings on that subject and Congressman Minge was one of the members who immediately, upon the posting of that notice, came to talk to a number of us, including me, about his concerns in this area, about his tremendous fears of what was happening, frustration of wanting to find a solution, but not candidly being entirely certain what it might be. And we tossed around some ideas; some of those are here. Others that are here were not discussed at that time and with which I have some reservation, but I can attest, from personal conversations, that Congressman Minge has been working very hard in this very difficult area and, as a colleague and one who shares many of the same kinds of constituents, I am grateful for your work.
Page 25 PREV PAGE TOP OF DOC
Mr. HYDE. Mr. Goodlatte.
Mr. GOODLATTE. Mr. Chairman, I have a brief opening statement.
I first want to thank you for holding this hearing and to welcome my colleague from the House Agriculture Committee, Mr. Minge, with whom I have worked closely over the years on a number of issues that are important to farmers across the country.
Mr. Chairman, while Mr. Minge and the witnesses on our second panel today can all speak with authority on agriculture issues, the legislation that we are examining today is not primarily agricultural in nature. The bill may be intended to address concerns raised by some within the agriculture community, but it will impact several additional areas of commerce by fundamentally altering our antitrust laws.
The Senate has held a number of recent hearings on these issues, and this committee considered agribusiness consolidation earlier this Congress. At these hearings, the Justice Department has made clear its views that antitrust officials are doing an effective job, and they are not requesting additional authority for the agriculture sector of the economy or for any other sector. So not only is this legislation unnecessary from the agriculture perspective, but I am concerned that we will not be hearing this afternoon from the Department of Justice or neutral antitrust experts who can detail the effects of this legislation on buyers, sellers, and manufacturers in other sectors of the marketplace.
Mr. Chairman, from my examination of these issues at both the Agriculture and Judiciary Committees, I am convinced that antitrust law and other business and security laws are more than adequate to prevent large companies from taking over smaller companies when such a move clearly does not make good economic sense. I am interested in hearing why these witnesses feel smaller companies are at such risk and why their views differ from the views of the Department of Justice.
Page 26 PREV PAGE TOP OF DOC
While agricultural concerns are the basis of this bill, the bill before us makes significant changes in overall antitrust law impacting all of American industry. Before taking such a serious step, I believe we should gain the clearest possible understanding of what the bill's supporters are trying to accomplish.
I look forward to hearing from our witnesses today. Thank you.
Mr. HYDE. Thank you.
Our first panel consists of the sponsor of H.R. 4321, Congressman Minge. He represents the Second District of Minnesota and is a graduate of St. Olaf College and the University of Chicago Law School. Before coming to Congress, he practiced law in his hometown of Montevideo, where he represented a wide range of clients and taught and lectured widely. He was first elected to Congress in 1992.
We will adhere to our usual practice of not questioning congressional witnesses.
STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MINGE. Thank you, Mr. Chairman, for that nice introduction. I wish that we did have an opportunity for you to question me. I would welcome the dialogue that would produce.
Page 27 PREV PAGE TOP OF DOC
I would also like to thank you for your brief summary of some of the salient provisions of the legislation that I have introduced and your observations on the subject areas.
I would like to begin my testimony by simply observing that over the last several years we have seen mergers and consolidations at an unprecedented rate. These have occurred in all sectors of our economy, and it seems, as they occur in one sector of the economy, they lead to mergers and consolidations in yet another; and also they lead to mergers and consolidations at yet different levels of that sector of the economy. Agriculture is a good example of this.
In the hog packing, meat packing sector we have had some mergers, but probably as much concern over what is happening at the supermarket or at the retail level and the feeling that if there is concentration at the retail level it takes larger entities at the meat packing level to deal with those consolidations at the retail level. So this is one sector. This is one experience that I think most of us can identify with because we watch the grocery ads in the newspapers.
But we also know in rail transportationjust to take one series of mergers, Union Pacific merged with Chicago Northwestern; it was a Midwest rail merger situation. We had a crisis in my congressional district that arose out of that merger. Subsequently we saw the Union Pacific merge with the Southern Pacific and yet another series of crises for shippers, acknowledged by the management of the Union Pacific that things had gone awry.
Page 28 PREV PAGE TOP OF DOC Similarly, we see that tremendous savings are projected from the mergers and consolidations, yet when you examine the financial statements of these firms 1, 2, 3 years subsequent to the merger, quite often the savings have not been realized. These mergers have been oversold to the public.
Well, with the explosion of growth in the high-tech sector and changes in our economy, and a recognition that our economy is, in essence, based on a competitive model, I think all of us have a great deal of interest in the integrity of that competitive model; and it is my concern with respect to the integrity of competition in our society that has led me to draft and to introduce this legislation. The legislation has essentially six parts, and I would like to quickly summarize those in the time that I have available.
First, it would broaden the antitrust laws to expressly state that the effect of mergers and anticompetitive conduct on suppliers and on competitors is as much a concern in enforcement of antitrust laws and the results from those enforcements as the effect on consumers. To date, we have seen varying decisions from the Supreme Court. I think at this point the effect on suppliers and competitors is being recognized. But it is as a result of case law, it is fragile, and I feel it should be a part of the Sherman and Clayton Acts.
The second portion of this bill would reverse the Illinois Brick decision. And, Mr. Chairman, you have already summarized that. If the caseload in the courts and the complexity of large class action lawsuits makes recovery for individual consumers inadvisable, I expect there are other ways this could be structured. States could sue under the Federal antitrust laws on behalf of the consumers within those States or other units of government. Or if it was something that was truly national in scope, it could be litigation maintained by the Federal Government on behalf of citizens of this country.
Page 29 PREV PAGE TOP OF DOC
In any event, I feel it is time to revisit the Illinois Brick decision; that we have had a number of cases that have arisen and really illustrated quite graphically the injustice that results when those that violate the antitrust laws are not held liable and responsible for the damages to the tertiary and subsequent damaged parties.
The third portion of this bill would increase the penalties from $10 million to $100 million for criminal violations of the antitrust laws. I have been advised the $10 million penalty level is nominal for many of the businesses in our society and that such an increase is long overdue.
The fourth provision of this bill would amend the Scott-Hart-Rodino legislation that is currently on the books with respect to the fees that are charged for the merger and consolidation petitions that are filed with the Federal Trade Commission and the Antitrust Division of the Justice Department. I believe it is fairly well recognized that the single-fee level that currently is in force is not appropriate, because in some cases we are charging firms that are merging too much for the review, and certainly in many cases we are charging far too little for the magnitude of the consolidation that is being proposed and has to be studied.
There is legislation which I understand has been filed by colleagues in the House, and in addition, I believe that the chairman of the Senate Judiciary Committee has had his own proposal considered on the Senate side. And I think if any piece of this bill is something that is at all timely in the short period remaining in this session, it would be this provision with respect to fees under the Scott-Hart-Rodino legislation.
Page 30 PREV PAGE TOP OF DOC
The fifth portion of my bill deals with the Antitrust Division of the Justice Department and agriculture. There has been a great deal of frustration in the farm community over the effects of concentration and perceived violations of the antitrust laws on the success of farmers in this Nation. While we have had a robust economy generally in the United States and unprecedented prosperity, farming has been left out, and farmers are seeking answers as to why they have suffered in the American economy in the 1990's.
I believe that manyin fact, I know many farmers believe that it is the lack of enforcement of the antitrust laws that has caused part of their plight. I think if they knew that the Justice Department had an identified individual that was overseeing violations or possible violations of the antitrust laws in the agricultural sector, agribusiness sector, it would give the farming community increased confidence in the enforcement of these laws.
Finally, I would like to point out that the bill has a couple of provisions that are probably within the jurisdiction of the Agriculture Committee. These deal with the Packers and Stockyards Act and a study of concentration in the ag sector.
I would like to thank you and the members of this committee for the opportunity to testify with respect to my legislation.
I would again like to thank you, Mr. Chairman, for your very gracious consideration of this legislation and the spirit with which you and I have discussed this and your interest in this area. I have told many people that it is my impression that you share the passion that many of us have that small businesses in our country, including farmers, have a continuing opportunity to be a vital part of the American economy; that the mega-merger trend is not something that we are going to stand by idly, watch develop and bring to its knees small businesses in the United States. Thanks again.
Page 31 PREV PAGE TOP OF DOC
Mr. HYDE. Thank you, Mr. Minge.
[The prepared statement of Mr. Minge follows:]
PREPARED STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify today.
First of all, I want to thank Chairman Hyde for holding a hearing on my legislation. I have talked with him often regarding this important topic and appreciate the opportunity to testify before the committee. Thank you Mr. Chairman. Over the past few years, there is virtually daily news about another merger or acquisitionTime Warner-AOL, Exxon-Mobil, USWest-Qwest, United Airlines-US Airways, Cargill-Continental Grainto name a few. These completed or proposed mergers and acquisitions along with the recent Microsoft rulings, have focused the public's attention on our nation's antitrust laws. The long, and often tortuous legal proceedings have highlighted the advantages and disadvantages of our current system. Additionally, many of us from agricultural states have been shocked at the rapid pace of consolidation in agribusiness. Farmers have no negotiating leverage and have little choice but to accept the prices that the large suppliers and distributers charge for production inputs. They find they must sell their farm products to huge processing companies or to elevators who are usually captive shippers on rail lines.
Page 32 PREV PAGE TOP OF DOC With the explosion of our high-technology economy, coupled with ever expanding global business practices, it is an excellent opportunity for the Committee to examine our existing anti-trust statutes and explore improvements to provide the federal government with the tools necessary to maintain a competitive marketplace in our changing economy.
I want to share with the Committee my concerns regarding antitrust laws, mergers, consolidation and the resulting high levels of concentration in the economy, generally, and the agriculture sector, in particular. To address some of these concerns, I recently introduced, HR 4321, The Antitrust Enforcement Improvement Act of 2000.
Without antitrust reform, consumers and small producers will not be protected from predatory and monopolistic practices. We are all at risk whether it is when we buy personal computers, take an airplane trip, or buy groceries. I have spent much time and effort with anti-trust scholars, academicians and attorneys trying to identify policies that can strengthen our nation's antitrust laws. My legislation contains several initiatives that address current antitrust issues, but is no means the ''be all, end all'' solution. It is a start and I urge the Committee to build upon my proposal to strengthen our existing antitrust laws.
In summary, HR 4321, The Antitrust Enforcement Improvement Act of 2000, does the following:
1) Broadens the existing antitrust laws to recognize that anti-competitive conditions should not be limited to adverse effects on consumers and/or purchasers. HR 4321 would include those who sell or provide services and competition to the list of protected persons.
Page 33 PREV PAGE TOP OF DOC2) Changes the rule established in the Supreme Court's Illinois Brick decision. Antitrust violators would be liable to both persons who were directly and indirectly affected by antitrust violations. Violators should not avoid liability costs arising from violations because damages may have been passed to others.
In 1977, the Supreme Court ruled in the Illinois Brick case that only those doing business directly with violators have the right to sue for compensation. Because initial purchasers usually pass the higher prices that result from violations of antitrust laws onto consumers through a series of intermediaries, consumers are unfairly denied compensation in the courts. By reversing the Illinois Brick decision, we would expand the opportunity for consumers to get reparations, making our antitrust laws more effective and fair for all those impacted. The wisdom of this is confirmed by the fourteen states and the District of Columbia which have rejected the Illinois Brick principle. This legislation is consistent with these state statutes.
The Microsoft case is a perfect example of how consumers can be left out of an antitrust suit. The Consumer Federation of America estimated that, during the 3-year period covered by the case, consumers paid between $35 and $45 too much per personal computer pre-loaded with Microsoft's operating system. This amounts to over $4 billion of overcharges in the United States alone.
3) Increases the maximum penalty that may be imposed in criminal antitrust cases from $10 million to $100 million. I believe that violators should face stiffer penalties more in line with the scale of today's economy. Furthermore, these additional revenues would fund a more responsive and thorough antitrust enforcement team at no cost to the tax payer.
Page 34 PREV PAGE TOP OF DOC
4) Modifies the Hart-Scott-Rodino Pre-merger Filing law in order to facilitate a higher level of scrutiny for the largest mergers. (For example, the FTC/DOJ could annually determine a threshold transactional size for the largest 5% of reportable mergers.) These largest mergers frequently have a dramatic impact on the public in terms of plant closings, layoffs, community desertions, etc. They also (though not in all cases) require more governmental time and attention because of the diversity of markets and issues that must be analyzed.
a. Requires that for this limited number of mergers, the merging companies would file information with the public as to the nature of the merger, the markets that are involved, and explanations for any claimed efficiency gains (including anticipated layoffs and plant closings).
b. Makes available data filed with DOJ/FTC available to states in which the merging companies do business.
c. Establishes a tier structure for filing fees that increases with the size of the transaction. Today, all firms pay $45,000. This could be reduced somewhat for a category of small transactions, and increased quite significantly for the largest mergers.
Filing fee tier structure:
$25,000 if less than $100 million
$50,000 between $100250 million
$100,000 between $250 million$1 billion
$150,000 over $1 billion.
Page 35 PREV PAGE TOP OF DOCd. Increases the agency time to analyze ''second request'' information. They should have a statutory right to 30 business days for the largest mergers.
5) Establishes a senior official position for agriculture at the Antitrust Division of the Department of Justice.
6) Specifies what are unfair practices in livestock purchasing and establishes a commission to conduct a review of the Packers and Stockyards Act to determine what definitions may be needed to strengthen the laws or improve enforcement. Farmers remain concerned about the increasing consolidation among grain purchasers, seed companies, and other agribusinesses in the agriculture economy. To date, we have held hearings and considered legislation on this issue, but in order to obtain hard data, HR4321 establishes a federal commission to investigate the harmful effects of consolidation and determine the level of injury to individual producers and consumers of agricultural products. These provisions are probably within the jurisdiction of the Agriculture Committee.
In addition to passage of HR4321, I believe Congress must increase funding levels for the Antitrust Division and the Federal Trade Commission to enable them to better deal with the responsibilities they have. We cannot short change these important agencies. The responsibilities and caseloads of these agencies continue to expand. Our nation's consumers and producers depend on the fair operation of our free market economic system. We need strong laws with strong teeth. I feel it is imperative that we have the means necessary to effectively enforce our nation's antitrust laws.
Thank you for holding a hearing on my legislation. I look forward to working with you on this important endeavor.
Page 36 PREV PAGE TOP OF DOC
Mr. HYDE. Our second panel consists of three private witnesses with various perspectives on the issues raised by H.R. 4321. Our first witness is, my staff has printed here, an old colleague; I don't necessarily subscribe to thata young colleague. Senator Howard Metzenbaum, who is now chairman of the Consumer Federation of America.
Senator Metzenbaum is a graduate of Ohio State University and its law school, and he began his political career in the Ohio legislature, where he served in both the House and the Senate. And after his service in the legislature, he founded his own law firm and also ran several of his own businesses, including an airport parking company and a newspaper company.
He was first elected to the United States Senate in 1976, where he served until 1994. On his retirement, he took his current position with the CFA.
Our next witness is Mr. Bert Foer, the president of the American Antitrust Institute. He is a graduate of Brandeis University, Washington University, and the University of Chicago Law School. He served as an assistant director of the Federal Trade Commission's Bureau of Competition, as the CEO of a chain of retail jewelry stores, and as a lawyer in private practice. He founded the AAI in 1998.
Our third witness is Mr. Leland Swenson, president of the National Farmers Union. He has been involved in farming issues all of his life. He began his career as president of the South Dakota Farmers Union, was first elected president of the National Farmers Union in 1988, and has been reelected every 2 years since then. He has also served on the boards of numerous other farmer organizations, including the International Federation of Agricultural Producers.
Page 37 PREV PAGE TOP OF DOC
We welcome all of you and look forward to your testimony, and, Senator Metzenbaum, please proceed.
STATEMENT OF HON. HOWARD METZENBAUM, A FORMER UNITED STATES SENATOR FROM THE STATE OF OHIO
Mr. METZENBAUM. Thank you very much, Mr. Chairman. It is a privilege to again appear before your committee and have the opportunity to work with you and some of the other members of this committee with whom I had prior experience.
As the chairman has stated, my name is Howard Metzenbaum, and I am here today as the chairman of the Consumer Federation of America, a nonprofit association of more than 260 proconsumer organizations. CFA, for which I work on a noncompensated basis, was founded in 1968 to advance the consumer interest. I am a lawyer, the former Chair of the Senate Antitrust Subcommittee. I am a staunch advocate of strong and fair antitrust laws.
Bert Foer will provide the committee with a detailed 11-page discussion of what is wrong with the Supreme Court's 1977 Illinois Brick decision and how best to correct it. I associate the Consumer Federation of America with Bert's testimony and briefly touch on some of the key points that he will be making.
Illinois Brick allows only those directly injured by monopoly or collusive behavior to seek redress in the Federal courts. What that means is, if a manufacturer engages in illegal price-fixing, for example, charging a retailer a price above the competitive price, the consumers who ultimately pay the overcharge are not permitted to recover any damages. They are nobody; there is no consideration given to them at all. This is fundamentally unfair and a particular sore point with me.
Page 38 PREV PAGE TOP OF DOC
Just 1 year ago, in fact, in September 1999, I appeared before the U.S. District Court judge hearing the so-called vitamin antitrust class actions which resulted in the largest settlement ever made in an antitrust lawsuit. In that case, the Justice Department uncovered an international conspiracy among pharmaceutical firms to fix prices for vitamins. The fines reached almost a billion dollars, and the settlement on behalf of the middlemen, corporate giants like Kellogg, General Mills and Kraft Foods, was more than $1 billion. The trouble was, the corporate beneficiaries of that settlement were not really the injured parties. In all likelihood, they had long since passed on the increased cost of those vitamins to their customers, the consumers who bought their products.
The sad fact is that under that much-heralded settlement, consumers were not reimbursed for any of the additional costs they incurred in overpriced vitamins in food. A settlement of over a billion dollars, plaintiffs' lawyers receiving hundreds of millions of dollars in fees, and not a damn nickel for consumers, the ones who were truly hurt.
Now, I tried to stick my nose into that hearing, the settlement before the judge, in an attempt to provide some relief to consumers. I asked the court and I asked plaintiffs' counsel as well, unsuccessfully I might say, to set aside some portion of this incredibly large settlement for antihunger programs around the Nation. It simply shocked my conscience that consumers, especially low-income consumers who paid billions of dollars in additional costs as a result of the companies' actions, did not share in the settlement, not one single penny. Neither the court nor the plaintiffs' attorneys evidenced any real concern for the ultimate buyers, the consumers who had paid the bill.
Page 39 PREV PAGE TOP OF DOC And I say with some regret that the judge practically threw me out of the courtroomnot physically, but almostbecause I continued to stand on my feet arguing that it wasn't right that the consumers not share in some respect in this settlement, not necessarily all the consumers, but at least hungry consumers in the country. I did not prevail. I totally failed.
Now, H.R. 4321 attacks this problem legislatively. By overruling the Illinois Brick decision, it returns to consumers and other indirect purchasers the right to recover damages for injuries caused by antitrust violations. Roughly half the States already have acted to negate the impact of Illinois Brick. Their consumers can, with varying limitations, bring State actions to recover damages.
As more States act, it becomes increasingly obvious that a single Federal solution would be more appropriate. H.R. 4321 is that solution, and I commend Congressman Minge and his cosponsors for offering it. And you, Mr. Chairman, I take my hat off to you for holding this hearing in the closing days of this Congress. Some would have been inclined to sweep it under the rug and say we will come back next year. You found time for this hearing, and I salute you and say to you how pleased we, speaking for consumers, are that you found time to hear this bill.
Let me address briefly some of the other provisions of the bill, and I will be very brief.
Restructuring the filing fees will provide resources for Federal regulatory agencies to do their jobs. The bill also increases the maximum statutory fine in antitrust cases from $10 million to $100 million. My own opinion is the actual amount could actually be higher, but I am at least comfortable with the $100 million figure. This reflects the magnitudes of today's economy and potential damages from anticompetitive activity. As Congressman Minge says, the $10 million maximum fine is simply out of date.
Page 40 PREV PAGE TOP OF DOC
The Consumer Federation of America sympathizes with the plight of the Nation's remaining small family farmers and opposes economically harmful concentration in food production, processing, distribution and retailing. It has called on the Justice Department and the Federal Trade Commission to vigorously investigate pending mergers and vigorously prosecute those found to be in violation of antitrust laws.
The legislation would create a blue ribbon commission to study concentration in food and agriculture. It would also permanently establish a senior position in the Justice Department's Antitrust Division, focusing specifically on agriculture issues.
Mr. Chairman, it is late in the session and it is not realistic to think that this can be passed during this session. But this is the minimum that Congress should do to address this problem, and we do hope that whoever is the leadership in the next Congress will provide leadership in moving forward on the Minge bill.
Thank you very much, Mr. Chairman.
Mr. HYDE. Thank you.
[The prepared statement of Senator Metzenbaum follows:]
PREPARED STATEMENT OF HON. HOWARD METZENBAUM, A FORMER UNITED STATES SENATOR FROM THE STATE OF OHIO
Page 41 PREV PAGE TOP OF DOC My name is Howard Metzenbaum. I am here today as chairman of the Consumer Federation of America, a nonprofit association of more than 260 pro-consumer organizations. CFA, for whom I work without pay, was founded in 1968 to advance the consumer interest through advocacy and education. Most of our members are national, state and local advocacy organizations and consumer-owned nonprofit cooperatives, such as credit unions and housing co-ops.
I am also here as a lawyer, as a former chair of the Senate Antitrust Subcommittee and as a staunch advocate of strong and fair antitrust laws. In addition, I serve on the advisory board of the American Antitrust Institute, a nonprofit organization that supports increasing the effectiveness and reach of our antitrust laws.
While the Consumer Federation of America enthusiastically supports all the provisions of H.R. 4321, I want to focus my comments primarily on what I consider to be the most important aspect of the billthat is, the provisions overruling the effect of the Illinois Brick decision.
Bert Foer of the Antitrust Institute has provided the committee with a detailed, 11-page discussion of what's wrong with that 1977 Supreme Court decision and how best to correct it. I won't attempt to duplicate what Bert has done. Instead, I will simply associate the Consumer Federation of America1 with Bert's testimony and briefly touch on some of the key points.
Illinois Brick allows only those directly injured by monopoly or collusive behavior to seek redress in the federal courts. What that means is this: if a manufacturer engages in illegal price fixingfor example charging a retailer a price above the competitive pricethe consumers who ultimately pay the overcharge are not permitted to recover any damages.
Page 42 PREV PAGE TOP OF DOC
This is fundamentally unfair and a particular sore point with me. Just one year ago, in fact, in September 1999, I appeared before the U.S. District Court judge hearing the so-called Vitamin Anti-Trust Class Actions, which resulted in the largest settlement ever in an antitrust lawsuit. In that case, the Justice Department uncovered an international conspiracy among pharmaceutical firms to fix prices for vitamins. The fines reached almost $1 billion and the settlement on behalf of the middlemencorporate giants like Kellogg, General Mills, and Kraft Foodswas more than $1 billion. The trouble was the corporate beneficiaries of that settlement weren't really the injured parties. In all likelihood, they had long since passed on the increased costs of those vitamins to their customers, the consumers who bought their products. And the sad fact is, under that much-heralded settlement, consumers were not reimbursed for any of the additional costs they incurred in overpriced vitamins and food. A settlement of over a billion dollars, plaintiffs' lawyers receiving millions in fees, and not a damn nickel for consumers, the ones who were truly hurt.
