Opinion
CIVIL ACTION NO. 03-206-KSF.
August 31, 2004
OPINION AND ORDER
This matter is before the Court on Plaintiff United States of America's motion for partial summary judgment [DE #84], Defendant Dairy Farmers of America, Inc.'s motion for summary judgment [DE #95], and Defendant Southern Belle Dairy Co., LLC's motion for summary judgment [DE# 100]. These motions are ripe for review.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Defendant DFA is a Kansas milk marketing organization owned and operated by its dairy farmer members. As a milk marketing cooperative, DFA's primary purpose is to market the raw, unprocessed milk of its dairy farmer members to dairy processors. A part of DFA's business strategy is to invest in downstream diary companies that process milk for consumption ("Fluid Milk Processors"). The purpose of the investment is two-fold — to allow DFA's farmer members to participate in the profits earned from the sale of the finished dairy-based products manufactured by the Fluid Milk Processor, and to secure an outlet for its' members' raw milk.
Defendant Southern Belle is a limited liability company that was formed in February 2002 and owns a fluid milk processing plant in Somerset, Kentucky ("Somerset plant"). Under the initial ownership structure of the company, fifty percent (50%) of the voting interests in Southern Belle were owned by the Allen Family Limited Partnership ("AFLP") and fifty percent (50%) were owned by the DFA. Effective July 14, 2004, DFA and AFLP agreed that DFA would exchange its common member interests in Southern Belle for non-voting preferred capital interests. Thus, DFA no longer has any right to vote on any matter or to sit on the Southern Belle Representative Committee. AFLP has no "put option," and can sell Southern Belle, at its option, at any time (and require DFA's interests to be sold). Southern Belle, and hence the Somerset plant, is managed by AFLP. DFA does not have any ownership interest in AFLP, and AFLP does not have any ownership interest in DFA. AFLP, and thus Southern Belle, are managed by Robert Allen.
National Dairy Holding, L.P., ("NDH") owns the Flav-O-Rich ("FOR") plant in London, Kentucky. NDH was formed in March 2001 by Tracy Noll, Allen Meyer, Cletes Beshears, the Cletes Beshears Family Trust, and DFA. Fifty percent of the voting interests in NDH were originally held collectively by Noll, Meyer, Beshears, and the Beshears Family Trust; the remaining 50% were held by DFA. In February 2004, Noll, Beshears, and Beshears Family Trust sold their interest in NDH as part of the sale of certain NDH assets to another Fluid Milk Processor. Accordingly, 50% of the voting interests in NDH are now held by Meyer and 50% are held by DFA. Because NDH is a limited partnership, it has a general partner, who is responsible for its operations, and limited partners. The general partner is Dairy Management LLC, a company that is owned 50% by Meyer, and 50% by DFA. The manager of Dairy Management LLC, and thus of NDH, is Meyer. In connection with the 2004 restructuring of NDH the relevant operating agreement of NDH was modified to clarify the relationship among Meyer, DFA, and NDH, to ensure that NDH is operated and controlled solely by its manager, Meyer.
On April 24, 2003, the United States and Commonwealth of Kentucky filed a complaint seeking the divestiture of Southern Belle Dairy by DFA and a finding that DFA's ownership of 50% non-voting, non-managerial interest in Southern Belle violates Section 7 of the Clayton Act, 15 U.S.C. § 367.110 et seq. The United States contends that DFA's partial acquisition of Southern Belle, combined with its 50% interest in NDH, will substantially lessen future competition in the sale of milk to Kentucky and Tennessee schools. The record shows that FOR, which is owned by NDH, competes with Southern Bell in the sale of processed milk products in many parts of Kentucky and Tennessee.
II. SUMMARY JUDGMENT STANDARD
Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In reviewing a motion for summary judgment, "this Court must determine whether `the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.'" Patton v. Bearden, 8 F.3d 343, 346 (6th Cir. 1993) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). The evidence, all facts, and any inferences that may permissibly be drawn from the facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
Once the moving party shows that there is an absence of evidence to support the nonmoving party's case, the nonmoving party must present "significant probative evidence" to demonstrate that "there is [more than] some metaphysical doubt as to the material facts." Moore v. Phillip Morris Companies, Inc., 8 F.3d 335, 340 (6th Cir. 1993). Conclusory allegations are not enough to allow a nonmoving party to withstand a motion for summary judgment. Id. at 343. "The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. at 252. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Id. at 249-50 (citations omitted). The party who bears the burden of proof must present a jury question as to each element of the claim. Davis v. McCourt, 226 F.3d 506, 511 (6th Cir. 2000). Failure to prove an essential element of a claim renders all other facts immaterial for summary judgment purposes. Elvis Presley Enters. V. Elvisly Yours, Inc., 936 F.2d 889, 895 (6th Cir. 1991).
