University of Wisconsin Center for Cooperatives
The Capper-Volstead Act: Opportunity Today and Tomorrow
In Commemoration of the 75th Anniversary of the Capper-Volstead Act
This paper was presented at the National Council of Farmer Cooperatives' National Institute on Cooperative Education, Annual Conference, Pittsburgh, PA. August 5, 1997. It is reprinted here by permission of the authors.
The year 1997 marks the 75th anniversary of the Capper-Volstead Act2, signed into law on February 18, 1922 by President Warren Harding.3 The Capper-Volstead Act has been called the "Magna Carta" of cooperatives in the agriculture industry, and the act has played and continues to play a vital role in enabling agricultural producers4 to collectively process, prepare, handle and market their products. Farmers have increasingly used the cooperative model of business organization because they have found it well suited to their economic and social needs, and the significance of the Capper-Volstead Act has grown accordingly. The legal protection from prosecution under the antitrust laws provided by the Act has allowed agricultural cooperatives to grow and prosper -without such protection a wide range of cooperative activities would be hampered or prohibited outright.
The cooperative itself, as a form of association for farmers, has played a part in American history for almost two hundred years. Far before the National Grange movement of 1871 to 1876, a group of Connecticut Dairy Farmers organized a cooperative association to market their milk and milk products as early as 1804.5 However, the first federal legal protection that specifically allowed farmers and agricultural producers to cooperate in joint activities was enacted much later, in Section 6 of the Clayton Act of 1914.6 Even so, it was not until 1922 that the true font of protection for collective action by farmers, the Capper-Volstead Act, was enacted by Congress, to provide specific legal protection to farmers from prosecution under the antitrust laws.
The primary purpose of the Capper-Volstead Act was to empower farmers and agricultural producers to market, price and sell their products through cooperative means. The title of the Act is illustrative of its intent: "An Act To Authorize Associations of Producers of Agricultural Products." 7 U.S.C. 291, 292 (1996). (emphasis added). By granting farmers the legal right to pool their bargaining and marketing resources, the Act attempted to place farmers on an equal footing with the large corporate buyers (called "agribusinesses") that purchased their raw agricultural products. In fact, Senator Capper stated that the purpose of the bill "is to give to the farmer the same right to bargain collectively that is already enjoyed by corporations." 62 Cong. Rec. 2057 (1922). The drafters of the Act accomplished this purpose by giving farmers a defined set of legal protections for collective bargaining and marketing of their products.
A collateral purpose behind the Act was to provide farmers who join together with a specific exemption from the antitrust laws. This legal protection is critically important to cooperatives, otherwise the federal and state antitrust laws would forbid most of the joint activities undertaken by farmers through cooperatives to market, price and sell their products. Congress first expressed its intent to create an antitrust exemption for agricultural cooperatives in Section 6 of the Clayton Act, enacted in 1914. This law states that "[N]othing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural or horticultural organizations..."7 15 U.S.C. 17. However, though the Clayton Act recognized that cooperatives possessed a legal right to exist, the Act did not offer specific guidance as to the types of activities in which a cooperative organization might engage. To remedy this deficiency, Congress passed the Capper-Volstead Act of 1922, clarifying the activities covered by the act and extending the protection from the antitrust laws to a broader class (i. e., stock) of agricultural cooperatives.
The Capper-Volstead Act was one of the byproducts of the post-World War I era. In the 1920's, demand for agricultural products was down from its peak at the end of the war, and individual farmers found that in the thinning market, the agribusinesses held every advantage when they negotiated with farmers over the terms of sale. Even in modern times, when farmers operate as individuals in negotiating the terms of sale and the price of their goods, they are often in weak bargaining positions. It has been said that "Farmers are price takers, not price makers. They are often in a position of having but one or two buyers for their production; rarely do several buyers compete for what they produce." Ralph B. Bunje, Cooperative Farm Bargaining and Pricing Negotiations, U.S. Department of Agriculture Information Report Number 26, 40 (1980).
It is as true now as it was in the 1920's that a farmer may be at a grave disadvantage when bargaining with an agribusiness that is much larger and has many more resources at its disposal. The agribusiness may negotiate with farmers in many different areas and in many different countries. Because of this, the agribusiness may have great flexibility in its ability to demand certain prices from a given farmer, and if it does not receive them, the agribusiness may refuse to do business to "punish" the offending farmer. On the other hand, the farmer may have only a few, or even only one, potential buyer for his product. This situation may force the farmer to take whatever price is offered. The ability to join together into cooperatives provides farmers with a way to equalize the bargaining equation.
A cooperative has been defined as "a corporation or association organized for the purpose of rendering economic services, without gain to itself, to shareholders or members who own and control it." United States Grocers, Ltd. v. United States, 186 F. Supp. 724, 733 (N.D. Cal. 1960). Cooperatives "render economic service," in part, by improving their members' bargaining positions. It has been said that cooperatives achieve this in four ways. Bunje, at 40-42. First, a cooperative, because it controls more product, cannot be dwarfed by an agribusiness as easily as an individual farmer, and can approach several different potential buyers in different areas because it has greater resources to contact and negotiate with them. This access to a larger number of outlets for members' products allows a cooperative to negotiate a higher price for its members.
