United States: Of Characterization And Common Sense: Court Holds That Erroneous Interpretation Of Allegations Of Complaint Doom Counterclaim To Bottom Of Chicken Coop

In In Re Processed Egg Products Antitrust Litigation, No. 2:08-Md.-02002-GP (E.D. Pa., June 10, 2014), the plaintiffs alleged that they purchased eggs from the defendant egg producing cooperatives, and that the plaintiffs had required that defendants provide only eggs that complied with a "certification program."  The defendants were required by the program to certify, for "animal welfare purposes," that they had expanded the size of the cages for chickens, which was accomplished  by reducing the number of chickens in each cage.  The complaint alleged that defendant egg producers had conspired to utilize the program as a pretext to reduce the output of eggs by reducing the number of chickens overall.  Defendants counterclaimed that the certification program itself was an agreement to restrict output in violation of the antitrust laws.

The unresolved issue of whether the Capper-Volstead Act immunizes agreements to reduce output.

Egg Products is one of a number of agricultural antitrust cases pending throughout the country1 that involve the scope of immunity for agricultural cooperatives pursuant to the Capper-Volstead Act of 1922, 7 U.S.C. § 291-292.  That Act provides agricultural cooperatives with an immunity to agree to fix sales prices through "collectively processing, preparing for market, handling, and marketing."

Agricultural cooperatives have asserted that collective action to augment sales prices through agreements to restrict output is included within the scope the immunity to set prices under Capper-Volstead.  Defendants have argued that because Capper-Volstead immunity allows them to fix prices, they must also be allowed to restrict production, because economics and logic suggest that output and price are at least complementary functions, if not a single integrated economic concept.

In In Re Processed Egg Products Antitrust Litigation, the plaintiffs alleged that United Egg Producers and other cooperatives conspired to induce their members to restrict egg output when restricting flock size by reducing cage space density for hens for animal welfare reasons.  In addition, plaintiffs alleged that the members were encouraged to export eggs at a loss, thus reducing the domestic egg supply available to domestic consumers.

It is generally assumed that Capper-Volstead does not protect efforts by co-op members to limit output pursuant to concerted action.  Industrial economics would dictate that as output is being restricted, prices to consumers will increase.  Motions to dismiss complaints alleging agreements by producers to reduce output based on assertions that Capper-Volstead completely immunized such agreements have been denied.  See generally, Don T. Hibner, Jr., Allegations of Conspiracy to Limit Crop Production: Ripe for Analysis Under Capper-Volstead (December 28, 2011).

In the over ninety years of the existence of Capper-Volstead, the issue of whether Capper-Volstead immunity extends to the setting of sales prices by agreements to restrict output has never been definitively resolved. These cases have taken on a high degree of significance since former Assistant Attorney General Christine Varney's announcement of a new antitrust task force of investigators at the DOJ to join with investigators from the Department of Agriculture to spearhead new Capper-Volstead enforcement oversight.

Dismissal of defendant producers' counterclaim asserting plaintiffs' complaint that the animal welfare certification program violated the antitrust laws was itself an antitrust violation

The In Re Processed Egg Products Antitrust Litigation defendants counterclaimed against plaintiffs, alleging that plaintiffs conspired to impose the requirement that producers have fewer chickens per cage, which forced producers to reduce output, and so the certification program constituted an antitrust violation by plaintiffs.

Defendants Cal-Maine Foods, Inc. and Rose Acre Farms, Inc. (jointly "CMRA") alleged in their counterclaims that the plaintiffs were guilty of fraud and promissory estoppel, as well as abuse of process and extortion, in filing the antitrust price-fixing complaint before the court.  The counterclaims stated that the direct action plaintiffs pressured CMRA to adopt a "certified program" for the sale of eggs, and that the plaintiffs had continued to support the program and demanded only certified eggs from CMRA while at the same time their complaints attacked the same program as being in violation of Section 1 of the Sherman Act.

The plaintiffs filed a motion to dismiss the counterclaim pursuant to Rule 12(b)(6) for failure to state a claim.  In an order dated June 10, 2014, the District Court for the Eastern District of Pennsylvania granted the plaintiffs' motion to dismiss the counterclaims.  In essence, the court held that there was nothing inherently wrong, nor was it implausiblly inconsistent with plaintiffs' legitimate business interests, for plaintiffs to demand certified eggs from the egg producers' agricultural cooperatives.

The court pointed out that CMR was guilty of serious errors in deductive logic, and that it's syllogism simply assumed faulty conclusions.  The court held that there was nothing inherently illogical in the plaintiffs requiring that they have the benefit of the certified egg program while simultaneously complaining that the program, as undertaken by the defendants, violated the antitrust laws.  In coining a new word, the court held that the proper characterization of the plaintiffs' complaints was that they passed muster under "Twiqbal," which was the court's shorthand for the application of the U.S. Supreme Court decisions in Bell Atlantic Corp. v. Twombly, and Ashcroft v. Iqbal.

The court noted that a key issue was the legality and legitimacy of the cooperatives' programs to increase cage sizes for chickens for "animal welfare purposes" by reducing the number of laying hens in each cage.  Increasing cage size could be consistent with the economic business interests of each individual plaintiff purchaser and that of the producers.  This would be so where the producer was free to maintain or increase its supply of egg laying hens by increasing the number of cages and the number of barns, which would allow it to expand egg production.  The court concluded that it would not be in the individual self-interest of a given producer to agree not to increase the number of cages that it maintained, even where it increased the cage space available to an individual chicken.  This would be an output-restricting agreement in violation of the Sherman Act.  This was so at least during the discovery phases of the agricultural cooperative litigation, given that it is generally assumed that Capper-Volstead does not protect efforts by co-op members to limit output pursuant to concerted action.

Conclusion

The opinions in the agricultural cooperative antitrust cases will provide the courts with ample opportunity to crack chicken jokes, as did the Court of Appeals for the Seventh Circuit in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396 (7th Cir. 1989) (Easterbrook, J.)  There, the plaintiff egg processors had "squawked" about alleged predatory pricing attempting to drive out the competition by "fowl means", thus leaving the plaintiffs "scratching in the dust".  We should remember the quotation attributed to Justice Holmes: "The life of the law has not been logic; it has been experience."

 Footnotes

1.See In Re Fresh and Processed Potatoes Antitrust Litigation (D. Idaho) No. 4:10-Md.-2186-DLW, and Edwards v. National Milk Producers Federation, et al. (N.D. Cal.) No. 4:2011-CV-04766 (plaintiffs alleged that National Milk Producers Federation and other dairy companies conspired to limit production of milk by paying farmers to reduce size of their milk herds).

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