Nor was this the only time recently the interests of consumers have been overlooked in the settlement of a highly publicized price-fixing case. Three years earlier, in October 1996, Archer Daniels Midland pled guilty to inflating the price of lysine, an important feed additive. It was fined $100 millionat the time the largest criminal antitrust fine in history. ADM's actions had added millions to consumers' grocery bills for years. And yet, once again, those most affected never received a cent in compensation.
In the vitamin case, in an attempt to provide some relief to consumers, I asked the courtunsuccessfullyto set aside some portion of the settlement for anti-hunger programs around the nation. It simply shocked my conscience that the consumersespecially low-income consumerswho paid billions of dollars in additional costs as a result of the companies' actions did not share in the settlement. Neither the court nor the plaintiffs' attorneys evidenced any real concern for the ultimate buyers, the consumers who had paid the bill.
Page 43 PREV PAGE TOP OF DOC
H.R. 4321 attacks this problem legislatively. By overruling the Illinois Brick decision, it returns to consumers and other indirect purchasers the right to recover damages for injuries caused by antitrust violations. Roughly half the states have already acted to negate the impact of Illinois Brick. Their consumers can, with varying limitations, bring state actions to recover damages. Other states are likely to follow suit as they come to realize that in major price-fixing scandals, their consumers will be without remedy. As more states legislate their own repeals, it becomes increasingly obvious that a single federal solution is most appropriate. H.R. 4321 is that solution and I commend Congressman David Minge and his cosponsors for offering it.
Let me briefly address some of the other provisions of the bill. H.R. 4321 proposes a new fee structure for pre-merger notifications, with the fee rising along with the size of the transaction. The current rash of mergers has simply stretched the ability of federal agencies to oversee them. Restructuring the filing fees will provide more resources for these agencies to do their jobs. The bill also increases the maximum statutory fine in antitrust cases from $10 million to $100 million. This reflects the magnitude of today's economy and potential damages from anti-competitive activity. As Congressman Minge says, the $10 million maximum fine is simply out of date.
Finally, H.R. 4321 addresses the issue of increasing concentration in food and agriculture. There is no question increased consolidation has occurred. A much more difficult question is whether growing concentration is or will soon lead to higher retail prices for consumers. There are numbers pointing in various directions.2 But clearly this is an area that should be watched carefully.
Page 44 PREV PAGE TOP OF DOC
The Consumer Federation of America sympathizes with the plight of the nation's remaining small family farmers and opposes economically harmful concentration in food production, processing, distribution and retailing. It has called on the Justice Department and the Federal Trade Commission to vigorously investigate pending mergers and vigorously prosecute those found to be in violation of antitrust laws.
Compared with other bills addressing concentration in the 106th Congress, the provisions of H.R. 4321 are modest. The legislation would create a blue-ribbon commission to study concentration in food and agriculture. It would also permanently establish a senior position in the Justice Department's antitrust division focusing specifically on agriculture issues. This is the minimum Congress should do to address this problem.
Mr. HYDE. Mr. Foer.
STATEMENT OF ALBERT A. FOER, PRESIDENT, THE AMERICAN ANTITRUST INSTITUTE
Mr. FOER. Thank you, Mr. Chairman. May I saySenator Metzenbaum, I thank you for endorsing our written statement. Senator Metzenbaum has been described as a force of nature, a veritable institution and powerhouse in antitrust, and I am grateful that he is a member of the advisory board of the American Antitrust Institute.
I am going to address my remarks to the desirability of Congress providing a legislative solution to the problems caused in indirect purchaser antitrust cases by three Supreme Court decisionsHanover Shoe, Illinois Brick, and ARC America. This is all laid out in the written testimony. I will not get into the legal details.
Page 45 PREV PAGE TOP OF DOC
Efforts to pass a Federal legislative solution have failed in the past, but the problems for consumers that were predicted way back in 1977 after the Illinois Brick decision have only grown worse. Today, we have a situation that is injurious to consumers, to businesses, and to the administration of justice. The immediate impact of Illinois Brick was to deprive many consumers and businesses of the ability to be made whole from antitrust injuries. Indirect purchasers are usually the ones who pay all or most of the illegal overcharges caused by antitrust violations.
Because of this, States began passing what are known as Illinois Brick repealers, statutes to specifically permit indirect purchasers to recover damages under the State antitrust laws. The number of jurisdictions providing for indirect purchaser actions has grown to approximately 24, but it is really a fairly squishy number. It may be smaller. Twenty-four is the largest that anyone cites. The resulting dual system varies greatly from State to State.
As citizens in nonrepealer States recognize that they are not able to share in the large recoveries from recent international cartel cases, as the Senator mentioned, it can be predicted that they will bring new pressures on their legislatures to pass additional repealer statutes. H.R. 4321 would permit any indirect purchaser to recover damages. This is the critical center of the reform. The devil, of course, will lie in the details.
For example, the recovery allowed by the bill is only with respect to the amount of the initial overcharge proved to be passed on to the victim. This provision oversimplifies the calculation of damages, and I don't think it would be acceptable to consumers because it means that the indirect purchaser may not be fully compensated and violators may be unduly insulated.
Page 46 PREV PAGE TOP OF DOC
We also note that the bill may inadvertently reduce the deterrent effect of antitrust by permitting a pass on defense, even in a case where there is no indirect purchaser in the litigation.
H.R. 4321 provides that in a class action the fact of injury and the amount of damages may be proven on a class-wide basis without requiring proof of such matters by each individual member of the class. It authorizes attributing damages in the ratio of an individual's purchases or sales to those of the class as a whole. This is a very important provision because many indirect purchaser actions at the State level have been defeated at the class certification stage.
The American Antitrust Institute is delighted that Congressman Minge has introduced and the Judiciary Committee has taken up the indirect purchaser issue. We at the AAI have established an internal committee that has experts in the antitrust community who are working on this topic, and our committee will be at your disposal as the legislative process moves forward.
We recognize that reform in this area is complicated and politically very difficult. It is particularly important that reform at the Federal level not have the unanticipated impact of reducing in practice the rights and remedies that currently exist for consumers in Illinois Brick repealer States. Many of these States work together on indirect purchaser cases, often in cooperation with private parties, and they achieve a notable success level of providing justice to their citizens.
Page 47 PREV PAGE TOP OF DOC Recognizing that many in the Federal Judiciary are not comfortable with consumer rights and reluctant to try class actions, it is imperative that any Federal legislation be clear, strong and precise, and that its implications be tested out by reference to the body of expertise that has come into existence in those States that have already repealed Illinois Brick.
We hope that your hearing today will be seen from the future as a landmark in a process that will build political support, develop a firm empirical base for reform, and ultimately lead to a major advance in justice for consumers and businesses and in efficiency for the Nation's judicial systems.
Mr. HYDE. Thank you very much, Mr. Foer.
[The prepared statement of Mr. Foer follows:]
PREPARED STATEMENT OF ALBERT A. FOER, PRESIDENT, THE AMERICAN ANTITRUST INSTITUTE
I am Albert A. Foer, President of the American Antitrust Institute, an independent non-profit research, education and advocacy organization(see footnote 1) that supports legislation to overturn the Illinois Brick decision(see footnote 2) and other reforms aimed at increasing the effectiveness and reach of the antitrust laws by assuring both that victims will be compensated and that putative violators will be deterred.
We have been asked to focus on Section 3 of H.R. 4321, which provides amendments to the Clayton Act. I will address my remarks to the desirability of Congress providing a broader federal remedy for the problems caused in indirect purchaser antitrust cases by three Supreme Court decisions. Efforts to pass a federal legislative solution have failed in the past, but the problems for consumers that were predicted back in 1977 after the Illinois Brick decision was announced have only grown worse. Today, we have a situation that is injurious to consumers, to businesses, and to the administration of justice.
Page 48 PREV PAGE TOP OF DOC
The Clayton Act provides for damages to be awarded to ''any person'' who is ''injured in their business or property'' by an antitrust violation.(see footnote 3) The antitrust laws do not provide, however, how damages are to be handled when damages are passed on from one set of victims to another. To simplify the issues dramatically, suppose that a manufacturing cartel violates the antitrust laws by fixing the prices of a particular product at a level above what would be the competitive price. The product is then sold to a wholesaler, who subsequently re-sells it to a retailer, who finally re-sells it to an end-use consumer. The direct purchaser is the wholesaler. Both the retailer and the consumer are indirect purchasers. It is likely that some, and sometimes all, of the monopoly overcharge (the difference between the competitive price and the illegally fixed price) was passed through the various levels of the distribution chain. The principal question is, at which levels do victims have the right to recover their damages?(see footnote 4)
The question began to appear in the Supreme Court with the Hanover Shoe case(see footnote 5) in 1968, where the issue was whether a defendant in an antitrust case would be allowed to argue that the plaintiff, a direct purchaser, had passed on the damages and therefore hadn't been injured. The Court rejected that idea, not wanting to complicate proceedings or undermine the incentive of claimants to bring treble damage suits.
This left open, however, an important question: if ''passing on'' could not be used defensively, could it nevertheless be used offensively? That is, could an indirect purchaser recover for illegal overcharges that were passed on to it? This was answered by the Supreme Court in 1977, in Illinois Brick. The Court held that an indirect purchaser may not recover damages. Hanover Shoe applied equally to plaintiffs and defendants. The Court also believed that the calculation of damages and their allocation among different levels of indirect and direct purchasers would be extremely difficult and cumbersome. Finally, the Court said that the deterrent purposes of the antitrust laws would be better served if the only plaintiffs were those with the largest stake, namely, in the Court's minds, the party or parties who were in privity with the law-violator. This opinion was rendered at a time when class actions were less well-established than they are today and the Court felt that indirect purchasers, each having only a small stake in the damages, would not have as much incentive to privately enforce the antitrust laws as direct purchasers. However, in the aggregate, consumer stakes frequently are significantly larger than any other group's. It should also be noted, as the Supreme Court has frequently stated, the purpose and ultimate test of the antitrust laws is consumer benefit, so it seems particularly odd that injured consumers are not made whole under the antitrust laws.
Page 49 PREV PAGE TOP OF DOC
The immediate impact of Illinois Brick was to deprive consumers, indirect purchasers between the consumers and the direct purchasers, and end-usersincluding many businesses of all sizesof the ability to be made whole from antitrust injuries. Such businesses and consumers are rarely the initial or direct purchasers of goods and services whose prices were artificially inflated, but they are usually the ones who paid all or most of the overcharges. Because of this inequity, states began passing what are known as Illinois Brick Repealer statutes to specifically permit indirect purchasers to recover damages under state antitrust statutes. By 1989, approximately fourteen states and the District of Columbia had passed repealers or had existing laws that could be interpreted to provide recovery for indirect purchasers.(see footnote 6) But how would concurrent state and federal authority over business practices work out, with two sets of contradictory standards in play? Were the state laws preempted by federal law?
This question was answered by the Supreme Court in 1989. In ARC America,(see footnote 7) the Supreme Court unanimously upheld the constitutionality of state indirect purchaser statutes. Since that time, the number of jurisdictions providing for indirect purchaser actions has grown to approximately twenty-four. The resulting dual system, while giving a significant proportion of the consumer population some hope of recovering damages under their state laws, varies greatly from state to state.
MANY CONSUMERS ARE DEPRIVED OF A REMEDY
From a consumer perspective, the current system is unfair if you live in a state that does not facilitate recovery for indirect purchasers in state antitrust cases. Consider the international food additive and vitamin cartel cases that generated headlines over the past couple of years. Some of the world's largest companies were caught engaging in price fixing on an enormous scale. Perhaps a billion dollars in overcharges were systematically levied on middlemen and passed on, at least to a large extent, to consumers. Some of this colluding was secretly filmed by the FBI and many of the companies settled, paying the largest penalties in antitrust history.(see footnote 8) The story of the food additive cartels is being told now in two new books aimed at a popular audience, replete with quotations from the top people at the ADM Company advising their co-conspirators that in their minds the competitor is their friend; the enemy is their customers.(see footnote 9)
Page 50 PREV PAGE TOP OF DOC
The middlemen were usually very large companies. As the direct purchasers, some of them turned around and sued the conspirators, even though there is reason to believe that they passed on most of the overcharges to consumers. One class of corporate victims reportedly settled for over a billion dollars. Others opted out of the class and are pursuing their own lawsuits. For these corporations, their recovery is to a large extent a windfall. But what about consumers?(see footnote 10) Only those who happen to live in repealer states have a chance to claim damages, and relatively few have in fact recovered damages because trial courts have frequently refused to certify a class.(see footnote 11)
What does this mean politically? As citizens in non-repealer states recognize that they were not able to share in the recovery from these dramatic international cartel cases, it can be predicted that they will bring new pressures on their legislatures to pass repealer statutes.
BUSINESSES ARE NOT GETTING THE PROTECTION THEY EXPECTED FROM ILLINOIS BRICK
Businesses that considered themselves potential targets of antitrust enforcement initially read the Illinois Brick opinion as holding forth the promise of a less threatening antitrust regime:
Only one layer of plaintiffs would be of concern. There would be no tracing of damages beyond the direct purchaser. This had several advantages for a defendant. First, there would be fewer parties to deal with. The fewer the plaintiffs, the less expensive and less disruptive the litigation. Second, any damages would be based on injury to the direct purchaser. If subsequent levels of the distribution chain added markups that increased the actual damages caused by the initial overpricing, this would be irrelevant. Third, courts, knowing that direct purchasers are likely to obtain a windfall, might well be sympathetic to defendants, exhibiting what has been called ''equilibrating tendencies of the court.''(see footnote 12)
Page 51 PREV PAGE TOP OF DOC
The potential plaintiffs would generally be limited to other businesses, which would be likely to have on-going relations with the accused. Direct purchasers would be relatively reluctant to initiate a lawsuit that would disrupt established relations, especially if they had passed on an overcharge and therefore weren't significantly damaged, and all the more so if the middlemen understand that they may be quietly sharing in some of the monopoly rents being obtained by their supplier. While it is true the Supreme Court made different assumptions, arguing that direct purchasers would have the most at stake and be most likely to bring a suit, the assumptions appear to have been wrong, resulting in a boon for defendants.
Although antitrust defendants have often been the beneficiaries of Illinois Brick, things have not always worked out to their advantage. First, antitrust defendants now must not only deal with direct purchasers in the federal courts, but with indirect purchasers in a multitude of state courts. Second, whatever the complexities of tracing damages that were eliminated from federal cases, they exist in the state cases.(see footnote 13) Third, the handling of cases in a variety of jurisdictions can be very expensive. Fourth, outcomes may be inconsistent. And fifth, as we've seen in the vitamin cases, where damages are great, corporate direct purchasers may have a large incentive to go for a windfall victory, even when the overcharges were probably passed on rather than absorbed. In other cases, they may not have significant incentive to seek recovery, preferring a private business solution, and leaving the antitrust violator with its windfall.
Overall, Illinois Brick has been a mixed bag for businesses, giving antitrust defendants a huge advantage in federal court, but creating a backlash in the states that to some extent undermines the benefits putative defendants had hoped for. For businesses that do not violate the antitrust laws and for businesses that suffer as indirect purchasers and cannot pass on their full losses, Illinois Brick presents no advantages.
Page 52 PREV PAGE TOP OF DOC
JUDICIAL ADMINISTRATION HAS BEEN HARMED
The Supreme Court in both Hanover Shoe and Illinois Brick was concerned with judicial economy. It felt that tracing damages beyond the initial purchaser would be too complicated and difficult, and it believed that direct purchasers, having the largest individual stakes and being closest to the violation, would be most likely to reflect the public's interest in the private enforcement of antitrust. Time has proven the Supreme Court to be wrong on both counts.
The widespread and still-expanding availability of a remedy under state laws has meant that complications have not been avoided. Rather, they have been displaced from a single federal case to a multitude of state cases. Further, the development of the consumer class action, while creating many complications, has demonstrated that there is a strong incentive to aggregate small damages in a manner that assures indirect purchasers can be at least as aggressive as direct purchasers (and probably more so, to the extent that they are the ones who suffer the main loss). This is not to suggest that a reform of the handling of indirect purchasers will be simple, but rather than the rationales supporting the status quo have been totally undermined.
COMMENTS ON H.R. 4321
The public has a large stake in private antitrust litigation. There are generally about ten private cases for each public case.(see footnote 14) While federal cases often dig out the fact of violation and provide injunctive relief to protect the public at large, it is up to private litigants to seek remedies for the damages suffered by individuals and businesses. The risk of private litigation not only deters antitrust violations but also provides incentive for unearthing public wrongs. ''Private attorneys general'' supplement the limited federal and state resources that are devoted to keeping our industries fairly competitive and play a role that was anticipated when the authors of the Sherman Act first introduced trebled damages.(see footnote 15) The overall scheme of antitrust requires that private litigation both provides recompense to those who are injured by antitrust violations and deterrence against such violations.
Page 53 PREV PAGE TOP OF DOC
H.R. 4321 would permit any indirect purchaser to recover damages. This is the critical center of the reform, and may be the least complicated aspect. But the devil will be in the details. For example, the recovery allowed by the bill is ''only with respect to the amount of the initial overcharge proved to be passed on to him.'' Sec. 3(d). This provision simplifies the calculation of damages, but it would not be acceptable to consumers because it means that the indirect purchaser may not be fully compensated and violators may be unduly insulated.
For example, most players in a chain of distribution apply a markup to their costs in order to determine a retail price. If the standard markup is 20% at the wholesaler and 50% at retailer level, the scenario unfolds this way: the manufacturers would have a competitive price of $10, but by agreeing among themselves to fix prices illegally, they charge, let us say, $12 (a 20% premium). In a competitive market, the wholesaler would have added 20% to $10 and sold to a retailer at $12. The retailer would have added 50% and sold to the consumer at $18.00. But with price fixing, the wholesaler adds 20% to the inflated $12 price and charges the retailer $14.40. The retailer adds 50% to this and charges the consumer $21.60. Under H.R. 4321, the damages will be the initial charge of $2 trebled to $6. But the full damages suffered by the end-use consumer will be the difference between the inflated price of $21.60 and the competitive price of $18.00, or $3.60. Trebled, that would be $10.80, nearly twice as much as H.R. 4321 would authorize. This type of increase in damages that generally occurs from level to level is entirely predictable by price fixers. Given the large amount of money that is apparently at stake, it is not clear why plaintiffs should not be permitted to prove, if they can, that their damages surpass the initial overcharge.
H.R. 4321 applies to indirect sellers as well as to indirect purchasers. The problem here is with underpayments, not overpayments. The situation arises when buyers have monopsonistic market power and collude with each other to reduce the price that they pay to purchase inputs. Monopsony has not received the amount of attention that monopoly has, yet its consequences for the economy are so similar that Professor Hovenkamp calls it ''the mirror image of monopoly.''(see footnote 16) A strong case can be made for antitrust to attack monopsony with the same vigor it applies to monopoly.(see footnote 17) In theory, both cattlemen and middlemen who have been underpaid as a result of an illegal conspiracy of, e.g. supermarkets that have jointly agreed to purchase beef at below-market prices, should have the opportunity to prove damages.
Page 54 PREV PAGE TOP OF DOC
HR 4321 entitles a defendant to offer, as a partial or complete defense, proof that it passed on either an overcharge or an undercharge. This appropriately overturns Hanover Shoe in the indirect purchaser situation. If indirect purchasers are to be permitted to recover for overcharges, then middlemen who were not harmed should not be entitled to windfall damages. A question is left dangling, however. If a middleman passes on a higher price, in most situations this will result in fewer sales. Can the middleman collect damages for reduced profits caused by the smaller number of units sold? (Lost profits are not considered a suitable subject for a class action.) And the formulation of H.R. 4321 raises another, more important question, because the language is not limited to a case in which there is an indirect purchaser. H.R. 4321 would allow a defendant to escape antitrust liability on a passing off defense even when there is no indirect purchaser in the case. We believe that this could kill off direct purchaser suits, which would undermine the deterrence effect of the law.
H.R. 4321 provides that in a class action, the fact of injury and the amount of damages may be proven on a class-wide basis, without requiring proof of such matters by each individual member of the class. It simplifies the process by attributing damages in the ratio of an individual's purchases or sales to those of the class as a whole. This is an important provision because many indirect purchaser actions at the state level have been defeated at the class certification stage.(see footnote 18) Some courts have been unwilling to make the types of category generalizations that are necessary to a class action. Certainly each individual suffers damages in his own way, and H.R. 4321 requires, appropriately, that damages shall be assessed only on behalf of any person who makes a valid damage claim, but without the type of generalizations that permit attribution in proportion to the class as a whole, courts will not be able to utilize indirect purchaser trials an effective tool for making victims whole.
Page 55 PREV PAGE TOP OF DOC
The American Antitrust Institute is delighted that Congressman Minge has introduced and the Judiciary Committee has taken up the indirect purchaser issue. We have established an internal committee of experts within the antitrust community who are working on this topic and our committee will be at your disposal as the legislative process moves forward.
We recognize that reform in this area is complicated and politically difficult. It is particularly important that reform at the federal level not have the unanticipated impact of reducing in practice the rights and remedies that currently exist for consumers in Illinois Brick Repealer states. Many of these states work together on indirect purchaser cases, often in cooperation with private parties, and achieve a notable level of justice for their citizens. Recognizing that many in the federal judiciary are not comfortable with consumer rights and reluctant to try class actions, it is imperative that any federal legislation be clear, strong, and precise, and that its implications be tested out by reference to the body of expertise that has come into existence in those states that have repealed Illinois Brick. This truly is a situation in which the states are testing laboratories for experimentation and in which the federal government should not act without evaluating these experiments. Research that can adequately guide the Congress is currently lacking.
We urge the Committee to hold additional indirect purchaser hearings to evaluate the experiences of the states, by taking testimony of Assistant Attorneys General, litigators, and consumers who have become familiar with the trial process. Which state statutes have proven most workable? What problems have repeatedly arisen in litigation? What presumptions and assumptions work and which do not? What methodologies have been developed for proving or rejecting pass-through claims? How frequently and under what circumstances have pass-throughs been absorbed? What types of law violations have resulted in indirect purchaser cases? Are they almost always horizontal price-fixing cases? Does the legislation need to be broad enough to deal with other types of violations or does this add uncertainties and complications?
Page 56 PREV PAGE TOP OF DOC
We hope that your hearing today will be seen from the future as a landmark in a process that will build political support, develop a firm empirical base for reform, and ultimately lead to a major advance in justice for consumers and businesses and in efficiency for the nation's judicial systems.
Mr. HYDE. Mr. Swenson.
STATEMENT OF LELAND SWENSON, PRESIDENT, NATIONAL FARMERS UNION
Mr. SWENSON. Thank you, Mr. Chairman, and I also commend you for holding this hearing, even at the late hour of the session. Because if we are going to begin the public dialogue on this issue, it has to begin; and I commend you for holding this hearing.
We also want to make a record of our strong support for H.R. 4321. I commend Congressman Minge and all the cosponsors in its introduction.
Let me say that next to low prices, concentration is probably the number one issue for farmers and ranchers all across this country. If they belong to the Farmers Union or they belong to commodity organizations or they belong to other general farm organizations, they are very, very concerned about the growing escalation of concentration.
We believe that tremendous harm has occurred to producers. There is a public perception that mergers and consolidations create market efficiency; we do not believe that that is true. When you take a look at what has happened to the marketplace for American family farmers and ranchers, there is less competition in the marketplace. Part of my testimony shows the control that four firms have over a number of agricultural commodities. But when you break that down to areas, regions, such as my State of South Dakota, the control or percentage of control of the market opportunities becomes even greater than what is reflected in these statistics and the country as a whole.
Page 57 PREV PAGE TOP OF DOC
We are also affected both as consumers and suppliers. We have seen tremendous concentration in the area of acquisition of input supplies, seeds and fertilizers and chemicals, and as I have already mentioned, the marketing of our product.