Second, a cooperative can resist agribusiness tactics that delay negotiations on price until late in the growing cycle. Late in the season, the farmer may need to sell quickly ripening crops or to place other agricultural products in times of annual off-peak demand. A cooperative may be able to sell products over a greater period of time to reduce the "fire sale" atmosphere of a late-season negotiating session. A cooperative can also negotiate the terms of sale to shift more of the financial risk and burden onto the agribusiness rather than onto the farmer. Agribusinesses, when contracting with individual farmers, may attempt to delay payment until the end of the growing or production cycle, shifting all the risk onto the farmer. A cooperative can negotiate to share the financial risk between the members and the buyers through the use of its greater economic clout.
Third, a cooperative provides better forecasting and data collection for farmers to utilize in their negotiations. Many farmers do not have the time or resources to engage in detailed economic forecasting and data collection, and are forced to rely on the agribusiness with whom they are contracting, often to their detriment. The increased information and forecasting ability of a cooperative allows members to examine factors such as: national price and demand levels, competition from other producing areas, and possible future fluctuations in price.
The last way that a cooperative improves its members' bargaining power is that it can help provide a guaranteed outlet for a farmer's product. For any agricultural product in a given market, there may be only a very few "outlets" for that product. Without such a guaranteed outlet, a farmer can be forced into disadvantageous terms for the conditions of sale or price simply to gain access to a buyer for his product.
Clearly, the cooperative performs a vital role for
farmers in selling their products, to say nothing of the efficiencies a
cooperative can create in processing, preparing and handling agricultural
products. These benefits are achieved by joint action -- the pooling of
farmers' resources to achieve a common goal through cooperation, rather
than by winner-take-all competition. However, as a prima facie matter,
the substitution of cooperation for competition in marketing, selling and
pricing a product may be illegal under the antitrust laws. The antitrust
laws function to prevent certain types of cooperation. It is only due to
the Capper-Volstead Act that cooperatives largely have been immune to prosecution
under the antitrust laws.
The antitrust laws are designed to preserve the American system of competition. They were enacted in part as a reaction to the trusts of the late 19th and early 20th centuries that controlled products as different as steel, oil, sugar, grain, and cotton. The trusts were entities that held controlling blocks of stock in virtually all the competing companies in a given field. The directors of the trusts, famous men such as Vanderbilt, Rockefeller, Morgan, and Pierpont, were able to control the prices and output of entire industries. Their business methods sought to eliminate competition through coordinated industry-wide conduct that lowered production and raised prices. Once they ended competition in their industries, they could maximize prices without improving their products, offering better customer service or increasing the efficiency of their delivery systems. Against these huge trusts, small businesses and farmers could not bargain effectively, and were unable to compete.
The United States antitrust laws were enacted to reduce the power of these large "trusts," hence the term "anti trust." The underlying intent of every antitrust law is to promote competition in industry, a goal that was antithetical to the founding purpose behind all the large trusts. It has been said that competition is the "holy grail" of the antitrust laws. The benefits of competition are many. Businesses are forced to provide better goods at lower prices, which keeps more money in the pockets of individual people. Competition also promotes innovation. In this race, the hare wins; businesses that are more efficient can charge less, will sell more, and can make more profit. Also, competition provides businesses with an incentive to invest in research and innovation, because they know that any new product or service they develop will not be locked out of the marketplace by a monolithic, overly-secure trust or monopoly.
The antitrust laws also favor the small producer or business. There are several reasons for this deference. Small business owners are the innovators in our economy. Out of necessity, they try risky ventures, new methods of operation, and cutting-edge practices. Bill Gates has said the thing that keeps him up at night is not a worry about a large company that already has an established business, but instead he fears that a small computer business in a basement or a garage will develop an innovative new program or system that will render him obsolete.
The Sherman Antitrust Act of 1890 is the primary federal antitrust law. Section 1 of the Sherman Act forbids "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade...." 15 U.S.C. 1 (1996). This section is intended to prevent any group of two or more companies from agreeing to cooperate in a fashion that would reduce the level of competition in an industry. Section 2 of the Sherman Act forbids monopolization, attempts to monopolize, and conspiracies to monopolize any part of commerce. 15 U.S.C. 2 (1996). This section is intended to prevent a company or group of companies from acquiring monopoly power that would enable it to raise prices to an anticompetitive level. Stiff fines and penalties are imposed for violations of the Sherman Act: for criminal violations of the Act, three (3) years in prison and the greater of either a fine of $350,000 for individuals, $10,000,000 for corporations; or the larger of twice the pecuniary loss to the victims or twice the pecuniary gain from the crime (called the "double loss/double gain rule"). Any injured parties can bring a civil suit based on the same conduct, and if successful, can recover treble damages, attorney's fees and costs of the suit.
The Sherman Act, the most important of the all the antitrust statutes, does not contain an exemption for any specific industries or groups. Before its enactment in 1890, Congress considered including an amendment which would have exempted agricultural cooperatives from the antitrust provisions of the Act. However, Congress declined to include such an exemption for agricultural cooperatives. 21 Cong. Rec. 2611 (1890). Though courts interpreted the Sherman Act to include a "rule of reason" test that weighs the positive aspects of any conduct against its alleged anticompetitive and illegal effect, from 1890 to 1920, many farmers feared that the Sherman Act could be applied to forbid the cooperative activity they found so necessary to economic and social survival.
