U.S. v. Dairy Farmers of America, Inc.

Decision Date25 October 2005
Docket NumberNo. 04-6318.,04-6318.
Citation426 F.3d 850
PartiesUNITED STATES of America; Commonwealth of Kentucky, Plaintiffs-Appellants, v. DAIRY FARMERS OF AMERICA, INC.; Southern Belle Dairy Co., LLC, Defendants-Appellees.
CourtU.S. Court of Appeals — Sixth Circuit

Robert B. Nicholson, United States Department of Justice, Washington, D.C., for Appellants. W. Todd Miller, Baker & Miller, Washington, D.C., Charles E. Shivel, Jr., Stoll, Keenon & Park, Lexington, Kentucky, for Appellees.

ON BRIEF:

Robert B. Nicholson, James J. Fredricks, United States Department of Justice, Washington, D.C., David Vandeventer, Office of the Attorney General, Frankfort, Kentucky, for Appellants. W. Todd Miller, Donald I. Baker, Kyle G. Manikas, Baker & Miller, Washington, D.C., Charles E. Shivel, Jr., Lizbeth A. Tully, Anthony J. Phelps, Stoll, Keenon & Park, Lexington, Kentucky, Bobby R. Burchfield, McDermott, Will & Emery Washington, D.C., David A. Owen, Brian M. Johnson, Theodore R. Martin, Greenebaum, Doll & McDonald, Lexington, Kentucky, for Appellees.

Before: CLAY, GILMAN, and COOK, Circuit Judges.

OPINION

CLAY, Circuit Judge.

The government of the United States and the Commonwealth of Kentucky (collectively, "the government") appeal the district court's grant of summary judgment to Defendant Dairy Farmers of America, Inc. ("DFA") on the government's claim that DFA violated Section 7 of the Clayton Act, 15 U.S.C. § 18. The government alleges that DFA's partial acquisition of Defendant Southern Belle Dairy Co., LLC ("Southern Belle") in 2002 had significant anticompetitive effects on the market for school milk in dozens of school districts in Kentucky and Tennessee. On appeal, the government specifically contends that 1) the district court erred in granting summary judgment to DFA without ruling on the government's claim that DFA's original agreement acquiring Southern Belle violated the Clayton Act; 2) the district court erred in granting summary judgment to DFA with respect to the government's claim that DFA's revised agreement acquiring Southern Belle violated the Clayton Act; and 3) the district court abused its discretion in failing to permit the government discovery on the revised agreement, pursuant to Rule 56(f) of the Federal Rules of Civil Procedure.

We agree with the government that the district court erred in failing to consider its claim that the original agreement violated the Clayton Act. Furthermore, we conclude that the district court's implicit grant of summary judgment to DFA on that claim was in error, and we REVERSE that claim and REMAND it to the district court for trial. We also conclude that the district court erred when it granted summary judgment in favor of DFA with respect to the government's claim regarding the revised agreement, and we REVERSE that claim and REMAND it to the district court for trial. We AFFIRM the district court's implicit denial of the government's request for further discovery under Rule 56(f) of the Federal Rules of Civil Procedure.

BACKGROUND
I. Substantive Facts
A. Introduction

This case involves a challenge by the government to the acquisition of Defendant Southern Belle by Defendant DFA and the Allen Family Limited Partnership ("AFLP"). The government alleges that this acquisition, as structured both in the original and revised agreements, has resulted in a monopoly on the market for school milk in over forty school districts in Kentucky and Tennessee, and that it has reduced competition substantially in almost fifty additional districts.

B. The Entities Involved
1. Dairy Farmers of America

DFA, a Kansas corporation with its principal place of business in Kansas City, Missouri, is a milk marketing organization and the largest dairy farmer cooperative in the nation. DFA's primary purpose is marketing the raw, unprocessed milk of its dairy farmers to dairy processors. DFA also invests in dairy processors in order to allow DFA's farmer members to participate in the profits earned from the sale of the finished dairy-based products, and to secure an outlet for its members' raw milk.

2. Southern Belle

Southern Belle is a limited liability company formed in February 2002. Southern Belle owns a milk processing plant in Somerset, Kentucky, that bids on school milk contracts. Under the initial ownership structure of the company, fifty percent of the voting interests in Southern Belle was owned by the Allen Family Limited Partnership ("AFLP"), which is managed by Robert Allen ("Allen"), and fifty percent was owned by DFA. Allen had previously been an advisor to DFA's corporate board. In addition, Allen had earlier participated in another joint venture with DFA, in which he made a $21.7 million profit on a $1 million investment. According to Gary Hanman, the CEO of DFA, DFA partnered with Allen on Southern Belle because "we knew him, our experience has been great, our relationship has been perfect through the years." J.A. 1061.

