581 F.2d 419 (5th Cir. 1978), 76-2845, Spartan Grain & Mill Co. v. Ayers

Docket Nº:76-2845.
Citation:581 F.2d 419
Party Name:SPARTAN GRAIN & MILL COMPANY, Plaintiff-Appellant, Cross-Appellee, v. Virgil AYERS et al., Defendants-Appellees, Cross-Appellants. Joe ACKER, Plaintiff-Appellee, Cross-Appellant, v. SPARTAN GRAIN & MILL COMPANY, Defendant-Appellant, Cross-Appellee.
Case Date:October 03, 1978
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 419

581 F.2d 419 (5th Cir. 1978)

SPARTAN GRAIN & MILL COMPANY, Plaintiff-Appellant, Cross-Appellee,

v.

Virgil AYERS et al., Defendants-Appellees, Cross-Appellants.

Joe ACKER, Plaintiff-Appellee, Cross-Appellant,

v.

SPARTAN GRAIN & MILL COMPANY, Defendant-Appellant, Cross-Appellee.

No. 76-2845.

United States Court of Appeals, Fifth Circuit

October 3, 1978

Page 420

John C. Butters, Atlanta, Ga., J. Vincent Cook, Athens, Ga., for plaintiff-appellant, cross-appellee.

Jerre B. Swann, Atlanta, Ga., for defendants-appellees, cross-appellants.

Appeals from the United States District Court for the Middle District of Georgia.

Before WISDOM, TJOFLAT and VANCE, Circuit Judges.

WISDOM, Circuit Judge:

Chicken feed transactions in northeastern Georgia produced this important antitrust litigation involving integrated poultry operations. Spartan Grain & Milling Company (Spartan), a seller of chicken feed, sued chicken producers (Virgil Ayers, W. C. Meaders, Jr., Boyce Blackmon, and Joe Acker) for the unpaid balances of their feed bills. The producers counterclaimed, maintaining that Spartan had violated several provisions of the antitrust acts. Joe Acker, the fourth producer, filed his own antitrust suit against Spartan. The district court directed a verdict for the producers on their antitrust claims. We reverse and remand.

I.

We must begin with an explanation of the broiler chicken industry. 1 The industry was born about fifty years ago. Fresh chicken had been a seasonal by-product of egg production. Less productive hens and young cockerels were culled from laying flocks in the late spring and early summer. These "June fryers" were tougher, dryer, and gamier than the broilers we eat today. In 1934 the average American ate eight ounces of chicken.

During the 1930's, enterprising egg producers realized that a market existed for chicken year-round. Broilers were raised independently of egg-laying flocks. Production of broilers quadrupled from 1934 to 1940, then doubled from 1940 to 1945. After World War II the expansion continued, largely as a result of capital investment by feed manufacturers and chicken processors. By 1954 Americans were eating an average of 13 1/2 pounds of broiler chicken a year. Supermarket distribution provided one boost; later, fast-food operations provided

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another. By 1975 the Department of Agriculture reported per capita consumption of chicken in this country as 40.9 pounds. The World Almanac 143 (1978).

The bird in question is a young chicken, between seven and ten weeks old. Broilers, also known as fryers, may be male or female. The market distinguishes between broilers and other poultry. Production of broilers involves several distinct steps.

The process begins with the primary breeder. This step produces chickens which are used as breeders, not as broilers. The chicks are shipped to "producers", such as those in this case, typically when they are one day old. Most of the birds shipped to the producers are pullets, although a few cockerels are included. After a week, the producers debeak the chicks. Soon, vaccinations begin. The birds are vaccinated for several fowl diseases, and tested for others. By the time they are twenty-four weeks old, they are ready to begin laying eggs. A good flock is productive for 38 to 40 weeks from the time they begin laying.

The third step takes the eggs to the hatchery. There, they become broiler chicks. These chicks then move to the fourth step, delivery to the growers. Each of the first four steps involves the feed merchants, providing grain for the flocks. In the fifth step the processor slaughters and dresses the broiler to prepare it for market. The customers for whom the broiler is prepared are often large supermarket chains or fast-food chains.