These fears were magnified in 1908 by the Supreme Court decision in Loewe v. Lawlor, in which the Court noted that the 1890 Congress had not included the proposed amendment to exempt agricultural cooperatives from the provisions of the Sherman Act. Loewe v. Lawlor, 208 U. S. 274, 301 (1908). The Court's comments implied that in future cases, the Supreme Court could find any common marketing or price setting activities by associations of producers to violate the antitrust laws. Id. After Loewe, many jurists agreed that Section 1 of the Sherman Act seemed to prohibit the formation, and joint pricing and marketing activities of individual producers through their agricultural cooperatives. In fact, in several state courts, farmers were prosecuted for price-fixing under state law versions of the Sherman Act. Reeves v. Decorah Farmers ' Cooperative Society, 160 Iowa 194 (1913); Burns v. Wray Farmers ' Grain Co., 65 Colo. 425 (1918); Ford v. Chicago Milk Shippers ' Ass ''n, 155 III. 166 (1895). These state prosecutions and the prospect of federal prosecutions placed farmers in an unenviable situation. The antitrust laws seemed to prohibit their cooperative activity, but even so, out of necessity farmers felt compelled to join together to create a collection, processing and marketing system for their products and for bargaining with the large agribusinesses.
In part to remedy the situation, Congress enacted Section 6 of the Clayton Act in 1914. Section 6 contained an exemption from the antitrust laws that specifically mentioned "agricultural, or horticultural organizations." 15 U.S.C. 17 (1996). However, the exemption provided by Section 6 proved to be inadequate. In particular, the exemption was limited to cooperatives that did not possess capital stock and that did not pay dividends to their members. In addition, Section 6 did not even differentiate between labor unions and cooperatives, or acknowledge the need for capital financing by cooperatives. Also, the exemption provided by Section 6 was vague and uncertain, as it failed to list the specific activities of cooperatives that were covered. These concerns were brought into greater focus after the end of World War I, as the number of cooperatives continued to multiply, and these cooperatives found that capital investment was necessary to provide an adequate level of service to their members. The post-war decline in agricultural prices and the loss of European export markets infused a sense of urgency into cooperative members, who desired a clear delineation of their legal rights to cooperatively produce, market, handle and price their products. Congress responded to these concerns by enacting the Capper-Volstead Act.
The Capper-Volstead Act was enacted in 1922.8 Representative Volstead, in discussing the Act, said
The Capper-Volstead Act has two sections. Section 1, the more "famous," contains the exemption from the antitrust laws and certain mandatory organizational requirements that all cooperatives must meet. Section 1 of the Act allows "farmers," defined by a non-exclusive list of various agricultural producers, to act together in associations. These associations may collectively process, prepare for market, handle, and market in interstate and foreign commerce the products of their members, and may enter into contracts and agreements that are necessary to effect these purposes. Further, such cooperatives may employ "marketing agencies in common" to achieve these objectives. 7 U.S.C. 291 (1996).
Section 2 of the Act gives the Secretary of Agriculture certain regulatory authority over the activities of cooperatives that claim protection under the Capper-Volstead Act. Section 2 was enacted to protect the public from harmful conduct by cooperatives that might inadvertently be encouraged by the antitrust exemption provided by Section 1. It authorizes the Secretary "to issue a cease and desist order" if he has reason to believe that any such association has monopolized or restrained trade to the extent that the price of any agricultural product is "unduly enhanced." 7 U.S.C. 292 (1996). However, in practice the judicial system has the primary responsibility to monitor and adjudicate alleged antitrust violations by agricultural cooperatives, and the Secretary of Agriculture has not exercised the authority provided by Section 2 of the Act. In fact, no formal proceeding has ever been commenced by the Secretary against an agricultural cooperative for "undue enhancement of price" under Section 2.
Persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations, corporate or otherwise, with or without capital stock, in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce, such products of persons so engaged. Such associations may have marketing agencies in common; and such associations and their members may make the necessary contracts and agreements to effect such purposes.
a) Mandatory Cooperative Structure
Any application of the Capper-Volstead Act to agricultural cooperatives divides into two central questions: (V Structure, i.e., is the cooperative the type of organization that is covered by the Act, and (2) Conduct, i.e., are the activities at issue protected by the Capper-Volstead antitrust exemption? As to the type of organization the Capper-Volstead Act encompasses, a cooperative must meet certain structural elements to fall within the antitrust exemption.
First, the members of the cooperative must produce agricultural products. This requirement has been broadly interpreted; indeed, the Act itself contains a non-exclusive list of examples: "farmers, planters, ranchmen, dairymen, nut of fruit growers...." 7 U.S.C. 291. Merely because a type of producer is not explicitly mentioned in the Act does not mean that Congress did not intend to include them.10 However, salaried farm managers and cash-rent lessors do not fulfill this requirement, members must be farmers and have a "vested" ownership interest.