Mr. Chairman, you mentioned the transportation. In many States there is captive transportation where you have to pay above the book price of transportation to be able to get trains to haul your grain to market, depending on the time of the season. So even in relation to what they send out as the transportation price, more times than not you will pay above that book price. So we are being squeezed on the expense side as well as the opportunity for income.
When we take a look at the trend of vertical integration, I will just share with you that in the hog industry, Smithfield Farms, in its latest acquisitions is now the largest slaughterer of hogs, and the largest producer of hogs. Sixty percent of what Smithfield slaughters comes from its own production, or the control of their own production through contracts. Sixty percent. Where does that leave the independent hog producer in market opportunities with Smithfield? It leaves him or her as a residual supplier, but more times than not, not a supplier at all.
I want to emphasize that lower prices that producers are now receiving have not translated into lower consumer food costs. Dr. Robert Taylor, an ag economist from Auburn University, looked at the last 15 years and pointed out that the market basket price for foods, for home consumption, has increased 3 percent, while at the same time the producer share of the market basket has decreased 36 percent. There should be a reduction in food cost for consumers, not an increase.
Page 58 PREV PAGE TOP OF DOC
Attached to my testimony is an article that appeared in the Wall Street Journal August 15th of this year. The headline: ''Could The High Price of Milk Be a Byproduct of Supermarket Mergers?'' We are at the point now here in the United States where five firms control 40 percent of the retail food market. Five firms. There used to be ten firms about 5 years ago. Now it is down to five.
When you look at this article, and it points out what is happening in Chicago, where families were paying a record $3.69 per gallon for whole milk at a time when farmers were receiving the lowest milk price in 20 years. But the real story is that they were paying 30 percent more than consumers 92 miles down the road in Milwaukee, Wisconsin, where the milk going to the consumers came from the same farmers. Now, something is wrong. Something is happening.
Let me point out that support for repeal of Illinois Brick is vital when you take a look not only at this issue, but at the recent lysine price-fixing case which went through the system. A ruling awarding damages occurred, but livestock producers, who had to pay a higher price for the feed, participated not at all in the recovery of the price-fixing element. They should have been compensated. They should have had the right to sue, yet they were barred from that because of the Illinois Brick case.
Another element of this piece of legislation that is important is preferential pricing. I know there is a feeling that the Packers and Stockyards Administration already has the authority to enforce that. I think that this piece of legislation strengthens the law by cleaning up some of the language that is on the books.
Page 59 PREV PAGE TOP OF DOC
I would just share, because I see my time is up, that one thing that can assist in the authority that the Department of Justice has, and Packers and Stockyards has, is if we provide them the appropriate budget for enforcement. We are taking on big companies that have deep pockets, and I think the one thing lacking with both Packers and Stockyards and the Department of Justice are the dollars with which to deal with enforcement. And I would encourage your help in that role.
The real element, in conclusion, is that independent family farmers and ranchers, and small business owners, are being exploited. The strength of our country depends on open markets, competitive markets and free enterprise. That is what is diminishing today. We need to restore that, the opportunity for entrepreneurs. We think this legislation begins that process.
Thank you for the opportunity.
[The prepared statement of Mr. Swenson follows:]
PREPARED STATEMENT OF LELAND SWENSON, PRESIDENT, NATIONAL FARMERS UNION
Thank you Mr. Chairman, for holding this very important hearing on antitrust enforcement. I serve as president of the National Farmers Union. On behalf of the 300,000 farm and ranch family members of the National Farmers Union, I am pleased to testify in strong support of H.R. 4321, the Antitrust Enforcement Improvement Act of 2000. I commend Representative Minge and the cosponsors for introducing this bill.
Page 60 PREV PAGE TOP OF DOC The bill has 5 main provisions:
1. It amends the Sherman Act to increase the fines for antitrust violators.
2. It amends the Clayton Act by eliminating the Illinois Brick(see footnote 19) restriction, so that indirect purchasers can recover damages due to overcharges and indirect sellers can recover losses due to underpayments; it also provides for class action lawsuits.
3. It amends the Packers and Stockyards Act to prohibit preferential pricing practices from being used for the purchase of livestock.
4. It establishes the Agriculture Concentration and Market Power Review Commission to hold hearings, collect information and make recommendations with respect to concentration.
5. It establishes a Special Counsel for Agriculture within the United States Justice Department.
With concentration levels at historic highs, and mergers and acquisitions occurring at an ever-increasing pace, the Minge legislation is desperately needed.
My statement today will focus on how antitrust concerns and concentration are affecting farmers and ranchers, as well as consumers, and how this legislation can improve antitrust enforcement.
CONCENTRATION HARMS PRODUCERS AND CONSUMERS
Page 61 PREV PAGE TOP OF DOC
Too often, people automatically equate mergers and consolidation with market efficiency. In too many cases, the opposite is true. As firms grow in size, they buy out their competitors, reducing the number of options in the market place. They also exert market power to get special deals from their suppliersmoney that must then be made up by charging the smaller firms more to do business.
Farmers and ranchers are affected by market concentration both as consumers and suppliers. They are consumers when they buy their inputs, such as seed, herbicides, fertilizer, fuel, machinery, etc. They are suppliers when they attempt to market their commodities. Due to the large number of consolidations, net farm income has been squeezed on both the expense side and the market side.
Four firms control: 81 percent of all beef slaughter, 73 percent of sheep slaughter, 57 percent of pork slaughter, 62 percent of flour milling, and 50 percent of broiler production.
Moreover, these high levels of horizontal concentration are made even worse by the accompanying vertical integration that is taking place in the industry. For example, Smithfield Farms, the largest hog processor is also the largest hog producer. Consequently, 60 percent of the hogs slaughtered by Smithfield, are hogs produced by Smithfield. This relegates independent hog producers to the role of residual supplier, leaving producers to get the best price they can in a market with an artificially low demand side.
Rapid consolidation is occurring in nearly every sector. Examples of recent mergers and proposed mergers affecting agriculture include:
Page 62 PREV PAGE TOP OF DOC
Smithfield Farms / Murphy Family Farms
Smithfield Farms / Carroll's Foods
Philip Morris / Nabisco
Case-IH / New Holland
Land O' Lakes - Fluid Division / Dean Foods
Pharmacia & Upjohn / Monsanto
Cargill, Inc. / Continental Grain
Farm families today are seeing low prices across many different commodities. Yet, these low prices have not translated to consumer savings. Instead, farmers and ranchers are receiving an ever-diminishing share of the consumer dollar, while processors and retailers gain more of the consumer dollar share. Dr. Robert Taylor, an agricultural economist at Auburn University, found that over the past 15 years, the retail cost of a market basket of food purchased for home consumption increased 3 percent, while the farm value of that market basket decreased 36 percent.
GOT MILK MONEY?
Page 63 PREV PAGE TOP OF DOC The Wall Street Journal printed an article on August 15, 2000, with the title, ''Could the High Price of Milk Be a Byproduct of Supermarket Mergers?'' The Journal reported that Chicago families were paying a record high $3.69 per gallon of whole milk at Jewel and Dominick's, the two chains that dominate the Chicago market. At the same time, farmers in the Midwest, who supply the milk, are receiving the lowest milk prices in two decades.
Nationally, the all-milk price for this year will average $12.40 per cwt., which is just over $1 per gallon. Obviously farmers are not the reason for the high milk price paid by Chicago consumers.
The Journal story points out that the top five U.S. chains now control 40 percent of all grocery sales, a share controlled by 10 companies five years ago. In addition, Jewel and Dominick's were both acquired by larger companies in the past two years. Jewel was purchased by Albertson's, the nation's second biggest supermarket chain. Dominick' s was purchased by Safeway, the nation's third largest chain.
The high prices charged by Jewel and Dominick's have had an additional impact by serving as an umbrella for other supermarkets in Chicago. USDA estimates that consumers in Chicago paid an average of 30 percent more than consumers in Milwaukee over the past year. The cities are 92 miles apart and supplied by the same group of farmers. Chicago's dairy consumers clearly did not benefit from supermarket consolidation.
FEDERAL REPEAL OF ILLINOIS BRICK IS VITAL
In December of 1998 and early 1999, pork producers received depression-era prices for their hogs, about $10 per cwt. or 10 cents per pound. They were understandably angry to see few corresponding decreases in pork prices at the retail level. However, due to the federal restriction imposed by the Illinois Brick court decision in 1977, producers have no legal or economic recourse against retailers in federal court, since producers are indirect sellers.
Page 64 PREV PAGE TOP OF DOC
The Illinois Brick restriction was also a factor in the recent lysine price-fixing case, where some large feed companies were awarded damages as direct purchasers. Since the feed industry is characterized by cost plus pricing, feed companies passed the costs of higher lysine prices on to livestock feed purchasers. Yet, most livestock feed purchasers were unable to recover the lysine price-fixing damages because they did not have standing in federal court.(see footnote 20)
Fourteen states and the District of Columbia have already passed legislation to repeal Illinois Brick at the state level. A federal repeal will provide an important remedy for both producers and consumers harmed by antitrust violations.
Another vital part of the bill is the provision that specifically allows injured indirect buyers and sellers to prove damages as part of a class action. (See The Bray Case attachment.)
NFU also strongly supports the provision that prohibits preferential pricing, except on the basis of quality or grade differences. The practice of preferential pricing in the livestock industry has resulted in large producers or feedyards getting sweetheart deals that are not offered to smaller producers who may have the same or even higher quality animals. Consequently, an artificial incentive to consolidate is createdone that has nothing to do with greater efficiency.
Page 65 PREV PAGE TOP OF DOC
The current Packers and Stockyards Act already has language that would arguably prohibit preferential pricing. However, USDA has had difficulty convincing the court to enforce the prohibition. The specific language in H.R. 4321 may provide the needed clarification to strengthen the law and enable enforcement efforts to be successful in future actions.
The impact on farmers and ranchers must be considered in agricultural antitrust cases. We believe the bill provisions to create a commission to study concentration and make recommendations will help achieve this goal. NFU is particularly supportive of the language that requires at least three of the 12 commission members to be actively engaged in farming or ranching. The bill also calls for creating a Special Counsel for Agriculture. Although the Justice Department recently created a Special Counsel for Agriculture, we support having this position codified in law.
The United States economic system was founded on capitalism, competition, and free enterprise. As certain sectors have become dominated by large firms, such as the processing and retail sectors, other sectors, such as the independent farmers, ranchers and business owners, have been exploited, due to the imbalance of market power and lack of price discovery. Consumers also suffer harm through higher prices and less choice in the market place.
Legislation, such as H.R. 4321, will help enable the Clayton Act and Sherman Act to be used to ensure fair and competitive markets. The National Farmers Union strongly supports this bill and urges its approval by the Judiciary Committee. Once again, thank you for holding a hearing on this key legislation.
Page 66 PREV PAGE TOP OF DOC
(Two attachments accompany statement1. Wall Street Journal Article; 2. The Bray Case;)
COULD THE HIGH PRICE OF MILK BE A RESULT OF MARKET MERGERS?
AUGUST 15, 2000 [THE WALL STREET JOURNAL INTERACTIVE EDITION]
BY SCOTT KILMAN AND AMY MERRICK, STAFF REPORTERS OF THE WALL STREET JOURNAL
CHICAGOMention the price of a gallon of milk to a shopper here, and duck for cover.
Jewel and Dominick's, the two supermarket chains that dominate Chicago, are both charging $3.69 for a gallon of whole milka record for the cityand consumers are taking action. Linda Vallaro, whose suburban Chicago family drinks two gallons of milk daily, says, ''I will go without milk rather than pay'' that price. She is taking her business to discount food stores that charge less than the chainssometimes more than $1 less.
Some economists say what is happening to milk is an early sign of how the merger wave sweeping through the supermarket industry might change the way food prices fluctuate. The top five U.S. chains now handle 40% of grocery sales, a share controlled by 10 companies five years ago.
Page 67 PREV PAGE TOP OF DOC
At the heart of the milk dispute is the fact that the price of raw milk nationwide has dropped sharply since 1998. High prices at that time encouraged farmers to expand their herds, resulting in a glut of milk on the market today. Many Midwestern farmers are being paid the smallest amount for their milk in two decades. Some are quitting the business.
While retail milk prices have been rising in Chicago, the average price of a gallon of milk in supermarkets across the nation has slipped 6%, or 18 cents a gallon, since January 1999, according to government surveys. But the same survey shows that the price dairy processors are paying farmers for beverage-quality milk has dropped about 26%, or 44 cents a gallon, since January 1999. And in the same period, the cost of the lower-quality milk used to make cheese has plunged 42%, but the average price of cheese in many supermarkets has barely budged.
The makers of dairy products, such as beverage milk and ice cream, say they aren't to blame for the price lag. ''The reality is we are passing along our changes [either increases or savings] to the stores,'' says Barry Fromberg, chief financial officer of Dallas-based Suiza Foods Corp., the nation's biggest dairy processor.
So why aren't consumers benefiting? The reasons vary, sometimes according to region. The six New England states, in a move to help the region's dairy farmers, three years ago set a minimum price that processors must pay for milk. With the processors passing this on, New England consumers saw an extra 14 cents tacked on to a gallon of milk, according to a July study by Ken Bailey, an associate professor of dairy policy at Pennsylvania State University.
Page 68 PREV PAGE TOP OF DOC
Mr. Bailey also discovered something having little to do with the states' setting a minimum price for processors. When raw milk prices do fall as low as permitted in New England, supermarkets there don't cut retail prices like they used to. The new store strategy is costing the typical New England consumer an extra 10 cents per gallon on top of the 14-cent increase resulting from the processors' minimum price.
Traditionally, many supermarkets have sold milk at little markup to get customers into their stores. At the same time, though, big grocery chains have always been slower to pass along lower milk costs to consumers than they have been to raise prices when cows get into trouble. And today, in an added wrinkle, the supermarket behemoths want to transform the dairy section into a profit center.
''A lot of grocersperhaps because of consolidationhave decided milk is no longer going to be a loss leader for them,'' says Donald Ratajczak, an Atlanta economist who specializes in food prices.
Nowhere is the change more apparent than in metropolitan Chicago, which sits on the edge of one of the biggest milk-producing regions in the world. Milk traditionally was cheap for the city's consumers even though the grocery business here has long been one of the most concentrated of any major U.S. city.
According to industry analysts, at least two-thirds of all the groceries sold in the Chicago area are handled by Jewel and Dominick's, both of which were acquired by bigger companies in the past two years. Jewel became part of Albertson's Inc. of Boise, Idaho, the nation's second-biggest supermarket chain. Dominick's wa s acquired by Safeway Inc. of Pleasanton, Calif., the nation's third-biggest supermarket chain.
Page 69 PREV PAGE TOP OF DOC
The price the new owners of Jewel and Dominick's are charging for milk is serving as an umbrella for other supermarkets in Chicago. These smaller stores can keep their milk prices high as long as the two big chains do so.
According to Agriculture Department surveys, a gallon of milk cost a Chicago consumer an average of $3.32 at large grocery stores last year, which is 30% more than the price consumers paid in Milwaukee just 92 miles up the interstate. The cities get their milk from the same farms.
The price of a gallon of milk in Jewel or Dominick's in Chicago would be illegal in New York, the only state in the country that has a price-gouging law (in this case, one that is designed to stop retailers from selling milk for more than 200% of the price that farmers got paid for producing it).
Neither Jewel nor Dominick's is backing down. They say they are competitive because they match each other's prices in Chicago on their premium milk brand. Each chain also offers a line of value-priced milk. In some scattered Dominick's stores Monday, for example, Chicago shoppers who bought two gallons of the discount brand got it for $2.09 a gallon. In many of the two chains' Chicago-area stores, however, a gallon of the discount line was priced just one dime below a gallon of the premium brand.
''Other stores use the price of milk to drive traffic,'' says Karen Ramos, a Jewel spokeswoman. ''What we choose to do is give savings on a variety of items.'' The owner of Dominick's says it doesn't much worry that smaller stores and convenience shops sell milk for less in Chicago. ''We don't use milk as a loss leader,'' said Debra Lambert, a Safeway spokeswoman.
Page 70 PREV PAGE TOP OF DOC
Among Chicago's unhappy milk consumers is Mary Ledman, who buys six gallons of milk a week for a household of five. Ms. Ledman was so startled by high milk prices during a recent shopping trip to Jewel that she quizzed the store manager, who told her that milk pricing is complicated.
It happens that Ms. Ledman is an economist who specializes in the dairy industry. She abandoned a cartful of groceries and now shops elsewhere. ''Some retailers are taking advantage of a window of opportunity,'' she says.
Write to Scott Kilman at email@example.com and Amy Merrick at firstname.lastname@example.org
THE BRAY CASE
BY LEESA KIEWEL
''If history repeats itself, then let us embrace history and make it a learned thing . . .''Theodore Roosevelt
This is the stuff a cowboy's nightmares are made of. It's the true story of how the beef cattle industry was sold out . . . to the point of collapse . . . and how a small group of determined ranchers fought to prove what they instinctively knew was wrong . . . and won. Today, there is an increasing interest in the ''Illinois Brick'' Case. But, to understand the significance of that, you must first know the amazing events that played out twenty-five years ago in a California court room, where a producer from South Dakota, along with others, stared down a monster of fear, intrigue and greed, in a world where deceit and corruption would take them from the retail meat cases of the country's largest food chains, all the way to the Oval Office and the hallowed Halls of Congress.
Page 71 PREV PAGE TOP OF DOC
This is their story . . .
In 1974, George Levin, a rancher from Hereford, SD, climbed on an airplane and flew to San Francisco, California, armed with the facts and figures he had been working on for years. Frightened, he entered a courtroom, put his hand on the Bible and swore an oath before Judge Oliver J. Carter to tell the truth about his research on the profit margins the retail beef markets had been reaping for years at the hands of producers who were broke, and going broker. As he took the witness stand, highly paid, powerful attorneys for the defendants, Safeway Stores, Inc., The Great Atlantic & Pacific Tea Company, Inc. (A & P) and Kroger Grocers, Inc., objected to his testimony, refuting George's qualifications as an economist. They formall y requested the judge to disallow the testimony of this simple, honest man from South Dakota. ''What you're suggesting is pure poppycock!'' responded an angry Judge Carter, ''To suggest that this man can't testify to his own livelihood is outrageous to me and this court, and we shall proceed without further comment.''
From there, George Levin provided testimony that eventually proved to be key in a landmark, winning case for the beef industry on a national scale. Other ranchers spoke before the court, too. When Jack Tool of Selby, Montana took the stand to testify he said, ''there's more cattle rustling going on behind the counters of the nation's food chains than ever has gone on in the rangelands of the West.''
The story really begins when groups of producers, pressured by receding markets, forced to watch retail meat prices climb while the prices they received declined, began to meet and question why they couldn't gain lingering attention of government officials, along with other national agencies and organizations responsible for watchdogging monopolization of an industry like theirs. The ranchers believed the grocers, using their national organization, the National Association of Food Chains (NAFC), as a cloak, were participating in secretive meetings to establish the prices paid, and the markets each grocer would participate in. Documents introduced at trial proved the association's constituency was made up of the largest retail food chains in the U.S.; small grocery companies and independents were not eligible for membership.
Page 72 PREV PAGE TOP OF DOC
The retail chains comprising NAFC were the largest purchasers of carcass beef in the U.S.
With their very lifestyles at stake, cattlemen came together, each contributing to a retainer fund, and began searching for an attorney who would take their case on a contingency basis, but more than that, one who could understand their business and was sympathetic to their cause. As in most everything, it became a matter of 'who knows who', and a young attorney named Joseph M. Alioto, specializing in anti-trust law, was eventually found in California, who agreed to take their case. ''The Bray Case'' charged the defendants with violation of Section 1 of the Sherman Act, in that they conspired to, and in fact did, regulate the price the plaintiffs received for their beef.
For 18 months, Alioto flew to points throughout the United States, taking depositions from the CEO's and meat procurers of Safeway, Kroger and A & P. Alioto's staff was busy in San Francisco researching corporate financial statements, discovering tidbits of information, that when pieced together, proved emphatically the companies had conspired to withdraw from one another's markets, allowing one major grocer the opportunity to leverage pricing throughout a number of states, while the others leveraged prices in the same way within other areas of the nation. If meat wasn't cheap enough on the east coast, A & P simply went west and purchased elsewhere, leaving meatpackers to sit with a perishable product, driving prices into a downward spiral, wreaking havoc within an industry that was sick, and getting sicker.
Alioto's firm discovered the grocers were utilizing what was known as ''The Yellow Sheet'', a publication listing the prices of beef during various time periods. The attorney argued successfully that the publication was a device through which the defendants and co-conspirators kept informed about meat prices, calculated the prices they would pay, and communicated the amount paid to the other stores.
Page 73 PREV PAGE TOP OF DOC
During the 1970's ''The Yellow Sheet'', formally known as the Daily Market & News Service, was published in Chicago, Illinois by National Provisioner, Inc. Every week, Monday through Friday, twelve men met in a converted 100-year old townhouse, five minutes from Michigan Avenue. They would spend the next eight hours or so on old, black telephones calling slaughterers, brokers, wholesalers and other people in the meat business. By 3:30 p.m., with the assistance of their director, Lester Norton, they determined the closing prices of beef, pork, lamb and offal products. Printed on eight and one half by fourteen inch sheets of yellow paper, the publication was rushed into the mailstream for circulation around the country. Little was known about those men, whose techniques were ambiguous at best and unscrutinized by the government. In those days, ''The Yellow Sheet'' was used for sale of an estimated 80 to 90 percent of the meat sold in the U.S.
As the evidence mounted, Safeway Stores, Inc. and Kroger settled with the plaintiffs out of court, leaving A & P as the only remaining defendant.
It wasn't an easy battle. The grocery giant and their legal counsel used every legal maneuver conceivable to delay the case. Judge Carter, who at that time, was the newly appointed Chief Judge of the District, scheduled hearing after hearing to rule on the countless motions filed, as he plowed his way through a complex case. ''Judge Carter was a fair man, and he tried an extremely complex suit in a thoroughly fair manner,'' said Levin. ''Ours was a highly unusual case; he saw to it that both parties followed the letter of the law.''
What the ranchers discovered when they flew to San Francisco to attend the trial insulted their strong senses of character and truthfulness. In sunny California, by the bay, they heard dark tales of treachery, lies and a ruthless greed that was slowly sinking America's cow/calf industry.
Page 74 PREV PAGE TOP OF DOC
Initial evidence presented by Alioto proved beyond a doubt, that through central buying offices in Chicago, intricate meat purchasing mechanisms had been initiated, providing the basis for the price-fixing of meat throughout the United States. George Levin's careful monitoring of price spreads proved that the spread between wholesale and retail markets continued to increase from 1952 until the case went to court. The only period when it leveled off was during May of 1965, when the US Government conducted a study of meat prices, and representatives of the three grocers testified in Washington. Following the conclusion of the brief investigation, the price spread continued its increase.
Evidence also placed the CEO'S of the three companies in meetings together, outside of the normal gatherings within their national association. Testimony proved that, because of the division of markets, the different defendants met with representatives of other food chains, compelling them to compete. In this vein, striking evidence revealed that representatives of Safeway Stores had been in contact with another grocery chain, Lucky Stores, immediately prior to Safeway's announcements that it was reinstating its former practices of discounting product.
Testimony by an owner of Winn-Dixie Food Stores, one of the alleged co-conspirators, revealed that meat margins had been discussed at NAFC meetings as early as 1963. NAFC documents, subpoenaed as evidence, were significant aspects of the case, proving that meeting topics, agendas, and minutes were labeled as confidential and were generally unavailable.