In the first years of the industry, each of the steps was taken by different people. Title to the product changed hands with each stage of the production process. After World War II the industry increasingly moved toward integrating the production process. The greater financial resources of the feed merchants and the processors enabled them to finance the expansion of the industry. The integrators expanded their control of the birds at each stage. Today, 99 percent of the broilers are raised either by "contract growers" or by the integrated firms themselves. Contract growers take the newly hatched broilers and raise them for a fixed price a dozen. Chicken feed and veterinary needs are provided by the integrated firm. Title to the birds rests with the integrated firm. And control over the production decisions rest with the integrated firm. Other stages in the process have also lost much of their independence.

The parties in this case were out of step with their industry. Spartan was a feed merchant, operating for the most part on a non-integrated basis. The producers owned hen houses and had been in the poultry business for up to twenty years. The producers had raised laying flocks both on a contract basis and on an independent basis. They preferred the independent contractor status: they made their own decisions, paid for the services they wanted, and had opportunities for greater return. Flock placements for that arrangement had not been available in their area since 1962. They would take flocks on a contract basis. They could not buy and raise flocks completely on their own. The risk that the hatching eggs could not be marketed would be too great. So, under either the independent or the contract system, the producers would produce only when they had someone committed to buy their hatching eggs.

In 1967 and 1968 the bottom fell out of the broiler industry in northeastern Georgia. Several firms had actively placed flocks on a contract basis in that area. Some terminated their operations entirely; others pulled out of the producers' area, Franklin, Hart, and Elbert Counties. There were no flocks available with guaranteed markets for their eggs on either an independent or a contract basis. Then, Spartan stepped into the scene.

Integration of the industry caused problems for Spartan. As other feed merchants increased their control over producers and growers, Spartan's markets were disappearing. Its solution to integration was to arrange its own contractual integration. Spartan negotiated with the broiler hatcheries in Pennsylvania and Ohio for commitments to take hatching eggs. It also arranged for primary breeders to produce flocks of laying chicks. Finally, it offered

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these flocks, with guaranteed markets for their eggs, to the producers in northeastern Georgia. Title to the laying chicks was to pass from the primary breeder to the producer. Spartan would then buy the eggs from the producers and sell them to the hatcheries. The producers received independent contractor status. They paid for their chicks' feed and veterinary attention; they decided whether they wanted more flocks and when. Spartan paid several cents a dozen above the long term market price for eggs, and nine cents a dozen above the spot market price in Georgia. 2

There was only one catch. Spartan pursued this contractual integration to keep its feed market. It required producers in its program to purchase only its feed. Its feed cost $15 to $20 more per ton than comparable feed. 3

The producers could join Spartan or stop producing broiler eggs. They joined. Meaders signed four contracts covering the period from October 1968 to July 1972. Ayers signed four contracts covering the period from May 1969 to August 1971. Blackmon signed five agreements for the period from November 1968 to May 1972. Acker had been dealing with Spartan since 1965. During the time relevant to this suit, he signed three contracts covering the period from May 1969 to January 1972.

Spartan phased out this program in 1971 and 1972. In November 1972 it filed suit in federal court against Ayers, Blackmon, and Meaders for the unpaid balances of their feed accounts. Federal jurisdiction stemmed from diversity of citizenship. In December 1972 these producers answered and asserted antitrust counterclaims. In August 1973 the district court struck the antitrust contentions as defenses to the contract action, and severed the antitrust counterclaims for later trial. That month Acker filed suit against Spartan on antitrust grounds. His suit was consolidated with the counterclaims of the other producers.

The contract portion of the case, with the non-antitrust counterclaims, was tried in May 1974. The district court directed a verdict for Spartan on the accounts claim and on four counterclaims. The court let one counterclaim go to the jury, which found for the producers. On the accounts, Meaders owed about $9,000, Blackmon about $22,000, and Ayers about $24,000.

All parties appealed. Spartan argued that the judge should have directed a verdict for it on the counterclaim that went to the jury; the producers argued that the trial judge erred in directing verdicts against them on their other counterclaims. The producers did not appeal the directed verdict on the accounts. This Court upheld the directed verdicts on two counterclaims, reversed the directed verdicts on two others, and found sufficient evidence to support the jury's verdict on the counterclaim the producers had won below. Spartan Grain & Mill Co. v. Ayers, 5 Cir. 1975, 517 F.2d 214. The remanded issues were settled without another trial.

The producers' antitrust claims were tried in August 1975. They asserted that Spartan's dealings illegally tied the sale of feed to the sale of chicks and cockerels and to the purchase of eggs. These actions, they argued, were tie-in arrangements which violated section one of the Sherman Act, 15 U.S.C. § 1, and section three of the Clayton...

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