As a corollary, all of the members of the cooperative must be engaged in production, as opposed to subsequent processing, of agricultural products. This basic structural requirement contains two constituent elements; (1) the members of the cooperative must be engaged in the production, as opposed to the processing, of agricultural products; and (2) all of the cooperative members must be agricultural producers. Case-Swayne Co., Inc v. Sunkist Growers, Inc., 389 U. S. 384, 392 (1967). The intent of the drafters of the Capper-Volstead Act was to provide an antitrust exemption to "farmers" and "people who produce farm products of all kinds." 62 Cong. Rec. 2052 (1922) (Sen. Kellogg). Not only is the Act specifically intended to cover producers as opposed to processors, the Act extends only to cooperatives that are composed entirely of producers -- no nonproducers may be members of a cooperative and receive Capper-Volstead protection. Case-Swayne Co. v. Sunkist Growers, Inc., 389 U.S. 384, 386. For example, in Case-Swayne, a small number of the Sunkist Growers' cooperative membership was made up of private corporations and partnerships that did not grow agricultural products, but instead owned and operated packing houses. The Supreme Court stated that because such non-producers were members of the cooperative, the Sunkist cooperative lost its Capper-Volstead exemption from the antitrust laws. In fact, the Court not only held that the non-producer members of the cooperative were outside the Capper-Volstead Act immunity, but that the presence of the non-members in the cooperative resulted in a complete loss of antitrust immunity for the cooperative and all its members, whether producer or processor. Id at 386.
However, courts have also held that cooperatives do not lose the Capper-Volstead antitrust exemption if they have only a small number of non-producers, who were admitted through administrative oversight or error, and who do not have decision-making authority in the cooperative. Alexander v. National Farms Org., 687 F.2d 1173, 1185-87 (8th Cir. 1982), cert. denied, 461 U.S. 937 (1983). In fact, many large cooperatives have members listed on their rolls whose status has changed from producer to non-producer. It is advisable for cooperatives to have a bylaw that automatically revokes the membership of any member who is no longer a producer, also thereby terminating that member's right to vote. A cooperative will not lose its protected status due to an isolated mistake that maintains a non-producer member on its roles, but the cooperative must be reasonably diligent in keeping its membership roles current. Alexander, 687 F.2d 1173, 1186.
As a second structural requirement, the association
of producers must adhere to a prescribed organizational structure. There
are three elements to this structural requirement:
(2) "No member of the association is allowed more than one vote" no matter the amount of stock or membership capital he may own (and even if by accident or administrative oversight non-producers are members of the cooperative, only producer-members may ever vote), or the association may not pay dividends on stock or membership capital in excess of 8% per annum. Id. The 8% requirement limits the return the cooperative may provide to capital invested by members. Though this limit may have been set high enough in the 1920's for cooperatives to attract investment capital, the higher rates of return available to farmers today for other investments render this limit somewhat onerous.
(3) "The association shall not deal in the products of nonmembers to an amount greater in value than such as are handled by it for members." Id. (also known as the "50% rule"). Non-member products have been defined as "all commodities not actually produced by members, but which are marketed by an association." Lemon, 44 N.D.L. Rev. 505, 510.
b) Exempt Cooperative Conduct
The next component in any application of the Capper-Volstead Act asks: are the activities at issue protected by the Capper-Volstead antitrust exemption? The only activities of a cooperative that are protected are the "processing, preparing for market, handling or marketing... [of agricultural] products of persons so engaged." 7 U. S.C. 291. Any cooperative conduct by farmers that does not fall within one of these activities is inherently suspect.
Even if properly structured, a cooperative will lose the Capper-Volstead exemption if it engages in certain illegal activities. Congress intended to equalize the bargaining power between farmers and large corporations with whom they deal -- not to confer a universal immunity for anticompetitive activities. The House Report on the Act explained:
In the event that associations authorized by this bill do anything forbidden by the Sherman Antitrust Act, they will be subject to the penalties imposed by that law. It is not sought to place these associations above the law, but to grant them the same immunity from prosecution by corporations now enjoyed so that they may be able to do business successfully in competition with them.H.R. Rep. no. 24, 67th Cong., 1st Sess. 3 (1921).11
Many Capper-Volstead cases have charged monopolization and attempts to monopolize by cooperatives. Most courts that have addressed the issue agree that when farmers obtain or retain monopoly status by improper means, beyond a mere voluntary association with other farmers to achieve a large market share, the Capper-Volstead exemption does not apply. However, the unlawful conduct that renders a monopoly status by a cooperative illegal is not clearly defined. Acquisitions of competitors for anticompetitive purposes; coercion of customers, suppliers or of non-member farmers; concerted refusals to deal that are intended to eliminate a competitor; the payment of secret cash rebates or the use of other anticompetitive tactics to raise prices all may constitute the basis for charges of monopolization that violate Section 2 of the Sherman Act. Maryland & Virginia Milk Producers Ass'n. v. United States, 326 U. S. 458 (1960).