Alioto was astonished when the defendant's expert witness on economics, Adam Smith, stated during cross-examination, ''seldom do members of the same trade industry gather together in the same setting for merriment . . . their conversations inevitably surround their business and price fixing conspiracies are born of that.'' Alioto incorporated that statement in his closing arguments before the six member jury.
Page 75 PREV PAGE TOP OF DOC
Court documents showed the meat departments of each chain substantially supported the operations of each defendant, accounting for 15% of the profits, as compared to less than 1% on grocery and produce items. As attorneys for the plaintiffs in the case dug deeper, they uncovered layer after layer of deception, discovering the grocers 'regularly received higher discriminatory prices on rendering products than any other competitor'.
Near the end of the trial, the silent courtroom was rocked by testimony from an individual who proved the rancher's suspicions were correct in their belief the NAFC had provided the vehicle through which the price fixing conspiracy was developed and implemented. The testimony and documents submitted to the jury related the sort of secret meetings worthy of Hollywood filmmaking. In smoke-filled, darkened rooms in undisclosed locations, representatives of the major markets had met, wearing color coded badges assuring anonymity of the participants, and they proceeded to conspire to fix the wholesale prices that would be paid for beef products. S. Kent Christensen provided the evidence, including documents, that a conscious effort was made by members of NAFC to meet secretly. Christensen, at that time, was CEO of the NAFC and was, at the same time, a member of the National Livestock & Meat Board, a capacity he served in for 24 years. Whether it was an attack of conscience, or simply the pressure applied by an adept attorney, the testimony provided the final nails in the coffin for the price-fixing giants.
The physical evidence list included a non-descript color brochure, used to promote NAFC, which Alioto's firm had researched, placing corporate officials in meetings they were reluctant to disclose. One A & P official in charge of meat marketing went so far as to deny even meeting representatives of other retail chains under any circumstancesa denial that withered when confronted with photographic evidence including the brochure.
Page 76 PREV PAGE TOP OF DOC
In the end, the evidence was insurmountable. After six weeks of trial, the jury returned a decision that would ignite the press and the cattle industry, finding A & P in violation of antitrust laws, including price-fixing and duplicity. The largest food retailer in the United States was fined a total of $32.5 million dollars. Further, Judge Carter allowed what was known as the ''Bray Case'' to become a class action suit, opening the door for other cattle producers to sue for damages that would be calculated at a rate of 20 cents per pound of beef sold through the retail food market during a five year period.
The food retailers immediately appealed their case, and time slipped by. News of the class action suit opportunity was picked up by the press. Through the ranks of an organization known as the Independent Stockgrower's of America, and by word of mouth, information was passed to a growing group of ranchers, who slowly began to sign releases allowing the Alioto law firm to represent them in the expanding suit, and paying their portion of the retainer needed to meet legal expenses.
But, in the State of Illinois, something was brewing that would stop the class action suit dead in its tracks and would have far-reaching implications within the world of anti-trust laws.
In Chicago, a little known company called Illinois Brick was being sued by the State of Illinois in US District Court for violation of the Clayton & Sherman Acts, the same anti-trust laws A & P were found in violation of. Illinois Brick, a concrete block manufacturer, sold blocks to masonry contractors who submitted bids to general contractors for the masonry portions of construction projects, and the general contractors, in turn, submitted bids for these projects to customers such as the State of Illinois and local governmental entities. The State of Illinois, as the plaintiff in the case, brought suit claiming that the manufacturers' price fixing injured the plaintiffs because the overcharges were ''passed on'' to them by masonry and general contractors. The manufacturers' motion for partial summary judgment, based on the contention that only direct purchasers could sue for the alleged overcharge, was granted by the District Court. However, the U.S. Court of Appeals for the Seventh Circuit reversed the lower court's decision, holding that indirect purchasers could recover if they could prove that the overcharge was passed on to them.
Page 77 PREV PAGE TOP OF DOC
When the case finally reached the U.S. Supreme Court, the Appeals Court decision was reversed and remanded. Holding to the original decision of the District Court, the Justices found, ''state and local governmental entities, as indirect purchasers, could not recover treble damages on the theory that the overcharges paid by a direct purchaser to an alleged antitrust violator were passed on to the indirect purchaser.''
Justices Brennan, Marshall and Blackman dissented, stating ''the Clayton & Sherman Acts were intended to protect individual consumers who purchase through middlemen.''
And so, it came to be, that a lawsuit surrounding a concrete block manufacturer in Chicago, Illinois provided the decision disallowing ranchers from claiming damages from meat retailers, since the retailers did not purchase their product 'directly' from producers of cattle. Today, twenty-five years later, the ruling still stands.
As the outcome of the Illinois Brick Case became apparent, the original litigants in the ''Bray Case'' settled their claim with A & P out of court, and Alioto shared with his clients more of his fee than they anticipated. When the Bray Case ended, A & P fired their CEO and Executive Vice President of Marketing and Purchasing.
Today, George Levin has retired from ranching. After fifty years in the business, he and his wife, Laura, moved 'to town', but he remains actively involved in the family-owned cow/calf operation which is now in the hands of the next generation. George hasn't however, retired from monitoring the retail price spread. This quiet, well-read, highly intelligent man still maintains graphs where he charts pricing. He makes frequent trips to the Sturgis Library, where he researches statistics and trade publications. He remains passionate in his thinking that today's producers, who point fingers of blame at the packing industry, fail to recognize the retail market's role in beef prices.
Page 78 PREV PAGE TOP OF DOC
S. Kent Christensen retired from NAFC 15 years ago, and resides in Arlington, VA. He suffers from Parkinson's Disease and doesn't recall some of the specifics surrounding the case. He does, however, remember the day that Alioto came to Washington, DC to depose him, and said, ''I remember thinking, that if any of the things Mr. Alioto was questioning were true, how could I continue my career with the organization . . . I come from a farm/ranch background, and it was inconceivable to me that anything of that nature was occurring.'' Christensen testified for an entire day during his deposition, and was accompanied by the NAFC legal counsel at that time, James Rill. Rill would later serve as the Reagan Administration's Anti-Trust Chief.
''The Yellow Sheet'' is still in publication today and is also available on the internet. Today it is owned by Urnar Barry Communications located in New Jersey. The publication employs 'reporters' who spend each day on the telephone contacting sources within the meat marketplace researching prices. Those prices and commentary are then published, along with USDA reported figures for comparison. After The Bray Case, the publication was investigated by the House Small Business Committee which subpoenaed the reporters' worksheets and other materials. The committee chairman at that time, Rep. Neal Smith, D-Iowa, charged that 'The Yellow Sheet fabricates a large percentage of its prices . . . the meat industry is about as far from a free market system of transaction as we can get'. Then Secretary of Agriculture Bob Bergland, announcing a departmental investigation of meat price reporting services, including ''The Yellow Sheet'', said, ''No one really knows how the values they put on meat are arrived at.'' Lester Norton, the publication's director at that time responded, ''We get used to criticism . . . it doesn't bother us a damn bit . . . all that any of these things do is increase our circulation.'' Norton objected to the subpoena, arguing the news publication should have been protected under the First Amendment, but that it lacked the resources to contest the government. The materials were turned over, he said, under the assurance from the committee that the information be kept confidential. Norton was known as 'the man who sets meat prices.'
Page 79 PREV PAGE TOP OF DOC
Judge Carter, who presided over the ''Bray Case'' has passed away. He went on to become a legend in the California judicial system, and became nationally known when he presided over the Patty Hearst Trial. His cases, and his rulings, are studied by law students across the nation. Judge Carter's written opinion and summary of the case are carefully researched and thorough. His expert guidance brought clarity to an extremely complex suit which could have easily confused jurors. His 'no-nonsense' style ensured a fair and impartial trial that ended with the largest anti-trust damage award at that time.
Joseph M. Alioto is still practicing anti-trust law in San Francisco. Most recently he won a case in Amarillo, Texas against Archer Daniels Midland and Cargill, representing the interests of a corn growers cooperative. Alioto came to the Bray Case fresh out of law school in 1969. His father, Joseph L. Alioto, had originally accepted the case in 1968. Upon the elder Alioto's election to the Mayor's Office in San Francisco, he assigned the case to his son.
Alioto's recollections of the Bray Case are passionately sharp. He refers to the Illinois Brick decision as an 'outrage'. In his view, the anti-trust laws that were enacted in the 1890's were based on the needs of the cattle industry, and for cattlemen to be put into the position that Illinois Brick takes them is 'beyond understanding'. Over the years he has testified before Congressional hearings, telling members exactly how he feels. He was particularly offended when the Reagan Administration was asked to investigate retail beef price fixing and denied the request.
Alioto didn't stop there. ''When we submitted the same request to the Carter Administration, they justified their inaction by saying that they could not agree with the Bray Case decision, and that the verdict and damage awards had more to do with the judge and the plaintiff's lawyer than with the validity of the case.'' ''While we were proceeding to trial in the Bray Case, the court granted an injunction precluding the grocers from proceeding with their buying practices of the past, and because of that injunction the beef industry experienced an influx of $4 billion dollars in the first year. If that isn't proof enough, I'm not sure what would be.''
Page 80 PREV PAGE TOP OF DOC
Alioto is quick to point out that federal judges, appointed by the President of the United States., are usually a reflection of an administration's position on anti-trust. In the late '60's and early '70's President Richard M. Nixon had appointed many judges to the Courts of Appeals. The Nixon Administration held an openly antagonistic position against anti-trust. As the Bray Case came to trial, Nixon had just resigned from the Oval Office, but Alioto knew the legacy of his position with anti-trust suits would linger for years. Hence, he advised his clients to settle out of court for the original $10 million dollars (which had been trebled to $32.5 million under anti-trust laws).
''Appeals Courts were dismissing anti-trust cases right and left in those days, and I felt it was prudent for my clients to settle their case as quickly as possible,'' he said.
''Nixon's legacy of antagonism towards anti-trust suits lives on today . . . Earl Warren, who was appointed by President Dwight D. Eisenhower, was the last federal judge who held a positive, forceful position towards enforcement of anti-trust laws,'' says Alioto. ''Judge Carter was appointed by President Truman . . . how I wish the judicial system today embodied the sort of fairness with regard to anti-trust laws that they did back then . . . things would be different in agriculture today, if that were the case.''
Files surrounding the case include letters Alioto wrote to Senator Edward Kennedy, requesting action by Congress. ''The ranchers who came forward with this suit . . . people like George Levin . . . were men with old-fashioned courage. Today's cattlemen need to refocus . . . consumers must be brought to understand that ranchers are receiving less than their cost of production, and that retailers are taking advantage of the situation at both ends of the market. Conspiring to fix margins, by manipulating prices to purchase beef low and sell high, defies the principals of supply and demand in this country. It's ludicrous for the justice system to stand by and watch.''
Page 81 PREV PAGE TOP OF DOC
Those same files about the ''Bray Case'' tell a wonderful story about Alioto, and how his sense of respect grew for the men and the industry he represented. After the ''Illinois Brick'' Supreme Court ruling, he sent letters to producers refunding their retainer fees, advising them not to spend any more of their money on a class action lawsuit in which no damages could be claimed. One paragraph from a twenty-five year old letter says it all. Informing George Levin of the high court's ruling he wrote, ''I cannot express my regret that we cannot pursue this case further; although I suppose we should find some gratification in what's already been accomplished. I have come to believe the cattlemen are the backbone of this country, and for their justice system to fail them, is incomprehensible. Thereupon, you will find a check enclosed, returning the retainer fee you submitted . . .''
Today, ''Illinois Brick'' is slowly becoming a buzzword in the Midwest's cattle industry. Most recently, a US Senator from one of the major cattle producing states alluded to introducing legislation that would change anti-trust laws to allow protection of consumers and producers who purchase or sell through middlemen. Senator Paul Wellstone, D-Minnesota, has asked the Clinton Administration to consider investigating anti-trust law enforcement saying, ''I'm going to push hard. I'm not going to let up on this. Every way I can keep talking about anti-trust action, I'm going to do so''. The old adage about taking 'An Act of Congress' to change things, may not be far from reality.
For those who experienced the ''Bray Case'', or study it today, the impact of ''Illinois Brick'' fosters lingering questions. Was it the hand of fate at work when the ''Illinois Brick'' case originated in the City of Chicago, so quickly on the heels of an enormous anti-trust damage award? Without the ''Illinois Brick'' decision, the implications of the ''Bray Case'' were infinite. Those answers may never be known. But, there are enormous possibilities . . . if a groundswell of support occurs within the industry for Congress to alter anti-trust laws, perhaps the gate George Levin has spent a lifetime trying to open will finally swing wide.
Page 82 PREV PAGE TOP OF DOC
Mr. HYDE. Thank you, Mr. Swenson. Mr. Scott.
Mr. SCOTT. I have no questions.
Mr. HYDE. Mr. Scott has no questions.
Mr. GOODLATTE. No questions.
Mr. HYDE. No questions. You have overwhelmed us. Mr. Hutchinson.
Mr. HUTCHINSON. No questions.
Mr. HYDE. Well, I am going to ask a couple.
Mr. Swenson, how much does opening foreign markets help farmers? In other words, isn't that a more workable solution to the family farm problem than special antitrust solutions?
And do you support normal trading relations with China?
Mr. SWENSON. We have not supported the current legislation in regards to PNTR because we think it lacks two elements. One is, it does not provide a mechanism for monitoring China's implementation of the agreement that would be required to go to the WTO.
Page 83 PREV PAGE TOP OF DOC
Farmers have no confidence in the current WTO enforcement if there is a violation of any type of a trade agreement. We see the ramifications of that, if you just look at the beef hormone issue with Europe.
Secondly, the enforcement procedure. Lack of enforcement. Again, you have to go back to the WTO.
We believe in trade, but we need to make sure our trade laws have the mechanism for monitoring and the mechanism for enforcement.
Let me say the benefit of trade cannot displace at all the importance of this piece of legislation. As we take a look at international trade and our market opportunity for the last 25 years, the volume of exports over the last 25 years has stayed pretty stable. It has been up and down a minor amount, but it has generally remained stable. Values have gone up and down relating to the price, but even under the current structure of our farm policy, where the industry can take prices as low as they want, and they are, we should be supplying product to the world. No one should be able to underprice us under the current structure of the farm bill, but yet we are not expanding export markets.
So it will not all happen in trade. We need to make sure we have a strong domestic farm policy, and we need strong antitrust laws to make sure there is not exploitation occurring in the market.
Mr. HYDE. One of the proposals in Mr. Minge's bill is to create a special counsel for agriculture in the Department of Justice, in their Antitrust Division. We understand the Department has already created such a post administratively that has been filled by Mr. Doug Ross.
Page 84 PREV PAGE TOP OF DOC
I am wondering what your experience has been with that office so far. How is it working?
Mr. SWENSON. We are very pleased. In fact Doug Ross and Adam Golodner from the Justice Department spent over an hour with 200 family farmers and ranchers that are in Washington, DC, this week as part of the National Farmers Union group. This bill would make sure the position exists by law.
So we support what has been done, but we just feel making it a permanent part of the law would be a positive step.
Mr. HYDE. All right. I am kind of picking on you, Mr. Swenson.
You point out the extremely high price of milk in the Chicago area. What do you think accounts for that? The grocery store market is concentrated, I grant you that, but Jewel and Dominick's aren't the only competitors. Why haven't other stores undercut them?
Question: Do dairy compacts contribute to these higher prices?
Mr. SWENSON. Dairy compacts don't contribute to the higher prices. But let me just say that both Jewel and Dominick's now have been bought out by Albertson's and Safeway. So they no longer are independent retailers, as we are led to believe in the story. But they control a majority of the market within the Chicago region; they set the price. They put up the umbrella, and the rest of the stores enjoy the margin of return based on what the leaders set. So they control that, the level of the consumer market, and they are able to set the price.
Page 85 PREV PAGE TOP OF DOC
Mr. HYDE. Thank you.
We have been joined by the illustrious ranking member, Mr. Conyers of Michigan; and Mr. Conyers, you are recognized for whatever purposes you wish.
Mr. CONYERS. Well, that has not happened before. We must be near the end of the session, Mr. Chairman. And I am delighted to be back, and thank you very much. I welcome the witnesses, and I particularly appreciate your holding this hearing on this bill.
Let me begin by saying I am glad to see Senator Metzenbaum still in the saddle. He is doing great work. He only calls me once a month, so I feel very fortunate to be working with you on this.
To my colleague from Minnesota, Mr. Minge, I would like to announce that as a result of preparing for this hearing, I would like to have my name added to the bill as a sponsor.
Now, I think what we are doing is dealing with the Illinois Brick decision in a very, very important way, and I have a statement to add to the record about this, but there is another part of this that is very important that I had not talked with my colleague from Minnesota about, and that is the impact of this measure beneficially upon African-American farmers, who are the smallest, who are in the most difficult position of all, and who will be, I think, thrilled to a family to find out that we are entertaining such a modification of antitrust law so that we can allow a little bit more level playing field. I think that is awfully important, and they will be happy to know about that.
Page 86 PREV PAGE TOP OF DOC
So I ask unanimous consent, Mr. Chairman, to revise and extend my remarks, and I thank the chairman.
Mr. HYDE. Without objection, so ordered.
[The prepared statement of Mr. Conyers follows:]
PREPARED STATEMENT OF HON. JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
I want to commend Representative Minge for introducing a bill, H.R. 4321, the ''Antitrust Enforcement Improvement Act of 2000,'' that makes many thoughtful, common-sense changes to our antitrust laws.
One important section of the bill would respond to the 1977 Supreme Court case, Illinois Brick Company v. Illinois. In that case, the Supreme Court held that only direct purchasersand not others in the chain of manufacture or distributioncan sue for damages under the antitrust laws.
The Illinois Brick decision means that consumers are often unable to seek compensation for antitrust violations if the wrongdoer was a supplier of an ingredient, but not the manufacturer of the final product that the consumer bought.
For example, last year the Department of Justice uncovered an international conspiracy among pharmaceutical companies to fix the price of vitamins. Cereal companies like Kellogg, General Mills, and Kraft Foods were forced to pay artificially high prices for vitamins and, in all likelihood, they passed these higher costs on to consumers.
Page 87 PREV PAGE TOP OF DOC
The DOJ obtained over $1 billion in fines as a result of the vitamin companies' illegal behavior. But consumers didn't see one dime of this recovery because they were not ''direct purchasers'' of the vitamins.
Similarly, in 1996, when Archer Daniels Midland pled guilty to inflating the price of lysine, an important feed additive, it was fined $100 million. Even though ADM's illegal actions added millions of dollars to consumers' grocery bills, consumers could not seek any recovery for this wrongdoing.
That is not the way our antitrust laws should work. The antitrust laws have a treble damages component to promote compensation and deterrence. How can we have adequate compensation when those injured by antitrust violations have no right to sue?
I understand that almost half of the States have passed laws like H.R. 4321 that respond to Illinois Brick, and provide a cause of action to indirect purchasers. But justice should not be limited to half of our citizens. All Americans deserve the right to seek compensation for antitrust violations.
There are other aspects of H.R. 4321 that deserve review at this hearing, such as the Commission to study agriculture antitrust issues, and the Office of Special Counsel for Agriculture within the Department of Justice, Antitrust Division.
I believe that we must more critically examine the effects of mergers and consolidations in all sectors of the economyincluding the agricultural sector. And we must provide the Justice Department and the FTC with sufficient resources to conduct merger reviews that are becoming larger and more complex with each passing year.
Page 88 PREV PAGE TOP OF DOC
This hearing provides is a good first step in discussing ways our antitrust laws can work better for consumers in our country, and I thank Mr. Minge for introducing this bill.
Mr. HYDE. We have exhausted the questioning and statements, and so with the approval of the committee, we will stand adjourned. And thank you very much.
[Whereupon, at 2:55 p.m., the committee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
Hon. HENRY J. HYDE, Chairman,
|National Association of|
|Washington, DC, September 11, 2000.|
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: On behalf of the 14,000 members of the National Association of Manufacturersand the 18 million people who make things in AmericaI would appreciate your placing this letter in the record for the September 12 hearing on H.R. 4321, the Antitrust Enforcement Improvement Act. The NAM strongly opposes enactment of H.R. 4321.
Page 89 PREV PAGE TOP OF DOC
The NAM questions the need to amend either the Sherman Act or the Clayton Act to include ''sellers'' or ''wholesale purchasers.'' Apparently, this is an attempt to clarify that these statutes apply to monopsony power just as they do to monopoly power. In a sense, this is redundant since case law has long recognizedand the Federal Trade Commission and Antitrust Division of the Department of Justice (''antitrust agencies'') have long appliedthis view. There is a danger, however, that by writing this established interpretation into the statutes, the well-understood case law may serve as a basis of wasteful litigation.
In addition, the NAM does not believe that an increase in criminal fines under the Sherman Act is warranted. The Antitrust Division has demonstrated on numerous occasions in recent years that it is able to extract record fines for antitrust violations without a statutory change.
The NAM would point out that by ordering H.R. 4194, the Small Business Merger Filing and Fee Elimination Act, to be reported, the Committee on the Judiciary just recently acted on changes to Section 7A of the Clayton Act in a manner inconsistent with Section 3(b) and 3(c) of H.R. 4321. Furthermore, the proposed overturn of the Supreme Court's decision in Illinois Brick that is incorporated in H.R. 4321 has consistently been rejected by the Committee on the Judiciary.
The NAM especially views with alarm the proposal in H.R. 4321 to release premerger notification material to state attorneys general. These documents contain highly confidential and proprietary information, the release of which could be extremely damaging to the successful consummation of the proposed merger. The NAM is very pleased that the federal antitrust agencies have instituted procedures that have and will protect this information. Any increase in disseminationwhether to state attorneys general or any other governmental bodywill only heighten the possibility of a leak.
Page 90 PREV PAGE TOP OF DOC
Finally, the NAM fervently opposes any sector-specific treatment of the antitrust laws. The NAM is joined in this view by, among others, the Antitrust Section of the American Bar Association and the International Competition Policy Advisory Committee (ICPAC). In fact, in its report issued on February 28, 2000, a majority of the ICPAC (composed of noted antitrust scholars) recommended that what current sectoral antitrust treatment exists in the United States should be eliminated. (See report, page 161.) Thus, the NAM sees no reason for creating either a commission to study special antitrust rules for agribusiness, since such sectoral distinctions violate the principle that the antitrust laws should be applied equally and fairly to all sectors.
In short, H.R. 4321 would create mischief, redundancy and impose bad antitrust policy. The NAM strongly opposes any further consideration of this legislation.
|Michael E. Baroody, Senior Vice President,|
|Policy, Communications and Public Affairs.|
cc: Members of the Committee on the Judiciary
PREPARED STATEMENT OF THE BUSINESS ROUNDTABLE
Page 91 PREV PAGE TOP OF DOC
The Business Roundtable (''BRT'') submits this statement in opposition to H.R. 4321, the proposed Antitrust Enforcement Improvement Act of 2000 (the ''Bill'' or ''H.R. 4321'').
The Business Roundtable is an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States. The chief executives are committed to advocating public policies that foster vigorous economic growth; a dynamic global economy; and a well-trained and productive U.S. workforce essential for future competitiveness.
The Business Roundtable strongly supports effective enforcement of the antitrust laws, which are critical to the strength of the U.S. economy. Long-term economic growth, consumer well being, and the international competitiveness of American businesses are fostered by effective competition, and maintaining and enhancing competition are critical elements of the U.S. national economic policy. The companies represented in the BRT are substantial purchasers and producers of goods and services and, therefore, have a vital interest in effective and fair enforcement of the antitrust laws. Indeed, many members of The Business Roundtable have been victimized by antitrust law violations, as have other companies and consumers.