The original agreement gave AFLP a "put option" that entitled it to sell its interests to DFA after three years at a price sufficient to recover its initial contribution. Although DFA asserts that AFLP has always had exclusive responsibility for the day-to-day operations of the plant and the sale and marketing of the products from the plant, including the sale of milk to schools, the initial agreement provided for the business and affairs of the company to be managed by the "Common Members," i.e., by DFA and AFLP.

On July 14, 2004, six days before DFA filed a motion for summary judgment in this case, DFA and AFLP agreed that DFA would exchange its common member interests in Southern Belle for non-voting preferred capital interests, thus eliminating DFA's right to vote on any matter or to sit on the Southern Belle Representative Committee. Pursuant to this revised agreement, AFLP no longer has a "put option," and can sell Southern Belle at its option at any time, and require DFA's interests to be sold. Southern Belle, including its plant in Somerset, is managed by AFLP, which, as noted, is managed by Allen. DFA does not have any ownership interest in AFLP, and AFLP does not have any ownership interest in DFA. With respect to day-to-day responsibilities, Southern Belle's school milk bidding and pricing decisions are made at levels below Allen.

3. National Dairy Holding and Flav-O-Rich

National Dairy Holding, L.P. ("National Dairy"), owns the Flav-O-Rich milk processing plant in London, Kentucky, which bids for school milk contracts in many of the same school districts as Southern Belle. National Dairy was formed in March 2001 by Tracy Noll ("Noll"), Allen Meyer ("Meyer"), Cletes Beshears ("Beshears"), the Cletes Beshears Family Trust ("Beshears Family Trust"), and DFA. In February 2004, Noll, Beshears, and Beshears Family Trust sold their interest in National Dairy. Consequently, Meyer now holds fifty percent of the voting interest in National Dairy, and DFA holds the other fifty percent. Meyer and DFA have participated in three other joint ventures, one of which enabled Meyer to turn an investment of several hundred thousand dollars into a gain of approximately seventy million dollars.

As a limited partnership, National Dairy has a general partner responsible for its operations and limited partners. The general partner is Dairy Management L.L.C., which, like National Dairy itself, is fifty percent owned by Meyer and fifty percent owned by DFA. Meyer is also the manager of Dairy Management. National Dairy is operated and controlled solely by its manager. While DFA owns fifty percent of the voting interest in National Dairy, which in turn owns Flav-O-Rich, DFA does not participate in any of Flav-O-Rich's school milk business decisions. Indeed, even National Dairy has limited involvement in the day-to-day operations of Flav-O-Rich, and no involvement in the school milk bidding process or knowledge about the schools to which Flav-O-Rich submits bids, the prices of the bids, or the product mix offered.

C. Evidence Relating to the Structure of School Milk Markets

The government retained three expert witnesses in conjunction with this case, each of whom prepared a written report. Frank Scott ("Professor Scott") is the Gatton Professor of Economics at the University of Kentucky. John P. Johnson ("Johnson") is a former president of Johnson's Dairy, Inc., in Ashland, Kentucky, with over twenty years of experience in the Kentucky dairy industry. Edward B. Rock ("Professor Rock") is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School.

According to the expert reports of Johnson and Professor Scott, the school districts at issue in this case purchase milk in half-pint cartons through a sealed bid process and award one-year contracts to the lowest bidder. There is a separate competition and bidding process in each school district. Southern Belle and Flav-O-Rich are the only bidders in forty-two school districts, and two of only three bidders in forty-nine additional districts.

Professor Scott found that the school districts have no practical alternatives to purchasing milk from these suppliers, and would continue to buy milk even if there were a fairly large price increase.

D. Evidence of Anticompetitive Effects of DFA's Partial Acquisition of Southern Belle

The government's experts offered testimony and submitted reports regarding alleged anticompetitive effects of DFA's partial acquisition of Southern Belle. Professor Scott's report of March 2004 asserts that it is in DFA's interest to reduce or eliminate competition between Flav-O-Rich and Southern Belle, because DFA receives fifty percent of the profits from both dairies, regardless of which supplies a particular school district; in other words, it would not benefit DFA for the two dairies to compete and drive down prices and profits.

In a deposition in June 2004, Professor Rock testified that...

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