Only five (5) Supreme Court decisions have directly interpreted the Capper-Volstead Act.12 They are instructive in determining the scope and evolution of the Act's protection. The Supreme Court decisions are also important because they reined-in the initial exuberance of the lower courts, some of which attempted to grant a compete "blanket" antitrust immunity to cooperatives for every conceivable activity -- far exceeding the immunity intended by the drafters of the Act. For example, one overly expansive court stated that the Capper-Volstead Act mandated that cooperatives "were not to be punished" for violations of the antitrust laws. United States v. Dairy Co-op Association, 49 F. Supp. 475 (D. Or. 1943). Even one Attorney General has issued overly broad statements concerning the extent of the Capper-Volstead protection for cooperatives, stating that the goal of the Act was "to insure cooperative associations that qualified thereunder immunity from prosecution under the Federal Antitrust laws." Opinion of the Attorney General 326, 333 (1930). Fundamental misunderstanding of the Capper-Volstead Act continued for decades after the passage of the Act. As late as 1958, one lower court stated
Immediately after the enactment of the Capper-Volstead Act, various cooperatives attempted to test the limits of the protection afforded by the Act and to expand the scope of its immunity by entering into agreements with non-producers. However, the antitrust exemption provided by the Capper-Volstead Act is limited to activities and agreements among producers. If the cooperative enters into combinations or conspiracies with non-producers, the Capper-Volstead antitrust exemption will not apply. United States v. Borden Co., 308 U.S. 188 (1939). In Borden, the first Supreme Court case to address the Act, a cooperative association of milk producers conspired with milk distributors, a labor union, municipal officials and other outside parties to fix the price that the cooperative members would be paid for their milk. The Court stated
The right of these agricultural producers thus to unite . . . cannot be deemed to authorize any combination or conspiracy with other persons and restraint of trade that these producers may see fit to devise .... [T]he conspiracy charge is not that of merely forming a collective association of producers to market their products but a conspiracy, or conspiracies, with non-members . . .Id. at 204-05. Thus, the Borden Supreme Court held that the antitrust exemption did not apply when cooperative members entered into agreements that restrained trade with proprietary organizations.
But the Supreme Court has also held that the exemption is not affected if the cooperative enters into agreements with other exempted agricultural cooperatives. Sunkist Growers, Inc. v. Winckler & Smith Citrus Products Co., 370 U.S. 19 (1962). In Sunkist Growers, Inc. v. Winckler & Smith Citrus Products Co. a group of lemon cooperatives joined together to form a federated association as a "marketing agency in common" to develop and process lemon by-products. One year later, a group of orange cooperatives joined together into a similar federation. The Court held that these federated cooperatives possessed the same antitrust immunity together as they did independently. Thus, a number of cooperatives may join together to act as one organization (i.e., a federation or "marketing agency in common") without losing Capper-Volstead protection. However, it still is clear that the exemption does not authorize conspiracies between agricultural cooperatives and outside corporations or individuals. Such conspiracies with non-producers, who do not qualify as members of a Capper-Volstead cooperative, are not insulated from the operation of the antitrust laws Id.
The requirement that all the members of a cooperative must be agricultural producers in order to qualify for the Capper-Volstead antitrust exemption was reaffirmed emphatically by the Supreme Court in 1967,13 and again in 1978.14 The Case-Swayne Court in 1967 stated that the Sunkist cooperative could not qualify for the antitrust exemption because some of the members were not producers, but instead were packing houses that contracted with the fruit growers to handle the growers' fruit for cost plus a fixed fee. Id. at 387, 388. The Court reemphasized that the legislative history of the Act clearly shows Congress' purpose to limit the immunity to actual producers. Id. at 391-93. The Court summed up by stating, "We think Congress did not intend to allow an organization with such nonproducer interests to avail itself of the Capper-Volstead exemption." Id. at 395-96. Indeed, the very presence of non-producers in the organization may shift the stance of the cooperative to a posture that is antithetical to the producer members. After the Sunkist producers and packers negotiated the terms of a contract, Sunkist had the power to review the contract; but if the large and well-funded packers were included in the cooperative, it was unclear whose interests Sunkist would represent.
Likewise, in National Broiler Marketing Ass 'n. v. United States, 436 U.S. 816 (1978), the Court found that a cooperative that included non-producer members did not receive Capper-Volstead protection. The National Broiler Marketing Association included two types of members: (1) farmers who raised chickens on their farms, and (2) large integrators who processed chickens at packing plants. Significantly, some of the large integrators did not raise chickens, but merely purchased chickens from farmers for their packing operations. The Court held that these integrators did not constitute "farmers" as intended by the drafters of the Act, and that their inclusion in the Association stripped it of its Capper-Volstead immunity. Id. at 824-25, 827-29.
So long as a cooperative limits its "monopolization" conduct to the voluntary enrollment of producers or to mergers with other Capper-Volstead cooperatives, it has a vast grant of immunity to increase its market share. Indeed, under the immunity provided by the Act, a cooperative lawfully can acquire a monopoly in its relevant market, using intentional conduct that otherwise would be anathema under Section 2 of the Sherman Act. In his famous charge to the jury in Cape Cod Food Products v. National Cranberry Association, 119 F. Supp. 900, 907 (D. Mass. 1954), Judge Wyzanski stated
Courts have also expanded the range of permissible activities allowed under the Act to achieve these high market shares. For example, the setting of a common price by the cooperative members for their agricultural goods (i.e., price-fixing) is held to be an exempt activity, under the rubric of common "marketing"15 in the Act. Maryland & Virginia Milk Producers Association v. United States, 362 U.S. 458, 466 (1960); Treasure Valley Potato Bargaining Ass'n v. Ore-Ida Foods, Inc., 497 F.2d 203, 216 (9th Cir.), cert. denied, 419 U.S. 999 (1974). The avowed intent of this price-fixing activity may even be to attempt to monopolize the relevant market. Other legitimate activities include: handling, processing and preparing products; joint marketing; using marketing agencies in common; and making the necessary contracts to achieve the legitimate objectives of the Association. However, a cooperative may not use tactics that are predatory to achieve its goals.