The BRT notes that U.S. federal antitrust enforcement has been especially vigorous in recent years, with increased enforcement budgets, record fines and jail sentences for criminal antitrust violations, many actions challenging civil violations, and challenges to many mergers and acquisitions. This vigorous record of enforcement under existing antitrust laws should be considered in evaluating the need for proposed amendments to those laws.
Page 92 PREV PAGE TOP OF DOC
I. THE BRT OPPOSES EFFORTS TO OVERTURN ILLINOIS BRICK.
The Supreme Court decided in Hanover Shoe(see footnote 21) and Illinois Brick(see footnote 22) that parties accused of price fixing cannot defend by asserting that a plaintiff who purchased directly ''passed on'' that overcharge to customers further down the distribution chain, and that indirect purchasers cannot pursue those claims, which rest exclusively with direct purchasers. The basic rationale for both decisions was the same.
The Supreme Court based its Illinois Brick decision on three basic rationales:
First, the Court was concerned that allowing both direct and indirect purchasers to recover created a risk of multiple recovery and inconsistent judgments. There was a risk of multiple liability if an indirect purchaser could recover damages, but the defendant was precluded from proving that the direct purchasers passed on the overcharge.
Second, the Court believed that it would be almost impossible to prove which portion of the overcharge was absorbed, and how much had been passed on. Moreover, the effort to determine whether and how much of an overcharge had been passed on or absorbed could unduly complicate and delay antitrust litigation.(see footnote 23)
Third, the Court believed that the antitrust laws would be enforced most effectively by direct purchasers, who would recover the largest damages and are best positioned to detect violations. A survey by the ABA Antitrust Section verified that direct purchasers regularly assert antitrust claims in the wake of government cases.(see footnote 24)
Page 93 PREV PAGE TOP OF DOC
Subsequent events have validated the Supreme Court's concerns. In the wake of Illinois Brick, several states amended state antitrust laws to authorize indirect purchaser lawsuits, and other state statutes were construed to allow indirect purchaser litigation.(see footnote 25) Although it does not appear that indirect purchaser cases are often litigated to judgment, many cases have been filed in state courts. Those cases have presented the types of concerns the Supreme Court identified in Illinois Brick, and no procedural mechanisms have been implemented to minimize those risks.(see footnote 26) These circumstances create an imperative for the defendants to settle, regardless of the lack of merit in the complaint.(see footnote 27)
To the extent indirect purchaser cases have been litigated, courts have confirmed the problems of proof of pass-on v. absorption of over-charges and judicial efficiency that underlay the Supreme Court's Illinois Brick decision. For example, several state courts have refused to certify classes of indirect purchasers on the grounds that the issues common to the class did not predominate because of problems in proving pass-on.(see footnote 28) One court characterized expert testimony on purported pass-on as ''evidentiary voodoo.''(see footnote 29) These courts have concluded that compensation of indirect purchasers is neither practical nor cost-justified.(see footnote 30)
State law indirect purchaser cases have been a windfall for plaintiffs' lawyers, and consumers have realized few, if any, substantial economic benefits, even under settlements. This is not surprising since few consumers retain records of purchases needed to establish their claims. This situation led one state court judge to dismiss the indirect purchaser complaint with the following comment:
Page 94 PREV PAGE TOP OF DOC
It is argued that a special master could overcome many of the problems with proof on the issue of damages [to consumers of infant formula]. However, for the Court to simply declare that it had a fund or anticipated a fund out of which thousands of retail consumers could essentially help themselves by the filing of a form would encourage fraud and perjury, would invite public criticism of the judicial process and would essentially deny the defendants . . . due process by placing these claims beyond the reach of effective cross examination.(see footnote 31)
The BRT has long opposed efforts to overturn the Supreme Court's decision in Illinois Brick.(see footnote 32) Congress has considered overturning Illinois Brick on many occasions since 1977. On each occasion, wisdom prevailed and no legislation was enacted. The BRT urges Congress not to enact the Illinois Brick provisions of H.R. 4321.
II. THE BRT SEES NO NEED TO INCREASE CRIMINAL FINES.
The Bill also proposes to increase the ceiling for criminal fines under the Sherman Act from the current $10 million level to $100 million. The BRT does not believe that any case has been made for the necessity for such an increase.
It is important to emphasize that no one condones cartel behavior that results in a criminal convictionsuch behavior imposes substantial costs on the economy, including BRT members. The Justice Department can and should vigorously prosecute all instances of such conduct.
Page 95 PREV PAGE TOP OF DOC
However, the Antitrust Division's remarkable success in recent criminal prosecutions is the best evidence that no increase in the ceiling on fines is necessary. Current law and the Sentencing Guidelines allows fines based on twice the gain or loss from illegal conduct. The Antitrust Division routinely collects fines in excess of the current $10 million ceiling by relying on these provisions of the Sentencing Guidelines.
The Antitrust Division collected a record-breaking $1.1 billion in criminal fines in fiscal year 1999, which exceeds the cumulative fines collected in all criminal antitrust cases since the Sherman Act was enacted. For example, the 1999 investigation of an international vitamins cartel resulted in a $500 million fine against Hoffman-La Roche, the Swiss pharmaceutical firm (the single largest criminal fine ever imposed), a $225 million fine against BASF, and an agreement by six European executives to serve prison sentences in the U.S. The highest visibility, largest criminal investigation in DOJ history was the well publicized investigation into food and feed additives (lysine and citric acid) involving Archer Daniels Midland and several other firms. Fines assessed total over $200 million, with ADM alone paying a fine of $100 million based on the Sentencing Guidelines, which allow fines at twice the gain or loss from the illegal conduct.
Thus, the Bill addresses a problem that does not exist.
III. THE BRT OPPOSES SPECIAL ANTITRUST LAWS FOR AGRICULTURE.
The Bill proposes to subject agribusiness mergers and other practices that might affect agriculture to particularly detailed antitrust scrutiny and duplicative agency review by both the Department of Justice (''DOJ'') and Department of Agriculture (''USDA''). Protecting the farming community is a worthy goal that Congress should achieve directly rather than by amending the antitrust laws, but the changes proposed by the Bill are unnecessary and unwise.
Page 96 PREV PAGE TOP OF DOC
The antitrust laws apply to virtually all industries with an even hand and not to achieve any particular outcome for favored or disfavored industry segments. For that reason, the U.S. antitrust laws enjoy almost universal support. Shifting from this even handed approach to protect a single economic segmentfamily farmersdistorts the purpose of laws that have served our economy well. The existing antitrust laws already protect farmers against large purchaser abuse because the improper exercise of the power to lower prices below competitive levels is already unlawful, and the federal antitrust agencies have enforced the law against conduct that might adversely affect farmers.(see footnote 33)
This is illustrated by several recent DOJ enforcement actions. For example, the DOJ's recent case challenging Cargill's acquisition of Continental Grain demonstrates DOJ's use of the antitrust laws to protect the interests of farmers against monopsony power.(see footnote 34) DOJ concerns were focused on competition between the firms in ''upstream'' markets (that is competition for the purchase of grain and soybeans from farmers and other suppliers). The DOJ concluded that reduction in competition would likely have resulted in farmers receiving less money for crops unless the competitive problems were eliminated by a consent decree.
In November 1999, the DOJ filed a complaint challenging the proposed merger between New Holland and Case Corporation because of concerns about increased prices for certain types of farm equipment.(see footnote 35) To address the DOJ's concerns, the parties agreed to significant divestitures, including New Holland's four-wheel-drive and large two-wheel-drive tractor businesses, and Case's interest in a joint venture that sold hay and forage tools.
Page 97 PREV PAGE TOP OF DOC
In 1998, the DOJ also investigated Monsanto's acquisition of DeKalb Genetics Corporation, an acquisition in the area of biogenetics.(see footnote 36) Both parties were industry leaders in corn seed technology and owned intellectual property rights over important technology. The DOJ expressed concern over how the transaction would affect competition for seed. To address these concerns, Monsanto spun off to the University of California at Berkeley its claims to a new technology to introduce certain new genetic traits into corn seed. Monsanto also entered into commitments to license its Holden's corn germplasm to a number of seed company customers, in order for these other seed companies to make their own corn hybrids. In another transaction, in 1999, Monsanto abandoned its proposed acquisition of Delta Pine & Land Co., another large cotton seed company, after the DOJ expressed that it was prepared to bring suit to block the transaction.
Subjecting agribusiness to duplicative agency review will impose greater costs without any likely gain. Dual jurisdiction as proposed by the Bill could create conflicting legal standards, increase costs of doing business, and reduce certainty and transparency. The DOJ has created a Special Counsel for Agriculture and dedicated staff with experience in agriculture matters to the Transportation, Energy and Agriculture Section of the Antitrust Division. The DOJ and FTC already regularly consult with the USDA. It would be unwise to authorize USDA to undertake an independent antitrust review for which it is ill-suited rather than cooperate in antitrust review by the DOJ, which has experience in both antitrust and agriculture issues.
The BRT therefore opposes enactment of the Bill. Rather, Congress should encourage the USDA and the antitrust agencies to continue to consult on matters relating to their law enforcement responsibilities, and direct that antitrust agencies to enforce the laws to protect competition in all markets, including agricultural markets.
Page 98 PREV PAGE TOP OF DOC
IV. THE BRT SUPPORTS REFORM OF THE HSR FILING AND REVIEW PROCESS BUT OPPOSES H.R. 4321.
The Bill also proposes to amend the Hart-Scott-Rodino Premerger Notification Act (the ''HSR Act''). The Bill would raise the fees for filings under the HSR Act, extend the waiting periods during which proposed mergers cannot be consummated, and authorize disclosure of HSR materials to state attorneys general. Although HSR Act reforms are necessary, the changes proposed by the Bill are totally one-sided and inappropriate in the absences of substantial reforms.
The Bill proposes to increase HSR filing fees, but not any of the thresholds that determine which transactions require notification. Because the filing thresholds have not been increased to reflect inflation and economic growth, today many small transactions that raise no competitive issues nonetheless must be reported under the HSR Act. Indeed, in FY98, nearly 27% of all transactions reported (approximately 1235) were valued at less than $25 million.(see footnote 37) This reporting obligation creates a significant burden and expense to the business community, especially in light of the fact that so few of these transactions (less than 1%) wind up being seriously investigated by either agency.
Furthermore, in FY98, over 70% of all transactions reported were granted early termination, indicating that these transactions did not raise any competitive issues.(see footnote 38) Serious investigations, where clearance is obtained by one of the agencies to conduct a preliminary inquiry, were conducted in only about 10% of all filings, and less than 3% of all filings resulted in the requests for additional data that delay closing. Therefore, most transactions that are being reported under the HSR Act do not raise significant enough competitive issues to warrant any investigation. Even cursory review of these transactions at the federal antitrust agencies imposes additional, unnecessary burdens on the agencies. The limited resources of the agencies should instead be devoted to matters raising real concerns.
Page 99 PREV PAGE TOP OF DOC
The Bill also would require the routine disclosure to state attorneys general of information assembled by the federal antitrust agencies. The BRT strongly opposes any such requirement. The information submitted to the agencies in HSR Act investigations includes some of the most sensitive, valuable information of the merging companies''crown jewel'' data. The routine dissemination of these data to state attorneys general substantially increases the risk that the data will be disclosed publicly. Today, parties to transactions may choose to authorize disclosure to state attorneys general, but do so under strict confidentiality assurances.(see footnote 39)
The House and Senate Judiciary Committees have passed HSR Act reform legislation with wide bipartisan support (S. 1854 and H.R. 4194). Both bills enjoy the support of the federal antitrust agencies as well as the business community. The BRT supports both bills and hopes they will be enacted during the current Congress.
Under the circumstances, the revisions to the HSR Act proposed in H.R. 4321 are unnecessary. Unlike S. 1854 and H.R. 4194, this Bill only raises the fees to be collected by the agencies and changes timing. It neither raises the filing thresholds to eliminate unnecessary filings, nor includes essential reforms to the merger review process. In the absence of those important features, the BRT opposes the HSR provisions of H.R. 4321.
The BRT believes that the U.S. economy has been well served by our antitrust laws. The amendments to those laws proposed in H.R. 4321 are unnecessary and unwise. The BRT urges Congress not to enact H.R. 4321
Page 100 PREV PAGE TOP OF DOC
PREPARED STATEMENT OF THE SECTION OF ANTITRUST LAW, AMERICAN BAR ASSOCIATION
The views expressed herein are presented on behalf of the Section of Antitrust Law. They have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should not be construed as representing the policy of the Association.
The Section of Antitrust Law of the American Bar Association (''Section''), the largest association of antitrust attorneys in the world, recommends that Congress not enact any of the pending legislative bills that would amend the antitrust laws, specifically to protect family farmers and their communities from perceived abuses by large purchasers of agricultural products.
Congressional efforts to protect the farming community are worthy, but amending the antitrust laws is not the tool by which Congress should attempt to achieve its goal. There are seven bills pending before Congress that seek to alter time-tested antitrust standards to protect family farmers against perceived abuses by large purchasers. The amendments would subject agribusiness mergers and certain enumerated practices to particularly detailed antitrust scrutiny and duplicative agency review by both the Department of Justice (''DOJ'') and Department of Agriculture (''USDA''). These changes are likely to impede the implementation of the vast majority of marketing practices and mergers that are likely to be beneficial to the economy, including farmers. In addition, as set forth herein, the proposed changes are unnecessary.
Page 101 PREV PAGE TOP OF DOC
The antitrust laws apply to virtually all industries with the objective of protecting competition, not competitors. The determination of legality is a fact-based inquiry that does not presume any particular outcome or single out any class of trade for preferred treatment. Rather, the analysis weighs the costs and benefits of each transaction. The proposed amendments shift the well-established focus of antitrust from the overriding goal of protecting competition to instead the protection of single class of trade, family farmers. The existing antitrust laws already protect farmers against large purchaser abuse because the improper exercise of monopsony power, i.e., the power to lower prices below competitive levels, is unlawful. Therefore, the proposed legislation is unwarranted.
Similarly, subjecting agribusiness to duplicative agency review is unlikely to achieve Congressional aims and, indeed, may impede the efficient operation of agricultural markets. Dual jurisdiction creates conflicting legal standards, increasing costs of doing business and decreasing transparency. The United States has been leading international efforts to reduce concurrent jurisdiction to review transnational mergers and should apply that position as well for review of mergers within the United States by federal agencies. The proposed legislative efforts may interfere with the high-degree of consultation existing between the USDA and the DOJ. The DOJ's commitment to protecting agricultural markets is demonstrated by the creation of Special Counsel for Agriculture and by the dedicated staff of agricultural specialists that form part of the Transportation, Energy and Agriculture section of the Antitrust Division. The proposed legislation may interfere with this high level of consultation by requiring USDA to undertake an independentrather than cooperativeantitrust review.
The Section therefore opposes enactment of the seven bills. Rather, Congress should encourage the DOJ and the USDA to continue to consult on matters relating to their law enforcement responsibilities, and fully fund antitrust enforcement to protect competition in all markets, including agricultural markets.
Page 102 PREV PAGE TOP OF DOC
The Section of Antitrust Law of the American Bar Association (''Section'') welcomes this opportunity to comment on proposed amendments to the antitrust laws regarding mergers and anticompetitive practices in agribusiness. The Section is composed of antitrust practitioners, government lawyers, and in-house counsel who address antitrust issues on a daily basis. As frontline antitrust lawyers, the Section is eminently qualified to evaluate the proposed legislation.
Congressional efforts to protect the farming community are worthy, but amending the antitrust laws is not the tool by which Congress should attempt to achieve its goals. There are seven bills pending before Congress that seek to alter the antitrust laws to protect an undefined subset of farmers, oftentimes referred to as ''family farmers,'' facing larger purchasers. The bills include substantive and procedural changes to the antitrust laws. Agribusiness mergers and certain enumerated practices apparently will be subject to particularly detailed scrutiny and duplicative agency review. These changes are likely to hinder the vast majority of marketing practices and mergers to the detriment of buyers and farmers. In addition, the proposed changes are unnecessary.
The antitrust laws necessarily use a flexible, balancing approach to evaluate whether mergers or competitive practices are unlawful. The antitrust laws prohibit mergers or conduct that interferes with the competitive process and harm either buyers or suppliers. Necessary to that determination is a weighing of the benefits and costs of the scrutinized conduct that considers the facts and circumstances of that conduct. Recognizing the importance of maintaining a flexible competition enforcement program, the antitrust enforcement agencies, the courts and even Congress are reticent to establish bright-line rules, especially rules prohibiting conduct in one industry that would be perfectly lawful in another industry and favoring one class of business over another. The proposed legislation reverses long-standing policies and may prohibit conduct throughout the agribusiness sector without engaging in the finely detailed analysis that has been the hallmark of antitrust law. Such proposals are inimical to the balancing necessary to a proper competition policy.
Page 103 PREV PAGE TOP OF DOC
Congressional efforts to protect farmers using competition policy are unnecessary because the antitrust laws are sufficient to protect farmers and agribusiness. Antitrust law prohibits the exercise of power by buyers and sellers of all products, including farm products. Monopsony, the power to lower prices paid to suppliers, is as inimical to competition as is monopoly, the power to raise prices paid by buyers. The agencies and most courts have taken this view and there are a number of enforcement actions exemplifying this approach.
Subjecting agribusiness to duplicative review is also unlikely to achieve Congressional aims. Concurrent jurisdiction is counter to the direction taken by Congress, the federal agencies, and international antitrust law enforcement. Congress has typically granted concurrent jurisdiction in industries in which there is comprehensive economic regulation, like telecommunications (Federal Communications Commission, ''FCC'') and power generation (Federal Energy Regulatory Commission, ''FERC''). When Congress deregulated the domestic airline industry, it wrested antitrust enforcement from the regulatory authority and vested it in the Department of Justice (the ''DOJ''). The DOJ and Federal Trade Commission (the ''FTC'') have concurrent jurisdiction over most industries, but have created a clearance process designed to have the actual antitrust review conducted by a single agency, typically whichever one has the industry expertise. Where concurrent jurisdiction continues to exist, the regulatory agency typically uses a similar analysis as used by the antitrust agencies. Some regulatory agencies and Congressional proposals have called concurrent jurisdiction and other industry-specific antitrust exemptions into question. Indeed, international antitrust enforcement agencies have moved to limit the extent to which global transactions and practices are subject to multiple jurisdictions and standards.
Notwithstanding the national and international recognition that antitrust review should be by a single agency, Congress is seeking to protect farmers by granting concurrent jurisdiction to the United States Department of Agriculture (the ''USDA''). We fail to see how duplicative review protects farmers. When evaluating transactions, the DOJ already consults with the USDA. Thus, granting express jurisdiction would not facilitate antitrust enforcement. Duplicative agency review could create conflicts between the DOJ and USDA, slowing the process and imposing costs on agribusiness transactions, including those that benefit farmers. Thus, the proposed legislation is more likely to injure farmers than to assist them.
Page 104 PREV PAGE TOP OF DOC
Even if there is truth to the notion that food processor consolidation is exerting downward pressure on prices paid to family farmers that is disproportionately greater than the same economic pressures felt by the rest of American industry, family farmers are responding by becoming more efficient themselves. These pressures have elsewhere spurred significant productivity gains. For this reason, it would be misleading to take a snapshot of our economy and assume that farmers, unlike other producer segments, are incapable of responding to such pressures and of reaping the benefits offered by the new economy. Recent press reports describe how over 50 percent of farms with annual sales above $250,000 have Internet access and are using it to expand the number of buyers for their products, lower their procurement costs, and eliminate middlemen distributors. Moreover, it would be dangerous to the grower sector of the economy to rob family farmers of the incentive to develop these new tools. Indeed, it would be ironic if the proposed legislation ended up insulating farmers from natural market forces, held in check by well-established antitrust boundaries, at the same time the rest of the world (including non-domestic agricultural industries) was moving to abandon long-held tenets of protectionism.
For these reasons, the Section recommends against adopting the proposed legislation. In lieu of such action, we suggest that Congress continue to ensure adequate funding of the DOJ and FTC antitrust enforcement programs and encourage the antitrust agencies to continue to cooperate with the USDA.
II. CURRENT LEGISLATIVE PROPOSALS
We have identified seven bills pending in Congress that specifically seek to remedy perceived pressures on family farmers. These bills are the:
Page 105 PREV PAGE TOP OF DOC
Agribusiness Merger Moratorium and Antitrust Review Act of 1999, S. 1739 and H.R. 3159 106th Cong. (1999);
Farmers and Ranchers Fair Competition Act of 2000, S. 2411, 106th Cong. (2000);
Agriculture Competition Enhancement Act, S. 2252, 106th Cong. (2000);
Agricultural Enhancement Act of 2000, H.R. 4339, 106th Cong. (2000);
Establishment of the Food and Agricultural Sector of the Antitrust Division of the DOJ, S. 1984, 106th Cong. (1999); and
Antitrust Enforcement Improvement Act of 2000, H.R. 4321, 106th Cong. (2000).
The Agribusiness Merger Moratorium and Antitrust Review (''AMMAR'') Act of 1999, S. 1739, and its companion bill, H.R. 3159, would impose a moratorium on mergers of certain agricultural businesses and create a commission to recommend changes in the antitrust laws. The moratorium will extend until the effective date of ''comprehensive legislation . . . addressing the problem of market concentration in the agricultural sector,'' but no longer than 18 months.
The determination of whether a merger is to be affected by the moratorium is based on a size-of-person test that is similar, but not identical, to that used for determining whether premerger notification is necessary under the HSR Act. Thus, the proposed laws would impose a moratorium on transactions that involve a purchaser which has assets or annual net sales exceeding $100,000,000 and which is acquiring an agricultural business with annual net sales or total assets of more than $10,000,000, or which has assets or net sales exceeding $10,000,000 and which is acquiring an agricultural business with assets or annual net sales exceeding $100,000,000. As in the HSR Act, the transaction must also involve the acquisition of at least 15% of the assets or voting securities of the acquired person, or assets and voting securities worth at least $15,000,000 in the aggregate. These proposed laws, however, do not incorporate the statutory and regulatory exemptions to notification under the HSR Act. Thus, the moratorium provisions sweep more broadly than the HSR Act and may affect agricultural mergers that are now exempted from notification by the government based on the assessment that they are unlikely to affect competition.
Page 106 PREV PAGE TOP OF DOC
The AMMAR Act would also establish the Agricultural Concentration and Market Power Review Commission the purpose of which is ''to study the nature and consequences of concentration in America's agricultural economy'' and to ''make recommendations on how to change underlying antitrust laws and other Federal laws and regulations to keep a fair and competitive agricultural marketplace for family farmers, other small and medium sized agricultural producers . . . and the communities of which they are a part.'' The majority and minority leaders in each house will each appoint three members on the recommendation of the chairmen and ranking members of the agricultural committees in each house, for a total of twelve members.
Like the AMMAR Act, the proposed Farmers and Ranchers Fair Competition Act of 2000 contains provisions that will be familiar to antitrust lawyers, but also contains language not found in the antitrust laws: it prohibits unfair or deceptive practices, false and misleading statements, discrimination in price for contemporaneously sold agricultural commodities of like grade and quality (not sold through public auction), and requires premerger notification of mergers of at least a certain size. But it also forbids giving ''undue or unreasonable preference or advantage to any particular person or locality'' in connection with a transaction involving an agricultural commodity. It prohibits retaliating against or disadvantaging any person who makes non-libelous statements regarding improper conduct by persons involved in agricultural transactions. It prohibits agreeing to a right of first refusal until after a study required by the bill is complete. And, most importantly, it provides that the enforcement of the act, including the review of premerger notifications, shall rest with the Secretary of Agriculture. The premerger notification thresholds are similar, but not identical, to those in the HSR Act.