The decision of the Supreme Court in Maryland & Virginia Milk Producers Association, Inc. v. United States well illustrates this point. The cooperative consisted of a large number of dairy farmers in Maryland and Virginia who supplied roughly 86% of the milk purchased by milk dealers in the Washington, D.C. area. The government charged that the cooperative had attempted to monopolize and had monopolized the sale of milk by engaging in illegal concerted activities to foreclose competition. The cooperative had purchased the assets of a proprietary competitor and inflated prices to remove competition, had obtained noncompetition agreements from the same competitor, and had pressured farmers associated with the competitor to join the defendant or to ship only to areas outside of Washington, D.C. The Supreme Court upheld these charges. In rendering its opinion, the Court stated that cooperatives were protected only in "carrying out the legitimate objects" of their members, but that the Act did not immunize cooperatives from prosecution for predatory practices. Id. at 468.
Interestingly, though the Maryland & Virginia Milk Producers Association opinion also indicated that a cooperative could legitimately expand through natural, self-generated increases in membership, the question of expansion by acquisition, merger or federation was not addressed. This "gap" was later filled by lower courts that have agreed that expansion by acquisition is a legitimate goal of a cooperative. Fairdale Farms, Inc. v. Yankee Milk, Inc., 635 F.2d 1037, 1043-44 (2d Cir. 1980), cert. denied, 454 U.S. 818 (1981). In Fairdale Farms, seven dairy cooperatives organized the Regional Cooperative Marketing Agency. This federation of cooperatives was legal under the Capper-Volstead Act. The court stated that Section 2 of the Sherman Act does not apply
The gradual expansion of judicial precedent to encompass more and more cooperative activities has naturally coincided with an expansion in the amount of business handled by cooperatives and with their growth in size.
In 1922, most cooperatives were local organizations of farmers who had similar interests and were of similar size. This situation changed over time, as the antitrust immunity provided by the Capper-Volstead Act helped encourage the growth of ever-larger cooperatives. The whole outlook of many cooperatives changed from local to multi-state and national, as individual cooperatives themselves joined together. In fact, by 1950, the majority of independent local cooperatives were gathered into federations. These federations and the larger cooperatives began embarking on significant business ventures. Cooperatives also began offering more services to their members, such as processing, warehousing and transportation. Cooperatives operated jointly owned plants, jointly owned subsidiaries, and began to vertically integrate from production site to grocery shelves. For example, some of today's cooperatives, Land O'Lakes, Ocean Spray, Welch's, and Sun-Maid, have integrated their producing, processing and marketing functions to place their product directly into the hands of consumers.
By the 1960's, the growth of large cooperatives was well underway. However, the Supreme Court's then recent decision in Maryland & Virginia Milk Producers Association v. United States, 362 U.S. 458 (1960) that seemed to prohibit the recent merger attempts by large dairy cooperatives alarmed members of Congress. Legislators worried that the Department of Justice, which had and still has regulatory authority over, and animus toward, cooperative mergers under Section 7 of the Clayton Act, would act to prohibit future mergers of large cooperatives. In fact, the fear that future mergers between cooperatives would be prohibited led to a proposed amendment to the Capper-Volstead Act, which would have granted the Secretary of Agriculture the power to approve mergers and acquisitions of agricultural cooperatives. S. 1643, 87th Cong., 1st Sess. 401(c) (1961). This amendment would have effectively stripped the Department of Justice of any control over cooperative mergers and would have placed all authority to regulate such mergers in the hands of the Secretary of Agriculture, who was seen as more sympathetic to the needs of cooperatives. However, this proposed amendment was heavily criticized because it did not give the Secretary of Agriculture any criteria by which to measure the effects of his decisions on competition.
Though the amendment was not enacted, sympathy for
cooperatives ran high, and mergers generally went unchallenged. For example,
the three largest milk cooperatives were formed by the merger of 166 small
cooperatives from 1968 to 1969. Significantly, these mergers were not challenged
by the Federal Trade Commission or the Department of Justice as a violation
of the antitrust laws. FTC Bureau of Competition Staff Report on Agricultural
Cooperatives 83 (Sept. 1974).
However, in the late 1970's and early 1980's, the increasing size and success of the larger agricultural cooperatives created a new attitude toward the Capper-Volstead exemption from certain quarters. Many people felt that cooperatives no longer needed the economic protection that the Act provided. In fact, the National Commission for the Review of the Antitrust Laws and Procedures recommended that the Act be more narrowly construed, and in some respects rewritten, to take into account the greatly increased competitive standing possessed by the large and successful agricultural cooperatives. National Commission for the Review of the Antitrust Laws and Procedures, Report to the President and the Attorney General, 253-70 (1979). The Commission stated that its proposals were based on a concern that the potential for cooperatives to possess a monopoly had become a threat to the U.S. marketplace. Id. at 258. It was suggested that the circumstances of the agricultural industry had changed to such an extent that the Capper-Volstead Act was no longer necessary. In the time since the 1922 passage of the Act, agricultural cooperatives had horizontally and vertically integrated their operations, large cooperative farms replaced the small independent farmer, and cooperatives themselves had expanded into many different lines of business. It was argued that, under these circumstances, the antitrust exemption provided by the Capper-Volstead Act was no longer needed, and further, it may have provided too much bargaining power to the members of agricultural cooperatives. National Boiler Marketing Ass'n v. United States, 436 U.S. 816, 839, 843 (1978) (White, J., dissenting). Even though criticism of the Act ran high, as with the 1960 amendment, this drive to rewrite or repeal the Act was also unsuccessful.