The Agriculture Competition Enhancement Act would create within the USDA a Special Counsel for Competition Matters to be appointed by the President with the advice and consent of the Senate. The Special Counsel would be charged with enforcing the act. The bill would create a parallel review within the USDA of all mergers of agricultural businesses subject to premerger review by the antitrust enforcement agencies under the HSR Act, and would specify that the Special Counsel, ''observing the time period limitations provided under the antitrust laws and the DOJ merger guidelines,'' shall review proposed mergers to determine whether they ''would cause substantial harm to the ability of independent producers and family farmers to compete in the marketplace.'' The Special Counsel may also request that the DOJ or the FTC require notification of an agricultural merger that falls below the HSR Act thresholds if he or she ''believes that such transaction will cause substantial harm to the ability of independent producers and family farmers to compete in the market.'' The bill would also prohibit unfair, anticompetitive or deceptive practices prohibited by the antitrust laws, including conspiracies to manipulate prices. Violating these provisions, which are to be enforced by the USDA, may result in a civil penalty of not more than $10,000 for each violation. Finally, the bill would require that an ''Assistant Attorney General for Agricultural Antitrust Matters'' be established ''within the Antitrust Division of the Department of Justice.'' The bill also contains a number of other provisions not directly related to competition policy.
Page 107 PREV PAGE TOP OF DOC
The Agricultural Competition Enhancement Act of 2000, would impose an absolute prohibition on mergers of very large agricultural entities: it would prohibit someone who already sells livestock, poultry or basic agricultural commodities (defined as corn, wheat or soybeans) at wholesale from acquiring another person or entity if the net assets or annual sales relating to agriculture of each person or entity exceeds $1 billion and if the acquisition ''would reduce competition so as to have a negative effect on prices paid to producers of'' the listed commodities. The bill would also require that anyone who files a notice of a merger under the HSR Act simultaneously file a similar notice with Secretary of Agriculture, who would issue a report containing, among other things, the secretary's determination of the proposed acquisition's effects on prices paid to producers of the relevant agricultural commodities. H.R. 4339 also calls for the creation of a special counsel for agriculture within the antitrust division and a study by the GAO of whether the Grain Inspection, Packers and Stockyard administration needs additional resources to investigate the ''competitive implications of structural changes in the meat packing industry.''
The proposed Antitrust Enforcement Improvement Act of 2000, would amend the Sherman and Clayton Acts as well as the Packers and Stockyards Act. Many of the proposed amendments to the Sherman and Clayton Acts are significant and of broad interest to the antitrust bar and our clients; but only certain proposals are applicable to agribusiness. H.R. 4321 seeks to clarify the terms ''commerce'' and ''competition'' in Section 1 of the Sherman Act by adding ''(which may include trade or commerce of sellers, trade or commerce of wholesale purchasers, or trade or commerce of both).'' It would add to Section 7 of the Clayton Act, ''For the purposes of this section, the term 'competition' may include competition among sellers, competition among wholesale purchasers, or competition among both.'' H.R. 4321 also proposes additional definitions of terms to clarify the meaning of ''undue or unreasonable preference or advantage'' in Section 202 of the Packers and Stockyards Act. Finally, in language similar to that of the House's and Senate's proposed AMMAR Act, the bill will create a congressionally appointed commission, again named the Agricultural Concentration and Market Power Review Commission, to review agricultural antitrust policy, and creates an Office of Special Counsel for Agriculture within the DOJ.
Page 108 PREV PAGE TOP OF DOC
The final bill reviewed in this report is Establishment of the Food and Agricultural Sector of the Antitrust Division of the DOJ, S. 1984, which creates within the Antitrust Division of the DOJ a position with the primary responsibility of advising the Assistant Attorney General on agricultural antitrust issues, including investigating restraints of trade in the agricultural sector and reviewing agricultural mergers. The advice given by the person who fills this position is to ''take[ ] into account the effects of the conduct or transaction under investigation on consumers, agricultural producers and rural communities.''
III. THE ANTITRUST LAWS ALREADY ADDRESS MONOPSONY CONCERNS IN AGRIBUSINESS
A. Antitrust Analysis Requires a Flexible, Fact-Specific Inquiry
To date, the federal antitrust laws apply unaltered across virtually all industries, with the overriding objective to foster free and open competition. These goals form the underpinning of the United States' capitalist form of economy and the underlying belief that competition leads to better quality, increased innovation, and lower prices for those products and services desired by consumers. Enforcement of the antitrust laws premised on the notion that competitive market forcesnot governmentshould play the primary role in determining the structure of the economy. The goal of the federal antitrust laws, therefore, is to protect competition, and not individual competitors.
The Sherman Act, the first enacted federal antitrust law, has been interpreted by the courts to set forth two basic requirements: (1) companies cannot agree to limit competition in ways that unreasonably restrain trade; and (2) a single company cannot use ''unreasonable'' methods to achieve or maintain, or attempt to achieve or maintain, a monopoly of a particular industry. In both instances, the antitrust laws are designed to prevent firms, individually or in concert with others, from unlawfully exercising market power. Market power is often defined as the ability of a seller or group of sellers to drive prices above the competitive level, reduce output, reduce the quality of a good or a service, or reduce the rate of innovation in a particular industry. In other instances, market power is the ability of a buyer or group of buyers to reduce prices below competitive levels, reduce output, or reduce innovation. The predominant method of analyzing the legality of a practice is known as the rule of reason. Under that rule, the courts examine the market circumstances to determine whether the practice reduces competition. If so, then the court analyzes the pro-competitive justifications for the practice. The court will find the practice lawful if after weighing the overall effect, the practice promotes rather than restricts competition. Thus, the rule of reason is an all-encompassing facts and circumstances analysis.
Page 109 PREV PAGE TOP OF DOC
Section 7 of the Clayton Act prohibits mergers and acquisitions of voting stock or assets where the effect of such a transaction ''may be substantially to lessen competition, or to tend to create a monopoly'' in ''any line of commerce'' in ''any section of the country.'' The focus is not on the conduct of the merging parties, but on whether the merger is reasonably likely to lessen competition substantially in one or more relevant antitrust markets. Application of Section 7 typically requires the definition of the relevant market(s) within which the competitive effect of the merger is to be analyzed. The analysis then proceeds to determine whether the merger will create or enhance market power or facilitate its exercise either by coordinated or unilateral conduct in such market(s).
The merger laws are designed and interpreted to balance competing interests between companies that desire to modify or create business relationships in a given market and their customers and suppliers who seek to buy or supply these companies' inputs and outputs. As with the rule of reason, the process of balancing these competing interests goes beyond simple presumptions and typically requires an extensive fact driven analysis. Thus, there is already in place a well developed and principled approach for evaluating competition issues that has withstood the test of time. This approach should not be tinkered with lightly. The proposals seek to substitute blanket conclusions about complex industry dynamics in lieu of fact-based inquiries which runs counter to well established antitrust jurisprudence.
B. The Antitrust Laws Prohibit the Illegal Exercise of Monopsony Power
The proposed laws are all animated by the concern that ''the economic viability of family farms'' is being jeopardized by the increasing consolidation of food packers and processors who are the main buyers of the products produced by these farms. The gravamen of these legislative proposals is that these power buyers, by virtue of their size, are exercising monopsony power through the exertion of strong downward pressure on the prices paid to farmers. However, the antitrust laws already enacted by Congress are sufficient to protect the beneficiaries of the proposed legislation, farmers, from these types of unlawful, market-distorting practices.
Page 110 PREV PAGE TOP OF DOC
Monopsony is simply the flip side of monopoly. Monopoly is the power to raise price and reduce output; monopsony is the power of a buyer to reduce purchases from and prices paid to sellers. Both monopoly and monopsony impose economic harm and misallocate resources. Monopoly injures buyers by raising prices and diverting resources from the monopolist's product to an alternative. Monopsony injures sellers by lowering prices and encouraging them to redirect their energies to socially less valuable products. Take the example of a hypothetical corn farmer, who is deprived of an adequate return if a corn oil producer exercises monopsony power. This may force the corn farmer to switch to alternative crops, or force him to exit farming altogether. In either event, the economy as a whole is worse off because the farmer's efforts are misdirected to less desired endeavors. The antitrust laws are equipped to prevent such deleterious effects.
Some claim that exercise of monopsony power is not detrimental to society because the lower prices are passed on to consumers. However, absent some efficiency-enhancing conduct, there is no reason to assume that monopsony savings result in lower prices. Again, consider the example of a hypothetical corn oil producer monopsonist. It reduces its purchases of inputs (e.g., corn), and, with less input, reduces the amount that it produces (e.g., corn oil). If the corn oil producer has no market power in the downstream market, the market to sell the oil, then there would be no effect on output prices. There is no incentive for the corn oil producer to lower its prices because it is already selling all it can. Thus, monopsony pricing does not translate into lower prices and does not benefit consumers. On the other hand, if the corn oil producer does have market power in the downstream market, it may couple the exercise of its upstream monopsony power with its downstream market power and that could result in higher consumer prices. Although some courts have barred antitrust actions based on monopsony without a showing of monopoly power or harm to consumers, this position is inconsistent with many other court decisions and the views of the antitrust enforcement agencies.
Page 111 PREV PAGE TOP OF DOC
There may be some impediments to challenging illegal monopsony that do not generally arise in monopoly cases. These impediments may give rise to the perception that the antitrust laws do not address monopsony. Sellers generally are reluctant to sue a large customer because the challenge is almost certain to end the relationship. In this instance, the courts may not provide an effective remedy for monopsony. This would explain, in part, the relatively small number of private cases challenging monopsony. The proposed legislation does not address this concern. The seller and enforcement agency may not be able to distinguish between hard bargaining and monopsony. On one hand, the large buyer may be avoiding transactions costs or achieving other economies. On the other hand, the buyer may be exercising power. It is not always easy to distinguish the two. While the proposed legislation identifies undue, unfair and anticompetitive practices that violate the law, it does not attempt to guide the courts or enforcement agencies on how to distinguish bargaining from market power.
Notwithstanding these potential hurdles, the federal antitrust law is capable of addressing monopsony power. Indeed, agriculture is one of the industries where antitrust enforcement against the creation of monopsony has been most active. More importantly, none of the legislative proposals reduce the hurdles to challenging monopsony power. To that extent, the proposed legislation is unlikely to promote antitrust enforcement of monopsony cases.
C. The Antitrust Laws are Being Enforced Against Illegal Exercise of Monopsony Power
Both the DOJ and FTC have been vigorously challenging mergers involving monopsony. In just the last year, the DOJ alleged in two complaints that the combined firm would have monopsony power, and as a result required relief before clearing these mergers. Similarly, the FTC has been aggressively pursuing monopsony. These challenges are not recent phenomena.
Page 112 PREV PAGE TOP OF DOC
The DOJ's recent case challenging Cargill's acquisition of Continental Grain demonstrates the government's ability and willingness to apply the antitrust laws effectively to agricultural related transactions, and in doing so to protect the interests of farmers against monopsony power. In this matter, the DOJ examined all the markets that would be affected by the transaction, and concluded that competition in a number of markets would be adversely affected if the assets of the two firms were merged. The DOJ's concerns were focused on competition between the firms in ''upstream'' markets, that is competition for the purchase of grain and soybeans from farmers and other suppliers. The DOJ concluded that reduction in competition would likely have resulted in farmers receiving less money for crops than in the absence of the transaction. Under the consent decree, restrictions were imposed on the transaction, including requiring the parties to divest (1) four port elevators located in Seattle; Beumont, Texas; Stockton, California; and Chicago; (2) four river elevators located in East Dubuque, Illinois; Morris, Illinois; Lockport, Illinois; and Caruthersville, Missouri; and (3) one rail terminal in Troy, Ohio.
The federal agency enforcement efforts are not limited to mergers. The DOJ has long recognized the danger of nonmerger monopsony conduct, and frequently considers the potential for the creation or maintenance of monopsony power when drafting business review letters. Additionally, private parties have brought suit under the antitrust laws to prevent monopsony or oligopsony in various industries, including agriculture. Also, the FTC apparently is scrutinizing B2B electronic marketplaces to ensure that incumbent firms do not use Internet exchanges to exercise monopsony power over suppliers.
D. The Antitrust Laws are Being Enforced Against Anticompetitive Actions That Threaten Family Farmers
Page 113 PREV PAGE TOP OF DOC
We have identified a significant number of antitrust enforcement actions, undertaken under existing law that protected family farmers from potential anticompetitive harm.
In November 1999, the DOJ filed a complaint challenging the proposed merger between New Holland and Case Corporation because of concerns about increased prices for certain types of machines that were purchased by farmers. To address the DOJ's concerns, the parties agreed to significant divestitures, including New Holland's four-wheel-drive and large two-wheel-drive tractor businesses, and Case's interest in a joint venture that sold hay and forage tools.
In 1998, the DOJ also investigated Monsanto's acquisition of DeKalb Genetics Corporation, an acquisition in the area of biogenetics. Both parties were industry leaders in corn seed technology and owned intellectual property rights over important technology. The DOJ expressed concern over how the transaction would affect competition for seed. To address these concerns, Monsanto spun off to the University of California at Berkeley its claims to a new technology to introduce certain new genetic traits into corn seed. Monsanto also entered into commitments to license its Holden's corn germplasm to a number of seed company customers, in order for these other seed companies to make their own corn hybrids. In another transaction, in 1999, Monsanto abandoned its proposed acquisition of Delta Pine & Land Co., another large cotton seed company, after the DOJ expressed that it was prepared to bring suit to block the transaction.
In the seminal case in monopsony law, the Supreme Court in 1948 remanded for trial an action by sugar beet farmers alleging harm from manipulative purchasing practices by a trio of regional beet refineries. It was alleged that refiners were able to dominate all aspects of beet production because of the limited growing area for beets and difficulties in transporting beets. The refineries' alleged anticompetitive practices included an agreement to pay a uniform price to the beet growers, the result of which was that the farmers' only alternative to selling to this group of refineries was to stop growing beets altogether, because the transport of unprocessed beets was prohibitively expensive. The Court held that the allegations if proven would violate the antitrust laws.
Page 114 PREV PAGE TOP OF DOC
In the mid-1970s, a coalition of fed cattle producers brought a major antitrust action against beef processors that stretched on for over a decade. The heart of this litigation was the cattle sellers' contention that beef packers had conspired to fix cattle prices by using a price list. The cattle sellers alleged that Iowa Beef Producers (now known as IBP, Inc.) and others exercised their monopsony power to depress the prices in the cattle procurement market. In 1990, the Fifth Circuit found that the sellers could not meet the burden of an antitrust plaintiff. However, the court noted that a sizeable amount of evidence supported the cattle sellers' allegations and that the possibility remained open that IBP and others acted as conspiring oligopsonists.
In Cackling Acres, Inc. v. Olson Farms, Inc., a group of fourteen egg producers sued two large egg distributors under Sections 1 and 2 of the Sherman Act, complaining that the defendants had conspired to depress the price of eggs. The jury found by special verdict that the defendants had abused their buying power and awarded the plaintiffs substantial damages for the defendants' antitrust violations. The Tenth Circuit upheld the jury's verdict, finding sufficient evidence to support the award to the plaintiff egg producers. As evidence, the plaintiffs relied on price parallelism, and documents and oral testimony regarding conspiratorial meetings.
IV. THE PROPOSED BILLS ARE INCONSONANT WITH FEDERAL ANTITRUST LAW PRINCIPLES
A. The Proposed Legislation Conflicts with Established Merger Law
The various proposed laws single out a particular industry for special treatment, make certain across the board assumptions, and sometimes leave little, if any, room for fact-based inquiry. Each of the proposed laws shifts the well-established focus of merger review from a lessening of competition overall with the potential resulting consumer harm to harm to a particular class of competitors, in this case family farms, regardless of whether or not consumers are harmed. Indeed, consumer benefits are factored out of some of these proposals completely. The proposed laws therefore prejudice the analysis and may lead to inconsistent conclusions. For example, they do not appear to provide any remedy to non-owner operated farms, although a merger that causes anticompetitive harm to family farms is likely to inflict such harm on these larger producers as well.
Page 115 PREV PAGE TOP OF DOC
In their least objectionable form, these bills to some degree unnecessarily duplicate existing antitrust protections as interpreted judicially. For example, the Antitrust Enforcement Improvement Act of 2000 (H.R. 4321) defines ''competition,'' as that term is used in Section 7 of the Clayton Act, to include competition among ''sellers'' and competition among ''wholesale purchasers.'' This principle has been recognized by the case law and by the federal antitrust authorities for some time and, therefore, it may be unnecessary to mandate such interpretations by statute.
As described above, the Antitrust Enforcement Improvement Act of 2000 creates an advisor to the Assistant Attorney General of the Antitrust Division. The advisor is charged with ensuring that all antitrust investigations take into account the effects of the conduct or transaction at issue on consumers, agricultural producers and rural communities. To the extent this mandate is consistent with existing principles of antitrust law that consider the effects of the exercise of market power on consumers and of the exercise of monopsony power on producers, it is redundant and unnecessary. To the extent it requires consideration of the effects on ''rural communities,'' there is no clear explanation regarding how this factor should be considered, and such consideration could be inconsistent with overall antitrust objectives.
Indeed, certain pending bills include provisions that move beyond well-recognized competition-enhancing standards in order to prohibit transactions that may be procompetitive in their overall effect, but which it is argued threaten the viability of less efficient family farms and independent agricultural producers. For instance, the Senate's Agriculture Competition Enhancement Act (S. 2252), as it relates to amending merger law standards, focuses exclusively on those transactions that ''would'' cause ''substantial harm'' to the ability of ''independent producers'' and ''family farmers'' to compete in the marketplace. Mergers that ''significantly increase [ ] market power'' and mergers that increase the ''potential'' for ''anticompetitive or predatory conduct'' are identified as unlawful. However, the explicative language also makes mergers unlawful if they have an ''effect'' (presumably downward) on ''prices paid to producers'' who have a vendor/vendee relationship with the merging parties, or if they ''adversely'' affect (presumably independent) producers. Under existing law, such mergers already are unlawful if they create or enhance monopsony power. Yet, this language appears to be more expansive and might bar any transaction in which, because of volume discounts, prices to the merging party are lowered, thereby potentially prohibiting the achievement of scale efficiencies that may be procompetitive in their overall effect.
Page 116 PREV PAGE TOP OF DOC
The Farmers and Ranchers Fair Competition Act of 2000 (S. 2411) employs a similar standard in prohibiting mergers that are ''significantly detrimental to the present or future viability'' of family farms, ranches or rural communities, Section 7(d)(1)(A), or that lead to the commission of unfair, unreasonable, unjustly discriminatory or deceptive practices by processors, commission merchants or brokers, Section 7(d)(1)(B). The bill gives the Secretary of Agriculture the authority to define the standards by which a merger may be significantly detrimental to the present or future viability of family farms, ranches or rural communities but does not elaborate on the criteria to be applied to make this determination. Again, depending upon how this language is interpreted, the standard could be used to challenge anticompetitive mergers that create monopsony power or procompetitive mergers that ultimately lead to the elimination of inefficient agricultural producers.
The Agricultural Competition Enhancement Act of 2000 (H.R. 4339) bans mergers between companies that purchase livestock, poultry or basic agricultural commodities for wholesale resale (''affected purchasers'') if (1) their combined assets or total sales exceed $1 billion and (2) the combination would ''reduce'' competition to the point of having a ''negative effect on prices paid to producers of any livestock, poultry, or basic agricultural commodities.'' What constitutes a ''negative effect'' on prices paid to producers is unclear. Mergers that enable agribusinesses to buy greater volume at legitimate discounts would be procompetitive. Yet, these mergers could also be said to drive down prices (but perhaps not margins). More puzzling is the $1 billion threshold, which seems arbitrary.
These proposals share a similar flaw. They articulate standards that could be used to outlaw mergers that are procompetitive. And, as discussed above, several bring within their scope relatively small transactions that are unlikely, in the opinion of the antitrust agencies, to have a significant anticompetitive effect. The Section therefore recommends against adopting these proposals which could be used to deny consumers the benefits of lower prices, better service and higher quality, and which are not monopsonistic.
Page 117 PREV PAGE TOP OF DOC
B. Legislative Proposals are Inconsistent with Non-Merger Antitrust Provisions as Well
In addition to the proposed changes in the review of mergers in the agriculture industry, some of the proposed bills propose a series of restrictions on the economic conduct of those who buy from agricultural producers. These restrictions include provisions related to price discrimination, unfair competition, permissible contract provisions, and vertical integration. Under the two Senate bills, the USDA, using a newly created enforcement mechanism, would enforce these restrictions.
The Section does not support these proposed provisions. The Section believes that the existing antitrust laws provide substantial and sufficient protection against the exercise of undue market power by those purchasing from agricultural producers, and that the addition of new provisions, no matter how well intentioned, risks creating unintended harm to consumers and to competition in agriculture-related markets. Moreover, the Section does not believe there is a need for authorizing USDA to engage in new antitrust and consumer protection enforcement activities. There are currently two federal agencies charged with precisely this role that already have the necessary expertise and available statutory authority to undertake the necessary investigatory and enforcement activities in the agriculture industry. There is currently sufficient opportunity for USDA (or any other federal agency) to encourage and assist antitrust and consumer protection enforcement efforts by the FTC and the DOJ. Creating a new enforcement body and mechanism creates the risk of inconsistent antitrust and consumer protection enforcement standards across industries that could become confusing and perhaps even conflicting.
Similar to the proposed changes in the merger review process, the non-merger provisions in the Senate bills are intended to correct a perceived imbalance in bargaining power between producers and purchasers of agricultural commodities. The antitrust laws, however, already contain provisions intended to assist producers in dealing with such imbalances. Section 6 of the Clayton Act, and the Capper-Volstead Act, make the formation and operation of agricultural cooperatives immune from federal antitrust laws, within certain limits. Most important, producers may form and operate cooperatives solely for the purpose of marketing and selling their products collectively.
Page 118 PREV PAGE TOP OF DOC
The Section recognizes that it is likely that many producers are not in position to take advantage of the protections offered by Section 6 and the Capper-Volstead Act. However, federal and state antitrust laws offer a number of opportunities for producers who have been harmed by their customers' unfair or anticompetitive conduct. The antitrust laws have long recognized that concerted or unilateral activity by purchasers that improperly depress the prices paid for products can be as harmful as the illegal exercise of market power by sellers. As discussed above, the exercise of monopsony power by buyers has often been found to be illegal. Producers can bring private actions, either individually or as part of class actions, against predatory conduct by purchasers, or they can seek to have state or federal antitrust authorities pursue such actions.
The Senate bills also seek to restrict price discrimination by purchasers of agricultural products. The Section understands that these provisions are designed to assure that small farmers do not receive unfavorable prices for their products relative to larger competing producers. In essence, these provisions would create solely in agriculture a buyer-side version of the Robinson-Patman Act, which prohibits price discrimination by sellers of goods under certain conditions. Like these provisions, the Robinson-Patman Act was intended, at least in part, to protect small businesses from the advantages held by larger rivals. The Robinson-Patman Act has been criticized as inimical to the general goals of the antitrust laws by preventing consumers from benefiting fully from the competitive advantages of more efficient retailers. The Section is concerned that the provisions here, while perhaps laudable in their intent to assist family farmers, risk creating unintended harm to the competitive process. Because these provisions would prevent discriminatory prices to be paid to producers, they could result in overall market prices for agricultural goods that fail to reflect the efficiency of larger producers. Artificial constraints on prices prevent markets from operating efficiently and can prevent markets from rewarding increased production efficiency. The economy benefits from increased efficiency at all levels of production and distribution, and, thus, provisions that reduce the ability to recognize efficiency can harm social welfare. As noted above, there do exist remedies available under state and federal law if buyers of agricultural products act in a predatory or unfair manner that does not risk the harm to consumers posed by the proposals pending in Congress.
Page 119 PREV PAGE TOP OF DOC
V. CONCURRENT JURISDICTION OVER AGRIBUSINESS IS UNWARRANTED
Several of the proposed bills discussed above contain provisions granting the USDA the power to undertake antitrust review, both mergers and non-merger matters, or require the DOJ to create a position within the DOJ to oversee agribusiness transactions. For example, under the Agricultural Competition Enhancement Act mergers involving purchasers that are both above and below the HSR threshold would be evaluated by the Secretary of Agriculture. The Secretary would determine whether the acquisition would (1) give affected purchasers ''significantly increased market power,'' (2) increase the potential for anticompetitive or predatory pricing conduct, and (3) affect the prices paid by the affected purchasers to agricultural producers. The Secretary would then prepare a report that detailed this analysis and include an economic analysis that tracks established Clayton Act legal standards. This would effectively create dual jurisdiction over agricultural mergers.
Concurrent jurisdiction is potentially harmful because it likely would increase costs and time delays inherent in duplicative review and has the potential for inconsistent standards and outcomes. Some of the bills could also impede the existing cooperation between the DOJ and USDA. We also do not view concurrent jurisdiction as benefiting competition in agribusiness. Concurrent jurisdiction is properly reserved for industries requiring comprehensive regulation, and agribusiness is not such an industry. Moreover, to the extent that the DOJ requires industry-specific input knowledge, it already consults with the USDA. With potential benefits outweighing the likely costs, we view the proposed procedural amendments to the antitrust laws as unwarranted.
Page 120 PREV PAGE TOP OF DOCA. Experience Shows That Concurrent Jurisdiction Is Generally Harmful
A dual review process creates a significant degree of uncertainty, potentially deterring procompetitive mergers, joint ventures and distribution methods. Dual review may result in inconsistent outcomes, thereby reducing the transparency of individual agency decisions. For this reason, Congress and the Federal agencies have avoided concurrent jurisdiction.
One of the concerns arising from concurrent jurisdiction is that industry members will be subjected to conflicting standards of antitrust review. One such example is the NYNEX/Bell Atlantic merger. The DOJ approved the merger without comment, while the FCC specified comprehensive conditions. In the recent merger of SBC and Ameritech, the FCC approved the merger subject to certain conditions that it anticipated would increase competition ''in the provision of local exchange services, including advanced services.'' The DOJ's review of the proposed merger led to a stipulation and final judgment that required the parties to divest certain cellular system assets.
Dual agency review is also costly to industry participants and regulatory agencies. Transaction costs are significantly increased for industry participants, who must respond to extensive requests for information from two agencies rather than one. The cost also in terms of agency resources is pronounced. For a single transaction, it may be necessary for numerous agency attorneys, paralegals and economists to review hundreds (if not thousands) of boxes of documents and interview dozens of witnesses.
Multiple agency review has other drawbacks. The regulatory agencies often attempt to apply competition-related principles (e.g., market definition, market power) despite the fact that they lack the expertise and experience of the antitrust agencies. Thus, even in the application of seemingly identical standards, disparate outcomes may result that increase the level of uncertainty and unpredictability in transactions. Uncertainty is exacerbated as well by agencies' use of different time periods for review. Regulatory agencies may be more open to political and special interest pressure than the antitrust agencies. In addition, such agencies may not have in place the statutory or regulatory protection from public disclosure of confidential information and, therefore, may be required under the review processes subsequently to disclose confidential information.
Page 121 PREV PAGE TOP OF DOC
The agencies themselves have been critical of concurrent jurisdiction. In November 1997, the Attorney General and Assistant Attorney General for Antitrust formed the International Competition Policy Advisory Committee (the ''Advisory Committee'') to study international antitrust issues. One topic addressed by the Advisory Committee was the overlapping roles of agencies reviewing mergers and acquisitions in some sectors. The majority of the Advisory Committee in its Final Report recommended removing competition review from the sectoral agencies and giving the power exclusively to the DOJ and FTC. The Advisory Committee's concerns included the duplication and inefficiencies created by a dual review system, as well as concerns about the negative impact on international efforts to harmonize policies and attain cross-border cooperation. Moreover, the Advisory Committee recognized that dual jurisdiction could create a perception that the FTC and DOJ lack the power to discuss with authority to foreign governments on particular transactions or on competition policy generally because they cannot bind the regulatory agencies that also have reviewing authority.
Even if such concerns were of little value, concurrent jurisdiction does not ensure that competition or farmers will be protected any better than under current procedural protections. For example, in the Union Pacific and Southern Pacific case, the DOJ and Surface Transportation Board (''STB'') reviewed the merger of two major railways in the southern United States. The DOJ strongly opposed the transaction and argued for significant divestitures of parallel tracks or for blocking the transaction entirely. In contrast, the STB, the agency with industry expertise, approved the merger subject to regulatory conditions. The merger resulted in significant delivery and transportation disruptions for many months. Had the STB recognized the power of the merged company, it could have avoided this waste. Thus, regulatory agency review provides no assurance that any segment of the industry or competition will be protected.
Page 122 PREV PAGE TOP OF DOC
B. Concurrent Jurisdiction Is Reserved for Industries Requiring Comprehensive Regulation
Congress typically has reserved concurrent jurisdiction for those industries with natural monopoly characteristics, where safety or national security is an overriding concern, or where universal service may be desired. In those sectors, Congress grants the regulatory agency oversight over all aspects of competition, including operations, pricing, entry, and exit. In these instances, the agency given the concurrent power to review transactions is the one with the expertise, responsibility and experience in interpreting and applying the complex regulatory regime governing that industry. Agencies that have concurrent jurisdiction with the FTC/DOJ for the review of mergers and other acquisitions are discussed below.
FCC The FCC has the power to review telecommunications mergers and acquisitions under Sections 7 and 11 of the Clayton Act and the Communications Act of 1934 (as amended). In assessing transactions, the FCC employs a ''public interest'' standard under which the Commission considers several factors pertaining to a proposed merger or acquisition, including effects on competition, universal service, national security, spectrum efficiency and diversity of views and content. As a part of its review, the FCC engages in competitive analysis under the auspices of the 1992 Horizontal Merger Guidelines promulgated by the DOJ and FTC.
FERC Pursuant to Section 402(a) of the Department of Energy Organization Act, regulation of mergers and acquisitions under the Natural Gas Act and Section 203 of the Federal Power Act was transferred to FERC in 1977. The Natural Gas Act requires FERC to apply the Natural Gas Act's public interest requirements in regulating gas companies and to take into account federal antitrust policies. Under the Federal Power Act, if it deems that a merger will be ''consistent with the public interest,'' FERC will approve a merger. According to Section 203(b), the Commission may condition approval on ''such terms and conditions as it finds necessary or appropriate to secure the maintenance of adequate service and the coordination in the public interest of facilities subject to the jurisdiction of the Commission.'' FERC uses three factors in determining whether a proposed merger will be in the public interest: (1) the merger's effect on competition, (2) the merger's impact on costs and rates and (3) the merger's impact on regulation. In 1996, FERC ''adopted'' the FTC/DOJ Horizontal Merger Guidelines as a framework for its review of mergers. FERC typically adopts a more narrow relevant market definition than the DOJ or FTC that tends to place a greater emphasis on the impact of the transaction on individual customers. Under the Federal Power Act, FERC also prohibits discriminatory pricing and access to natural gas and electric transmission systems.
Page 123 PREV PAGE TOP OF DOC
CAB/FAA For many years, mergers and acquisitions of one or more air carriers or persons engaged in aeronautics were prohibited by the Federal Aviation Act of 1958 unless approved by the CAB. The CAB's jurisdiction over airline mergers was transferred in 1985 to the DOT as a part of the Civil Aeronautics Board Sunset Act of 1984. Under this Act, DOT's jurisdiction over domestic airline mergers terminated on January 1, 1989, and today these aviation industry mergers are reviewed by the DOJ under Clayton Act standards applicable to the balance of the economy. Of course, airline safety is regulated today by the FAA.
ICC/STB Between 1887 and 1995, the ICC regulated the railroad industry pursuant to the Interstate Commerce Act. As a part of the gradual deregulation of railroads, in 1995, Congress enacted the Interstate Commerce Commission Termination Act, which terminated the ICC and transferred its powers to regulate railroads to the STB. The Act vested jurisdiction over rail mergers, consolidations and pooling transactions with the STB. While the DOJ participates in a dual review as a commenting party, the STB has the power to approve mergers despite DOJ opposition. The STB will approve a merger or consolidation of large railroads if it deems that the transaction is ''consistent with the public interest.'' According to this standard, the agency will examine whether the transaction would have ''an adverse effect on competition among rail carriers in the affected region or in the national rail system.'' In the case of a rail merger not involving two large railroads, the STB will approve a transaction unless it finds that (1) there is a likelihood of substantial decrease in competition, creation of a monopoly or restraint of trade in freight surface transportation in any U.S. region; and (2) the transaction's anticompetitive effects outweigh the public interest in meeting significant transportation needs.
FRB The FRB reviews transactions under the Bank Merger Act of 1966 and the Bank Holding Company Act. Under the Bank Merger Act, the FRB reviews bank mergers whereby the acquiring or resulting bank will be a state-chartered bank that is a member of the Federal Reserve System. While the Bank Merger Act utilizes Sherman Act- and Clayton Act-type standards, the Act features a ''public interest'' defense that enables the relevant agency to approve transactions if anticompetitive effects are ''clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.''
Page 124 PREV PAGE TOP OF DOC
Under the Bank Holding Company Act, the FRB uses the same standard to evaluate acquisitions of banks and bank holding companies by bank holding companies and financial holding companies. However, in contrast to the Bank Merger Act, the Bank Holding Company Act does not mandate that the FRB secure a report from the DOJ prior to approval of a bank acquisition, although in practice the DOJ provides a report. With regard to acquisitions of banks or bank holding companies under both statutes, these transactions are exempt from the HSR reporting requirements, but the DOJ may review the relevant agency's decision and decide to challenge it within 30 days, depending on the circumstances. The initiation of a challenge operates as a stay of the agency's decision. If the DOJ does not challenge the decision, it is immune from any challenge under the antitrust laws apart from Section 2 of the Sherman Act and any subsequent conduct violations. The Bank Holding Company Act also requires a filing with the FRB when bank holding companies that have not elected financial holding company status acquire non-bank entities engaged in activities ''so closely related to banking as to be a proper incident thereto.'' These transactions are subject to antitrust agency review but are exempt from the traditional HSR reporting requirements so long as copies of the application filed with the FRB are contemporaneously filed with the DOJ and the FTC at least 30 days prior to the consummation of the transaction. The FRB is moving closer to using a similar, but not identical, antitrust analysis to that used by the DOJ, with the agencies occasionally reaching inconsistent outcomes.
The predominant theme from our review is that, notwithstanding the broad public interest mandates of the regulatory agencies, many are applying standards similar to those used by the antitrust specialists to review transactions, finding competition to be in the public interest. In light of the regulatory agency application of DOJ and FTC principles, there seems little to warrant dual jurisdiction. In addition, after the desire for regulation disappears, so do concurrent jurisdiction and differing competition standards.
Page 125 PREV PAGE TOP OF DOC
C. DOJ and USDA Already Exchange Views and Consult on Antitrust Enforcement
Whether reviewing mergers or other anticompetitive practices, the USDA and DOJ consult with each other. The proposed legislation requires the USDA to take an analysis independent of the DOJ. In that regard, the legislation would prevent the Secretary from consulting with the DOJ. The DOJ would thus be deprived of industry experience provided by the USDA and the USDA would be unable to access the DOJ expertise in antitrust matters. In addition to inhibiting cooperation, subjecting agribusiness to duplicative review likely will lead to conflicting applications of competition policy. In our view, the more prudent course would not be to require independent review, but to enable and encourage a high degree of consultation between the USDA and the DOJ.
In enacting the HSR Act, Congress established a comprehensive process under which the DOJ or FTC may review mergers, including those in agribusiness. The mergers that trigger notification must meet three conditions (subject to certain specific exceptions that are beyond the scope of these comments). First, the acquired or acquiring persons must have annual net sales or total assets of $100 million or more and the other must have annual net sales or total assets of $10 million or more (known as the ''size of person'' test). Second, as a result of the acquisition, the acquiring person would hold either (1) 15 percent of either the voting securities or the assets of the acquired person or (2) voting securities and assets of the acquired person with a total aggregate value in excess of $15 million (known as the ''size of transaction'' test). Third, either the acquiring person or the acquired person must be engaged in interstate commerce or in an activity affecting interstate commerce.
Page 126 PREV PAGE TOP OF DOC Each party to the transaction files a Notification and Report Form with the FTC and the DOJ. They must then observe an initial 30-day waiting period, during which time the transaction may not be closed. During this time, the DOJ/FTC implement a procedure that ''clears'' review of the transaction to the agency with the most expertise. If the initial review identifies potential competition concerns, the reviewing agency issues a request for additional information, a ''second request.'' If second requests are served, the parties must then substantially comply with such requests and wait an additional period of time, generally 20 days, before consummating the transaction.
During the review period, which may last several months, interested third parties, including sister government agencies and members of the industry or industries affected, have the opportunity to provide information and expertise to the government attorneys and economists investigating the transaction. For transactions involving agribusiness, the FTC and DOJ actively seek and obtain assistance from USDA. The USDA's news are particularly relevant because as a buyer of agricultural products it is knowledgeable of the market dynamics also has an interest in lowering prices of food products and as a regulator it has a responsibility maintaining a healthy farming sector. For example, during its recent investigation of Suiza Foods, the DOJ obtained substantial support from USDA. The same is true in the DOJ's recent investigation of the proposed acquisition by Cargill, Inc. of Continental Grain Company's Commodity Marketing Group. During the summer of 1999, the FTC and DOJ formalized the informal consultative relationship with the USDA by entering into Memorandum of Understanding Relative to Cooperation With Respect to Monitoring Competitive Conditions in the Agricultural Marketplace.
The FTC also has addressed industry-specific concerns by exercising its statutory power to require prior notification of certain types of acquisitions in the dairy industry that it regarded as raising antitrust concerns but were not otherwise reportable.
Page 127 PREV PAGE TOP OF DOC
Cooperation between sister agencies is not limited to agribusiness. With regard to mergers and consolidations in the defense industry, the FTC and DOJ work in close consultation with the Department of Defense to take into consideration the unique characteristics of that industry. In 1993, the Department of Defense created an antitrust task force under the auspices of its Defense Science Board to provide advice on how the Department of Defense (''DOD'') can play a constructive role in antitrust review by the DOJ and FTC of mergers and joint ventures in the defense industry. The task force concluded that, while competition among firms in the defense industry is significantly different from competition among firms in other sectors of the economy, the Horizontal Merger Guidelines were flexible enough to take into consideration the special circumstances of downsizing in the defense industry. One result of the Defense Science Board's review is that the DOD has established a protocol for sharing information during the merger review process.
The Department of Interior (''DOI'') is also required to consult with the DOJ and FTC. The DOI is responsible for managing responsibly the mineral rights of the United States, including crude oil and natural gas resources. Congress requires the DOI to use competitive bidding to allocate oil and gas exploration properties and to consult with the DOJ and FTC to ensure that the process is not inconsistent with the antitrust laws.
Additionally, Congress has modified the traditional antitrust analysis to recognize industry-specific concerns without authorizing concurrent jurisdiction. The Newspaper Preservation Act of 1970 authorizes a limited exemption from the antitrust laws to support qualified newspaper publications. The act softens the requirements of the failing firm doctrine and allows a failing newspaper, defined as one that is in ''probable danger of financial failure,'' to enter into a joint operating agreement with a competing paper. In this arrangement, the two newspapers' business functions merge but their editorial functions remain separate. The Attorney General, operating through the Antitrust Division, approves the exemption. The policy rationale is the preservation of editorial diversity.
Page 128 PREV PAGE TOP OF DOC
There is thus ample precedent for allowing for the DOJ (and FTC) to consult and share information on matters relevant to their expertise and law enforcement responsibilities. More particularly, there is a high degree of ongoing consultation between the DOJ and USDA, making legislation requiring such cooperation unnecessary.
Similarly, a number of pending bills mandate the creation of a position in the DOJ to oversee on a full-time basis competitive issues in the agricultural industry. The Section does not believe that the creation of such a position needs to be or should be statutorily mandated. Given the limited resources available to the Antitrust Division, the Section believes that the Assistant Attorney General in charge of the Antitrust Division should retain the flexibility to hire and task attorneys to meet the most serious issues perceived by the Assistant Attorney General at that particular time. It is important to note that the current Assistant Attorney General, Joel Klein, has identified the agricultural industry as one needing special attention from the Antitrust Division at this time. Accordingly, he has appointed Douglas Ross, an experienced antitrust attorney, as Special Counsel for Agriculture in the Antitrust Division. In addition, one of the deputy assistant attorneys general, John Nannes, is charged with, among other things, supervising matters related to agriculture. Finally, the Division has long had a litigating section in Washington designated to develop and maintain an expertise in the antitrust issues unique to agriculture and to pursue investigations and litigation in that industry. Given this level of commitment to the agricultural industry by the Antitrust Division, and given the need to maintain flexibility in staffing as issues and economic conditions fluctuate and change, the Section believes that a statutory mandate for a position permanently dedicated to agricultural issues is unnecessary.
Page 129 PREV PAGE TOP OF DOCVI. RECOMMENDATIONS AND CONCLUSIONS
In proposing amendments to the antitrust laws for agribusiness, Congress is attempting to protect one of the most vital sectors of the United States economy, United States agriculture. It is doing so by creating rules of competition different from those applicable to other industries and additional federal agency review. Congress has generally decided competition policy, while leaving the specific application of the antitrust laws to the courts and to the antitrust agencies. The agencies have been actively enforcing the law against monopsonistic practices against farmers. When conducting antitrust investigations in agribusiness, the DOJ and USDA consult to arrive at a proper course of action. The antitrust principles that are being applied have developed over a century and withstood the test of time. With one broad stroke, Congress seems to want to change the standards and remove the important roles that both DOJ and USDA are playing in agriculture. In our view, such changes at best are duplicative and at most alter the time-tested antitrust standards that have contributed to our economic vitality.
Rather than adopting the proposed legislation, Congress should support existing efforts of the DOJ and USDA to consult on antitrust matters. In addition, Congress should fully fund the antitrust enforcement efforts of both the FTC and DOJ to ensure that all industries are protected by the antitrust laws, including agribusiness.
PREPARED STATEMENT OF NEIL E. HARL, CHARLES F. CURTISS DISTINGUISHED PROFESSOR IN AGRICULTURE, PROFESSOR OF ECONOMICS, IOWA STATE UNIVERSITY, AMES, IA
Page 130 PREV PAGE TOP OF DOC First, though let me say that I appreciate the opportunity to participate in this Forum and I commend the Secretary for scheduling the event. The issue before the group is highly important to the agricultural sector and, ultimately, to consumers and is a complex one. It comes down to whether the Packers and Stockyards Act is being violated.
Second, we should recognize the unique setting of this inquiry, not geographically but competitively. It was 110 years ago, July 2, that the Sherman Act became law. Although Congress was concerned about concentration in oil, steel, railroads and in several other areas, a major driving force behind the legislation was the 1888 report on competitive abuses in meat packing.
The 1917 investigation by the Federal Trade Commission of the meat packing industry led directly to the consent decree in 1920 and the Packers and Stockyards Act of 1921.
Moreover, the U.S. agriculture is now in the midst of the greatest, most far-reaching structural transformation of the past century. The transformation is characterized by the deadly combination of concentration (in input supply and output processing) and vertical integration, from the top down. The problem is much broader than anti-competitive practices in cattle slaughter.
The agricultural sector is more vulnerable than at any time in the modern era. Input suppliers and output processors seem bent on achieving unprecedented control over producers and over the production processes. One casualty, and a prominent one, is free, open and competitive markets.
Page 131 PREV PAGE TOP OF DOC In my view, competition is the genius of our economic system. Competition assures that economic growth (and per capita personal incomes) are maximized and that income is allocated fairly. It is incumbent upon all of us to work to maintain a high level of competition. Any practice which is destructive of competition should receive regulatory attention especially when the practice is carried on in the presence of high levels of concentration. We must make the markets work.
BREADTH OF THE ACT
Section 202 of the Packers and Stockyards Act provides broad authority to the regulator in proscribing any ''unfair, unjustly discriminatory, or deceptive practice or device'' or arrangements ''to make or give any undue or unreasonable preference or advantage to any particular person or locality in any respect whatsoever, or subject any particular person or locality to any undue or unreasonable prejudice or disadvantage in any respect whatsoever. . . .'' That broad grant of authority is unprecedented.
It is important to note that Congress did not include efficiency as a criterion for intervention, nor did the Congress create a defense if practices benefit the packer. Therefore, it is irrelevant that certain practices benefit packers by fully utilizing capacity and thus maximizing packer profits. Moreover, the Congress, in this provision, unlike many regulatory provisions, did not couch the provision in terms of impact on consumers. Section 202 was clearly focused on harm to producers. Therefore, the question is whether captive supplies are reasonably expected to be ''unfair, unjustly discriminatory, or deceptive. . . .'' If the answer is yes, the Secretary has the authority to act.
Page 132 PREV PAGE TOP OF DOC Congress did not impose a requirement that the Secretary can act only if there is a showing of economic harm to producers. Section 202 was drafted to attack unfair, unjustly discriminatory, or deceptive practices in their incipiency. As with price fixing, a showing of actual harm is not required. As the courts have said, ''the power to fix a reasonable price today is the power to fix an unreasonable price tomorrow.'' If a practice is ''unfair, unjustly discriminatory or deceptive . . .,'' it cannot be justified on the grounds that harm has not been proved.
The essential issue, therefore, is whether captive supplies are ''discriminatory, or deceptive. . . .'' Captive supplies foreclose access to markets by independent producers, contribute to thinness in markets which undercuts the market as a reliable allocator of resources and distributor of income and make possible manipulation of markets by packers in the presence of thinness of markets. On the face of it, captive supplies are discriminatory in effect. In my view, in light of the degree of concentration in meat packing today, captive supplies easily meet the test of being unjustly discriminatory. It is also reasonable to conclude that captive supplies are ''unfair'' to independent producers and that some features of captive supplies are ''deceptive'' in the operation and functioning of markets for cattle destined for slaughter. The negative effects of captive supplies that have been identified are consistent with common sense, economic theory and a respected body of empirical evidence. While the various research studies have been challenged on various bases, there is general agreement that increasing levels of concentration correlate with lower price levels.
The fact that there has been no judicial decision supporting the position that captive supplies are inherently anti-competitive begs the question. There is unlikely to be any litigation until the Secretary uses the authority in Section 202 to issue regulations specifically targeting captive supplies.
Page 133 PREV PAGE TOP OF DOC
It is instructive to review the regulations which have been issued under Section 202. To date, so far as I can determine, regulations have not been subjected to empirical proof of negative effect on competition as a pre-condition to issuance of the regulations. The regulations issued by the Packers and Stockyards Administration contain extensive provisions, the violation of which constitute a violation of Section 202 including
1. Proscribing a packer from having an ownership interest in, financing, or participating in the management or operation of a market agency selling livestock on a commission basis. 9 C.F.R. §201.66.
2. Proscribing a packer or any officer, agent, or employee of a packer, or a person owning a substantial interest in a packer, from operating as a market agency purchasing livestock on a commission basis, or as a dealer or having an ownership interest in, financing, or participating in the management or operation of such a market agency or dealer. 9 C.F.R. §201.67.
3. Requiring packers to conduct their livestock purchasing operations in competition with and independently of other buyers. 9 C.F.R. §201.69.