By the 1990's, a growing awareness of cooperatives' continuing need for the Capper-Volstead Act has emerged. For example, in the 1990 GAO Report, Dairy Cooperatives: Role and Effects of the Capper-Volstead Exemption, September, 1990, the GAO stated
Therefore, to the extent that the increased market strength of processing and distribution firms and of dairy farmers offset each other, the premise of the Capper-Volstead antitrust exemption for cooperatives - that farmers cannot effectively bargain independently because their operators are too small - remains.
Id. at 3.
Thus, the Act has survived the vicissitudes of both
good times and bad, and continues to provide a shelter for cooperatives
to survive and flourish. As of 1995, there were four thousand and six (4,006)
agricultural cooperatives in the United States.16
The number of full time employees of these cooperatives was 177,857. These
cooperatives had combined assets of $40.2 billion. Setting an all time
high, in 1995 these cooperatives had a total gross business volume of $112.2
The cooperatives of today can be divided roughly into three types: marketing, farm supply and service cooperatives. Marketing cooperatives derive most of their revenues from the sale of their members' farm products. Farm supply cooperatives derive most of their revenue from the sale of farm production supplies, farmstead equipment, building materials, heating oil, and lawn and garden supplies. Service cooperatives derive their revenue by providing specialized business services relating to the agricultural operations of farmers, ranchers and other agricultural producers, such as cotton ginning, trucking, storing, drying and artificial insemination. Farmer Cooperative Statistics, 1995, United States Department of Agriculture, Rural Business Cooperative Service Report 52 (November, 1996). The variety of marketing cooperatives is aided by the fact that the Capper-Volstead Act provides a wide range of flexibility in choosing a structure. The Act does not require cooperatives to have either capital stock or even a corporate form. In fact, associations that fall within the protection provided by the Act may be structured as nonprofit corporations, for-profit businesses, unincorporated associations, or stock or nonstock farmer cooperatives. Further, several cooperatives may join together into a federation, and this agency itself may receive Capper-Volstead protection.
Recently, antitrust enforcement has focused on one sector of our agricultural economy, that is, the dairy industry, and the Capper-Volstead exemption has not immunized the bid-rigging conduct at issue. As of July, 1997, the Antitrust Division has filed 134 criminal cases against cooperatives, corporations and certain executives in the milk/dairy products industry. Criminal cases have been brought in 20 states: Alabama, Connecticut, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, New York, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas and Virginia. In addition to bid-rigging, typical companion charges have included: mail fraud, false statements, false declarations before a federal grand jury and obstruction of justice. The Antitrust Division has also brought criminal cases charging conspiracies to fix wholesale prices of milk.
To date, 70 corporations, including numerous cooperatives,
and 59 individuals have been convicted and fines totaling approximately
$81.6 million have been imposed. Twenty-nine individuals have been sentenced
to serve a total of 4,380 days, or an average of approximately 6 months
in jail. Civil damages total approximately $8 million. Five grand juries
in four states continue to investigate the milk industry. The following
chart tracks the rise (and decline) of such investigations.
As the table below indicates, the number of cases brought by the Antitrust Division peaked in 1992 and has declined dramatically into 1997. However, as grand juries are currently investigating price-fixing and bid-rigging allegations in four states, several future cases may yet result.
However, fear of antitrust prosecution has not prevented cooperatives from finding new and innovative ways to provide value to their members. Because cooperatives in every agricultural field seek to provide the most efficient service to their members, more and more cooperatives have considered using subsidiaries as a method of conducting certain lines of business. For example, a cooperative may find it advantageous to create a separate subsidiary corporation to handle a particular line of business. A subsidiary may be either wholly owned or jointly owned with other cooperatives or entities. Such a subsidiary corporation may be able to raise outside capital for its business venture, when it would not be feasible to raise money by direct investment from the members in the cooperative. Subsidiaries, whether Capper-Volstead cooperatives or not, may provide insulation to the parent cooperative from certain types of liability.
Cooperatives have also begun to take advantage of U.S. laws allowing for joint expansion into foreign markets, and this may be accomplished with an Export Trade Certificate of Review.17 A Certificate protects the holder (usually a joint agent or association) and the member businesses of the group identified in the Certificate from state and federal government antitrust actions, and from private, treble damage antitrust liabilities for the export conduct covered by the Certificate.18 Once the Certificate is issued, the domestic cooperatives specified in the Certificate may engage in joint exporting activities that would normally be prohibited by the United States antitrust laws. This advantage allows United States businesses and cooperatives to penetrate better and to compete more effectively in foreign markets.
Today the Capper-Volstead Act is as important as ever, and the cooperatives that have flourished under its protection continue to engage in new activities to provide value to their members. From the possibility of a nationwide dairy federation to the new generation of small dairy cooperatives springing up in the Upper Midwest, the Act continues to provide limited immunity to both large and small cooperatives, and continues the success of its mission to help farmers meet the challenges of our ever changing agricultural economy.