4. Prohibiting a packer or an officer, agent or employee or person who owns a substantial interest in a packer from owning, financing or controlling a livestock custom feedlot. 9 C.F.R. §201.70a.
The words ''unfair, unjustly discriminatory, or deceptive practice or device,'' as used in Sections 202(a) and 312(a) of the Packers and Stockyards Act are not defined. Thus, according to the courts, ''their meaning must be determined by the facts of each case within the purposes of the Packers and Stockyards Act.'' Capitol Packing Co. v. U.S., 350 F.2d 6776 (10th Cir. 1965). The courts look to the Secretary of Agriculture for insight into what is ''unfair, unjustly discriminatory or deceptive. . . .''
Page 134 PREV PAGE TOP OF DOC
The legislative history of the Act gives some insight into the breadth of the prohibition of practices intended by Congress. As Congressman Anderson of Minnesota, who was a member of the House Agriculture Committee and a prime sponsor of the bill, stated during the floor debates on the bill in the House of Representatives
''Industry is progressive. The methods of industry and of manufacture and distribution change from day to day, and no positive iron-clad rule of law can be written upon the statute books which will keep pace with the progress of industry. So we have not sought to write into this bill arbitrary and iron-clad rules of law. We have rather chosen to lay down certain more or less definite rules, rules which are sufficiently flexible to enable the administrative authority to keep pace with the changes of methods in distribution and manufacture and in industry in the country. . . .
''Now, I want to call attention to the fact that for the most part the bill does not deal with offenses essentially criminal in character. It deals with offenses against good morals in business. That is the reason that the particular procedure adopted in this bill was adopted.'' 61 Cong. Rec. 1887 (1921).
The legislative history of the Packers and Stockyards Act squarely supports the assertion that Congress intended the Secretary to use the broad authority in Section 202 to proscribe packer practices that threaten free, open and competitive markets. As Rep. Jones of Texas observed in 1921
Page 135 PREV PAGE TOP OF DOC
''The producer must always sell in a market that he does not control . . . His only hope of securing a fair price lies in an open, competitive market.'' 61 Fed. Reg. 1861 (1921).
RESULTS OF LITIGATION UNDER THE ACT
It has been held that a practice which is violative of the Act does not become lawful merely because others engage in the same practice. Those who have engaged in a violative practice ''must extricate themselves by purging their business methods of unfair, unjustly discriminatory and deceptive acts, and not by relying on the conduct or misconduct of others who may be equally guilty and who may find themselves in a similar predicament. . . .'' Midwest Farmers, Inc. v. U.S. 64 F. Supp. 91, 97 (D. Minn. 1945).
Failure to compete. In a 1975 case, the Judicial Officer held that a packer had violated subsections (a) and (e) of Section 202 of the Act and Section 201.70 of the regulations by engaging in livestock purchasing practices which had the effect of restricting competition in the purchase of calves. In re San Jose Valley Veal, Inc., 34 Agric. Dec. 966 (1975). The packer employed a person registered as a market agency and dealer to purchase calves. An official of the packer, who was in charge of livestock procurement, was at the markets at the time the purchases were made by the market agency-dealer. The Judicial Officer concluded that if the packer ''had purchased its own calves, another regular and substantial buyer would have increased competition and would have added to the demand for the sale of . . . calves.'' Id., at 98485.
Page 136 PREV PAGE TOP OF DOC
The Seventh Circuit Court of Appeals upheld a portion of an order of the Judicial Officer requiring a packer to cease and desist from an anti-competitive practice. In re Swift & Co., 20 Agric. Dec. 1120 (1961), aff'd sub nom. Swift & Co. v. U.S., 308 F.2d 849 (7th Cir. 1962). The packer entered into an agreement with a dealer under which the dealer would buy all the top grade hogs at a particular stockyard and would furnish to the packer whatever quantity of the top grade hogs the packer wanted at the same price at which the dealer purchased them plus trucking charges. Prior to this agreement, the buyer for the packer and the dealer competed for purchases of hogs at the market and that competition substantially increased the prices paid for top grade hogs. The court held that the ''essential nature and the necessary result of this arrangement or practice was to eliminate competition.'' Id., 308 F.2d 853.
In a 1985 Eighth Circuit Court of Appeals case, an agreement between two registered dealers not to bid against each other at auctions for cows was an unfair practice violation. Farrow v. U.S.D.A., 760 F.2d 211 (8th Cir. 1985). The court held that there was no need to show actual damage to competition for an unfair practice to exist.
Under section 201.67 of the regulations issued under the Act, ''[n]o packer, officer, agent, or employee of a packer or a person who owns a substantial interest in a packer, shall independently, or in combination with others, or through any corporate or other device, operate as a market agency purchasing livestock on a commission basis, or as a dealer, or have an ownership interest in, finance, or participate in the management or operation of any such market agency or dealer.'' The regulations also require each packer and dealer to ''conduct his buying operations in competition with, and independently of, other packers and dealers similarly engaged.'' The Judicial Officer, in a 1975 case, held that section 202(a) of the Act and section 201.68 of the regulations were violated where a person registered as a market agency and dealer owned 50 percent of the stock of a packer, and where the market agency-dealer participated in the management or control of the packer. In re San Jose Valley Veal, Inc., 34 Agric. Dec. 966 (1975). In another proceeding, the Judicial Officer held that the joint ownership of a dealer engaged in the cattle buying business and a packer was violative of the Act. In re Central Coast Meats, Inc., 33 Agric. Dec. 117 (1974). The Judicial Officer concluded that the practice of joint ownership and operation involved a restriction or lessening of competition. Id., 33 Agric. Dec. at 13637. The Ninth Circuit Court of Appeals, however, reversed the decision and order of the Judicial Officer. Central Coast Meats, Inc. v. U.S.D.A., 541 F.2d 1325 (9th Cir. 1976). The court concluded that it is not a per se violation of Section 202(a) of the Act for a packer to act as a dealer. The court acknowledged that the packer and dealer operations were not conducted at all times as completely independent and competitive entities, it was the view of the court that ''this in itself is not sufficient to constitute a violation of the Act under the circumstances presented here.'' The court held that the two entities each independently constituted a competitive force at the sales. The court stated, only after ''considered balancing of the benefits and evils that their [joint owners] method of doing business may be shown to have presented to the producers'' could it be said that it had been ''shown that the consequences of the dual operations . . . is likely to be injury to the producer of the sort the Act is designed to present'' and that such an evaluation was not conducted by the Judicial Officer. Id., 541 F.2d 13271328. In a subsequent proceeding in which the respondents relied upon the court's opinion in that case, the Judicial Officer stated that ''[t]he Court of Appeals divided two to one, and I have not changed my views as a result of that split decision. Accordingly, the views set forth in my opinion reflect the present policy of this Department.'' In re Sterling Colo. Beef Co., 35 Agric. Dec. 184 (1980).
Page 137 PREV PAGE TOP OF DOC
In a 1980 case, a custom feedlot, held by the Judicial Officer to be subject to the Act as a dealer or market agency, owned approximately 22 percent of the stock of a packer and its president was an active member of the packer's board of directors and served for a period as chairman of the board. Customers for whom the feedlot fed cattle, frequently sold their cattle to that packer. The Judicial Officer held that this arrangement constituted a ''conflict of interest involving the ownership and management of'' the packer and custom feedlot. Noting that divestiture was not sought in the case, the Judicial Officer held that ''it is appropriate to issue a cease and desist order in this respect only to minimize the likelihood of future violations resulting from the conflict of interest situation.'' In re Sterling Colo. Beef Co., 39 Agric. Dec. 184, 239.
Policy statements. The regulations contain a policy statement as to packers engaging in the business of custom feedlot operations. 9 C.F.R. §203.18
''(a) In its administration of the Packers and Stockyards Act, the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) has sought to promote and maintain open and fair competition in the livestock and packing industries, and to prevent unfair or anticompetitive practices when they are found to exist. It is the opinion of the Administration that the ownership or operation of custom feedlots by packers presents problems which may, under some circumstances, result in violations of the Packers and Stockyards Act.
''(b) Packers contemplating entering into such arrangements with custom feedlots are encouraged to consult with the Administration prior to the commencement of such activities. Custom feedlots are not only places of production, but are also important marketing centers, and in connection with the operation of a custom feedlot, it is customary for the feedlot operator to assume responsibility for marketing fed livestock for the accounts of feedlot customers. When a custom feedlot is owned or operated by a packer, and when such packer purchases fed livestock from the feedlot, this method of operation potentially gives rise to a conflict of interest. In such situations, the packer's interest in the fed livestock as a buyer is in conflict with its obligations to feedlot customers to market their livestock to the customer's best advantage. Under these circumstances, the packer should take appropriate measures to eliminate any conflict of interest. At a minimum, such measures should insure:
Page 138 PREV PAGE TOP OF DOC
''(1) That feedlot customers are fully advised of the common ties between the feedlot and the packer, and of their rights and options with respect to the marketing of their livestock;
''(2) That all feedlot customers are treated equally by the packer/custom feedlot in connection with the marketing of fed livestock; and
''(3) That marketing decisions rest solely with the feedlot customer unless otherwise expressly agreed.
''(c) Packer ownership or operation of custom feedlots may also give rise to competitive problems in some situations. Packers contemplating or engaging in the business of operating a custom feedlot should carefully review their operations to assure that no restriction or competition exists or is likely to occur.
''(d) The Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) does not consider the existence of packer/custom feedlot relationships, by itself, to constitute a violation of the Act. In the event it appears that a packer/custom feedlot arrangement gives rise to a violation of the Act, an investigation will be made on a case-by-case basis, and, where warranted, appropriate action will be taken.''
Statement with respect to packers engaging in the business of livestock dealers or buying agencies. 9 C.F.R. §203.19
''(a) In its administration of the Packers and Stockyards Act, the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) has sought to prevent conflicts of interest and to maintain open and fair competition in the livestock and meat packing industries. The ownership or operation of livestock dealers or buying agencies by packers, under some circumstances, may result in violations of the Packers and Stockyards Act.
Page 139 PREV PAGE TOP OF DOC
''(b) Traditionally, livestock dealers and buying agencies purchase livestock for resale or to fill orders for farmers, ranchers, producers, other livestock firms and packers. When a livestock dealer or buying agency is owned or operated by a packer, and when such packer is also buying livestock for its own operational requirements, there is a potential conflict of interest. Furthermore, the purchase and sale of livestock by meat packers may result in control of markets and prices which could adversely affect both livestock producers, competing packers, and consumers.
''(c) Arrangements between packers and dealers or buying agencies which do not normally create a conflict of interest or result in a restraint of competition include:
''(1) Operations utilizing different species or classes of livestock; (2) operations where the business activities are widely separated geographically; and (3) operations where tie-in purchases or sales are not involved. Packers contemplating engaging in the business of a livestock dealer or a buying agency are encouraged to consult with the Grain Inspection, Packers and Stockyards Administration (Packers and Stockyards Programs) prior to the commencement of such activities.
''(d) In the event a packer/dealer or a packer/buying agency arrangement appears to give rise to a violation of the Act, an investigation will be made on a case-by-case basis and, where warranted, appropriate action will be taken.''
Other significant cases. Courts have found that one of the purposes of the Packers and Stockyards Act is to prevent ''potential injury by stopping unlawful practices in their incipiency'' and that ''proof of a particular injury is not required'' to permit regulation of practices by packers. Daniels v. United States, 242 F.2d 39, 42 (7th Cir. 1957), cert. denied, 354 U.S. 939, reh'g denied, 355 U.S. 852 (1957).
Page 140 PREV PAGE TOP OF DOC
In a 1999 case, IBP, Inc. v. Glickman, the plaintiff purchased cattle under a ''Beef Marketing Agreement'' which was proposed by a group of Kansas feedlots. Under the agreement, the plaintiff would make an initial bid on a pen of cattle. The initial bid was based on the mid-point between the highest purchase price reported by the U.S.D.A. in a given week in Kansas for at least 2,500 cattle and the highest price the plaintiff paid for the same number of cattle in Kansas during the week. This was called the ''Kansas High Price.'' The feedlot could then accept or reject the bid. If the bid was rejected, then other cattle buyers could bid. But, as long as the plaintiff's initial bid was no less than 50 cents below the Kansas High Price, the plaintiff had a right of first refusal on the cattle. Thus, once other buyers had completed bidding, the feedlot had to offer the pen of cattle to the plaintiff at the highest bid price. If the plaintiff opted to exercise the right of first refusal, the feedlot could go back to the high bidder in an attempt to get a higher bid. But after all bidding was complete, the plaintiff could still get the cattle by matching the highest bid. The U.S.D.A. argued that the right of first refusal violated the Packers and Stockyards Act, which makes it unlawful for a packer to engage in ''any unfair, unjustly discriminatory, or deceptive practice'' or ''make or give undue or unreasonable preference or advantage to any particular person or locality. . . .'' The Judicial Officer had concluded that the plaintiff did not have to participate in bidding after its initial bid and could obtain a pen of cattle by matching, instead of exceeding, the highest bid. The appellate court disagreed and said the right of first refusal did not have the effect of suppressing or reducing competition. Indeed, the court said that the plaintiff paid a higher price for cattle under the agreement than for cattle bought in transactions with other feedlots. IBP, Inc. v. Glickman, 187 F.3d 974 (8th Cir. 1999).
Page 141 PREV PAGE TOP OF DOC
The broad scope of the Packers and Stockyards Act and its legislative history are unique in U.S. regulatory law. The Congress clearly intended to empower the Secretary of Agriculture to take the necessary steps to counter the anti-competitive practices of meat packers, which even then, in 1921, were long-standing. Nearly 80 years have passed since enactment of the legislation. While the names of the players have changed during the period, the meat packing industry has continued to become ever more concentrated.
It is noted that the Act does not require actual damage to competition for an unfair practice to exist. Moreover, there is no defense to Section 202 on the grounds that benefits may flow to packers as a result of the practice. Indeed, there is no defense to Section 202 on the grounds that the practice might conceivably benefit consumers. Section 202 was designed to preserve free, open and competitive markets for the benefit of producers. In my considered view, packers should be prohibited from achieving captive supplies in a setting of high levels of concentration, as now exist in steer and heifer slaughter. This is a defensible and appropriate position to take regardless of how accomplished and regardless of contemporary evidence of competitive damage. It is an unfair practice and should be subject to regulation to eliminate the aspects of current procurement practices with specific regard to use of packer-fed cattle and forward contracts which violate the Packers and Stockyards Act. Regulations should eliminate the aspects of forward contracts which have a significant discriminatory effect or negative effect on competition. Moreover, issuance of the regulations should be followed by aggressive enforcement of the regulations.
In a broader sense, what is at issue here is the deadly combination of concentration in processing coupled by vertical integration from the top down. Captive supplies, however, arranged, are a form of vertical integration. With the high levels of concentration existing, captive supplies and contract marketing contribute to a thin market which is easily manipulated by packers.
Page 142 PREV PAGE TOP OF DOC
The outcome of this regulatory decision will help to determine whether producers are independent entrepreneurs or serfs. Congress clearly intended that the Packers and Stockyards Act be administered to prevent the loss of competition to the detriment of producers.
The practice of allowing captive supplies in light of the extremely high level of concentration in steer and heifer slaughter is indefensible in light of the clear focus of the Packers and Stockyards Act on producers.
(Footnote 1 return)
AAI is described at www.antitrustinstitute.org.
(Footnote 2 return)
Illinois Brick Company v. Illinois, 431 U.S. 720 (1977).
(Footnote 3 return)
Section 4 of the Clayton Act.
(Footnote 4 return)
The typical situation becomes more complicated because some absorption of the overcharge may occur at succeeding levels and because the initial overcharge is likely to become enhanced at succeeding levels, as will be discussed later.
(Footnote 5 return)
Hanover Shoe, In. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).
(Footnote 6 return)
See ARC America Task Force Report of the American Bar Association Section of Antitrust Law, 59 Antitrust L.J. 273 (1990).
(Footnote 7 return)
California v. ARC America Corp., 109 S.Ct. 1661 (1989). See Ronald W. Davis, ''Indirect purchaser Litigation: ARC America's Chickens Come Home to Roost on the Illinois Brick Wall,'' 65 Antitrust L.J. 375 (1997).
(Footnote 8 return)
F. Hoffman-La Roche Ltd. paid a criminal fine of $50 million. See James M. Griffin, ''An Inside Look at a Cartel at Work: Common Characteristics of International Cartels,'' speech to American Bar Association Section of Antitrust Law, April 6, 2000, available at www.DOJ.gov.
(Footnote 9 return)
See Kurt Eichenwald, The Informant, and James Lieber, Rats in the Grain.
(Footnote 10 return)
Sen. Howard Metzenbaum (ret.) unsuccessfully attempted to gain standing for consumers before the court accepted the class settlement. An interesting case in the parade of horribles is Campos v. Ticketmaster, 140 F.3d 1166 (8th Cir. 1998), which denied standing, because of Illinois Brick, to individuals who alleged that they had paid too much to Ticketmaster for concert tickets that they obviously were purchasing ''directly'' from Ticketmaster, because the concert venues (arenas) were deemed the real ''direct purchasers,'' for whom Ticketmaster was acting as an agent. See Albert A. Foer, ''On the Appeal of Ticketmaster,'' http://antitrustinstitute.org/recent/21.cfm.
(Footnote 11 return)
William H. Page, ''The Limits of State Indirect Purchaser Suits: Class Certification in the Shadow of Illinois Brick,'' 67 Antitrust L.J. 1 at 5 (1999).
(Footnote 12 return)
See Stephen Calkins, ''Equilibrating Tendencies in the Antitrust System, with Special Attention to Summary Judgment and to Motions to Dismiss,'' in Private Antitrust Litigation,'' 185 (Lawrence White, ed., 1988) and Robert H. Lande, ''Are Antitrust 'Treble' Damages Really Single Damages?'' 54 Ohio State L.J. 117 (1993).
(Footnote 13 return)
It is an axiom of law that a party is responsible for the foreseeable or natural consequences of his act. The price-fixing manufacturer knows who is in the distribution chain all the way to the end consumer and can usually model the effects of any changes in price, most, if not all, of which are intended.
(Footnote 14 return)
Ernest Gellhorn and William E. Kovacic, Antitrust Law and Economics 462 (1994). If you exclude government merger cases and focus on Sherman Act claims, the ratio is probably far larger.
(Footnote 15 return)
It has been argued persuasively by Robert H. Lande that when all factors are taken into account, including detection problems, proof problems, antitrust damages generally should be substantially higher than singlefold. Op. cit. note 12 supra.
(Footnote 16 return)
Herbert Hovenkamp, Federal Antitrust Policy, 14 (1994).
(Footnote 17 return)
The American Antitrust Institute has advocated greater focus on problems of buyer power in the context of supermarket mergers. See http://www.antitrustinstitute.org/recent/79.cfm.
(Footnote 18 return)
See William H. Page, ''The Limits of State Indirect Purchaser Suits: Class Certification in the Shadow of Illinois Brick,'' 67 Antitrust L.J. 1 (1999).
(Footnote 19 return)
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977)
(Footnote 20 return)
Article by Michael Stumo, Organization for Competitive Markets and C. Robert Tayor, Auburn University, February 7, 2000.
(Footnote 21 return)
Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).
(Footnote 22 return)
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
(Footnote 23 return)
H.R. 4321 is particularly objectionable because it makes no effort to address this problem. Unlike H.R. 4321, prior bills to allow indirect purchaser actions recognized the risk of multiple liability and attempted to address that risk (however unsuccessfully) through such mechanisms as requiring joinder of all interested parties, allowing defendants to raise a pass-on defense, and prohibiting duplicative liability. See, e.g., H.R. Rep. No. 1397, 95th Cong., 2d Sess. (1978); S. Rep. No. 934, 95th Cong., 2d Sess. (1978); H.R. 2244, 98th Cong., 1st Sess. (1983); S. 915, 98th Cong., 1st Sess. (1983); S. 2481, 99th Cong., 2d Sess. (1986), Cong. Rec. S635253 (daily ed. May 21, 1986).
(Footnote 24 return)
Report of the American Bar Association Section of Antitrust Law Task Force to Review Proposed Legislation to Repeal or Modify Illinois Brick, 52 Antitrust L.J. 841, 863 (1984).
(Footnote 25 return)
At least 14 states and the District of Columbia enacted such statutes. See Report of the American Bar Association Section of Antitrust Law Task Force to Review the Supreme Court Decision in California v. ARC America Corp., 59 Antitrust L.J. 273, 305313 (1990) (''ARC America Report''). The Supreme Court upheld the constitutionality of these statutes in California v. ARC America Corp., 490 U.S. 93 (1989).
(Footnote 26 return)
See Ronald W. Davis, Indirect Purchaser Litigation: ARC America's Chickens Come Home to Roost on the Illinois Brick Wall, 65 Antitrust L.J. 375, 395406 (1997); ARC America Report at 281304; Janet L. McDavid, The California Experience: A Hole in the Illinois Brick Wall?, 1 Antitrust 16 (Winter 1987).
(Footnote 27 return)
Davis, note 6 supra at 396.
(Footnote 28 return)
William Page, The Limits of State Indirect Purchaser Suits: Class Certification in the Shadow of Illinois Brick, 67 Antitrust L.J. 1 (1999).
(Footnote 29 return)
Id. at 25.
(Footnote 30 return)
Id. at 36.
(Footnote 31 return)
Donelan v. Abbott Labs., No. 94 C 709 (Dist. Ct. Sedgewick Co., Kan. Dec. 6, 1995).
(Footnote 32 return)
For example, the BRT opposed S. 2481 in 1986, S. 915 in 1984, and S. 1874 in 1978.
(Footnote 33 return)
See, e.g., National Macaroni Mfrs. Ass'n v. FTC, 345 F.2d 421 (7th Cir. 1965) (wheat buying cartel held per se unlawful); United States v. Rice Growers Ass'n, 19862 Trade Cas. (CCH) 67,288 (E.D. Cal. 1986) (merger of rice processors held unlawful).
(Footnote 34 return)
See United States v. Cargill, Inc., et al., No. 1:99 CV 01875 (D.D.C.) (Complaint filed July 8, 1999) (alleging the merger would result in monopsony power without alleging an anticompetitive effect in a downstream market); Remarks by John M. Nannes, Deputy Assistant Attorney General, U.S. Dept. of Justice, before the New York State Bar Association Antitrust Law Section Annual Meeting, Jan. 27, 2000 (in the Cargill case, the DOJ ''concluded that the combining firms would have been able to depress the price paid for inputs even though we did not have a concern that they would have the ability to raise the price of outputs'').
(Footnote 35 return)
United States v. Fiat S.p.A., Fiat Acquisition Corp., New Holland N.V., New Holland North America, Inc., and Case Corp.; Proposed Final Judgment and Competitive Impact Statement, 64 F.R. 68377 (December 7, 1999) (DOJ filed a complaint challenging the proposed merger between New Holland and Case Corporation because of concerns about increased prices for certain types of machines that were purchased by farmers; to address the DOJ's concerns, the parties agreed to significant divestitures, including New Holland's four-wheel-drive and large two-wheel-drive tractor businesses, and Case's interest in a joint venture that sold hay and forage tools).
(Footnote 36 return)
United States Department of Justice Press Release, ''Justice Department Approves Monsanto's Acquisition of DeKalb Genetics Corporation,'' 1998 WL 839632 (DOJ) (November 30, 1998
(Footnote 37 return)
See Federal Trade Commission and Department of Justice Annual Report to Congress, Fiscal Year 1998, Pursuant to Subsection (j) of Section 7A of the Clayton Act, Hart-Scott-Rodino Antitrust Improvements Act of 1976, Appendix A, Table 1.
(Footnote 38 return)
(Footnote 39 return)
ABA Antitrust Section, The Merger Review Process 2939 (1995).