The Capper-Volstead Act
(Public-No. 146-67th Congress)
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations, corporate or otherwise, with or without capital stock, in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce, such products of persons so engaged. Such associations may have marketing agencies in common; and such associations and their members may make the necessary contracts and agreements to effect such purposes; Provided, however, That such associations are operated for the mutual benefit of the members thereof, as such producers, and conform to one or both of the following requirements:
First. That no member of the association is allowed more than one vote because of the amount of stock or membership capital he may own therein, or,
Second. That the association does not pay dividends on stock or membership capital in excess of 8 per centum per annum.
And in any case to the following:
Third. That the association shall not deal in the products of nonmembers to an amount greater in value than such as are handled by it for members.
Sec. 2. That if the Secretary of Agriculture shall have reason to believe
that any such association monopolizes or restrains trade in interstate
or foreign commerce to such an extent that the price of any agricultural
product is unduly enhanced by reason thereof, he shall serve upon such
association a complaint stating his charge in that respect, to which complaint
shall be attached or contained therein, a notice of hearing, specifying
a day and place not less than thirty days after the service thereof, requiring
the association to show cause why an order should not be made directing
it to cease and desist from monopolization or restraint of trade. An association
so complained of may at the time and place so fixed show cause why such
order should not be entered. The evidence given on such a hearing shall
be taken under such rules and regulations as the Secretary of Agriculture
may prescribe, reduced to writing and made a part of the record therein.
If upon such hearing the Secretary of Agriculture shall be of the opinion
that such association monopolizes or restrains trade in interstate or foreign
commerce to such an extent that the price of any agricultural produce is
unduly enhanced thereby, he shall issue and cause to be served upon the
association an order reciting the facts found by him, directing such association
to cease and desist from monopolization or restraint of trade. On the request
of such association or if such association fails or neglects for thirty
days to obey such order, the Secretary of Agriculture shall file in the
district court in the judicial
The facts found by the Secretary of Agriculture and recited or set forth in said order shall be prima facie evidence of such facts, but either party may adduce additional evidence. The Department of Justice shall have charge of the enforcement of such order. After the order is so filed in such district court and while pending for review therein the court may issue a temporary writ of injunction forbidding such association from violating such order of any part thereo£ The court may, upon conclusion of its hearing, enforce its decree by a permanent injunction forbidding such association from violating such order or any part thereof. The court may, upon conclusion of its hearing, enforce its decree by a permanent injunction or other appropriate remedy. Service of such complaint and of all notices may be made upon such association by service upon any officer or agent thereof engaged in carrying on its business, or any attorney authorized to appear in such proceeding for such association, and such service shall be binding upon such association, the officers, and members, thereof.
Approved, February 18, 1922 (42 Stat. 388) 7 U.S.C.A., 291-192
United States v. Borden Co., 308 U.S. 188 (1939) (A combination of a cooperative with nonproducer labor unions and municipal officials is not protected by the Capper-Volstead Act.)
Maryland & Virginia Milk Producers Association v. United States, 362 U.S. 458, 466 (1960) (The Capper-Volstead Act does not provide cooperatives with complete immunity to engage in predatory practices that otherwise violate Section 2 of the Sherman Act).
Sunkist Growers, Inc. v. Winckler & Smith Citrus Products Co., 370 U.S. 19 (1962) (Several cooperatives may join together as one organization without forfeiting their Capper-Volstead protection).
Case-Swayne Co. v. Sunkist Growers, Inc., 389 U.S. 384, 392 (1967) (The members of a cooperative must be engaged in the production, as opposed to the processing, of agricultural products; all of the cooperative members must be agricultural producers).
National Broiler Marketing Ass tn. v. United States, 436 U.S. 816 (1978) (To qualify for Capper-Volstead protection, all of a cooperative's members must be producers; processors and packers do not fall within the definition of "producers" according to the legislative intent of the drafters).
Number of cooperatives and memberships by major business activity, 1995
Major business activity
1 Excludes cottenseed. Cottonseed sales were included with cotton. Cottonseed meal and oil were included with farm supply and miscellaneous, respectively.
2 Includes eggs, turkeys, squab, and related products.
1 Mr. Barnes is the managing shareholder of the Washington, D.C. office of Jenkens & Gilchrist, P.C., and has represented many agricultural cooperatives and their "marketing agencies in common." Mr. Ondeck is an associate attorney in the Washington, D.C. office of Jenkens & Gilchrist, P.C.
4 Senator Kellogg, the floor manager of the Capper-Volstead Act, used the generic term "farmers" to describe the agricultural producers covered by the Act, stating "I think 'farmers' would have covered them all." 62 Cong. Rec. 2052 (1922).
9 It should be noted that the 18th Amendment, also known as the Volstead Amendment, ushered in the era of Prohibition, and was introduced by the long-winded Representative Volstead in 1917 (ratified in 1919). The Amendment forbade the manufacture, sale and transportation of intoxicating liquors, and was repealed in 1933.
17 Certificates of Review are issued under the auspices of the Export Trading Company Act of 1982 ("ETCA") by the Office of Export Trading Company Affairs ("OETCA"), in the International Trade Administration, Department of Commerce.
18 In antitrust actions brought by private parties, the Export Trading Company Act confers the following protections on holders of a Certificate: creates a rebuttable presumption that the conduct specified in a Certificate is lawful, reduces the statute of limitations for bringing an action from 4 to 2 years, awards the holders of the Certificate costs and attorney's fees if they prevail in a suit, and reduces the holders' liability from treble to single damages.