III. DEFENDANT DFA'S MOTION FOR SUMMARY JUDGMENT
1. The Clayton Act
Plaintiff bring this action under Section 7 of the Clayton Act, which states, in relevant part:
No person engaged in commerce . . . shall acquire, directly or indirectly, the whole or any part of the stock or other share capital . . . of another person engaged also in commerce, where in any line of commerce . . . in any section of the country, the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly.15 U.S.C. § 18.
Section 7 forbids a stock or asset acquisition if it may substantially lessen competition in the relevant market. H.J., Inc. v. Internat'l Tel. Tel. Corp., 867 F.2d 1531, 1537 (8th Cir. 1989). Thus, the first step in Section 7 analysis is the definition of the relevant market. Id. The burden of defining the market rests with the plaintiff, and once the relevant market is established, plaintiff must then show that the acquisition may substantially lessen competition. Id. This Court will assume, for the purposes of this summary judgment analysis, that Southern Bell and FOR are in the same product market and serve the same locale. Thus, the main issue pertinent to this summary judgment analysis is whether the record reflects evidence that creates a question of material fact as to whether the effect of DFA's acquisition of a 50% non-voting interest in Southern Belle, when combined with DFA's 50% voting interest in NDH, and thus in FOR, Southern Belle's competitor, is to substantially lessen competition in violation of Section 7 of the Clayton Act.
A combination is presumed to violate Section 7 if the market is sufficiently concentrated and the challenged acquisition would significantly enhance concentration. The seminal case on this matter is United States v. Philadelphia Nat'l Bank, 374 U.S. 321, (1963), where the Court adopted a presumptive standard of illegality for horizontal mergers based on concentration ratios and market shares. The Court stated: "a merger which produces a firm controlling an undue percentage of the relevant market, and results in a significant increase in the concentration of firms in that market, is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anti-competitive effects." Id. at 363. In Philadelphia Nat'l Bank, the Supreme Court held presumptively illegal a merger resulting in a single firm controlling 30% of a market in which four firms had 78% of the sales.
Plaintiff would have the Court apply this presumption of illegality to the acquisition at bar, thus defeating DFA's motion for summary judgment. However, inherent in the Philadelphia Nat'l Bank analysis, and in the application of the presumption, is that the challenged acquisition results in at least some control of a large percentage of a market by one firm. Here, however, DFA's acquisition of a 50% non-voting interest in Southern Belle has not resulted in DFA controlling a large portion of the relevant market for the sale of processed milk to schools. While DFA essentially owns a 50% voting interest in FOR, often Southern Belle's only competitor in the relevant market, its acquisition of shares in Southern Belle does not increase the percentage of the market that DFA "controls" or even enhance DFA's ability to influence the market because DFA's non-voting interest in Southern Belle does not give it any control over the business decisions made by Southern Belle. The balance of control in this relevant market has not shifted to DFA as a result of this challenged acquisition, thus application of the Philadelphia Nat'l Bank presumption of illegality is not appropriate in this instance, and the United States must come forth with some evidence regarding the possibility of anti-competitive effects resulting from this acquisition in order to defeat DFA's motion for summary judgment.
It is further evident that the facts of this case do not support the application of a presumption of illegality when one considers that Philadelphia Nat'l Bank and its progeny typically involve "horizontal mergers" — a merger of two or more companies that compete directly with one another in the same market. Southern Belle and FOR are independent horizontal competitors, a circumstance that is not affected by DFA's non-operational partial ownership interests.
2. Anticompetitive Effects
An acquisition is illegal under Section 7 of the Clayton Act if its effect "may be to substantially lessen competition, or to tend to create a monopoly." 15 U.S.C. § 18. The Clayton Act is indeed concerned with probable, rather than certain anticompetitive effects:
Section 7 of the Clayton Act was intended to arrest the anticompetitive effects of market power in their incipiency. The core question is whether a merger may substantially lessen competition, and necessarily requires a prediction of the merger's impact on competition, present and future. The section can deal only with probabilities, not with certainties. And there is certainly no requirement that the anticompetitive power manifest itself in anticompetitive action before § 7 can be called into play. If the enforcement of § 7 turned on the existence of actual anticompetitive practices, the congressional policy of thwarting such practices in their incipiency would be frustrated.FTC v. Procter Gamble Co., 386 U.S. 568, 577 (1967) (citations omitted). However, the words "may be" refer to a reasonable probability and not a mere possibility of anticompetitive effect, and the mere possibility of a prohibited restraint does not meet the statutory requirement that the effect of the acquisition "may be" such restraint or tendency. See FTC v. Consolidated Foods Corp., 380 US 592 (1965). In other words, Section 7 of the Clayton Act deals in probabilities, not "ephemeral possibilities," and is concerned with the loss of competition which is sufficiently probable and imminent. See United States v. Marine Bancorporation, Inc., 418 US 602, 623 (1974).
Essential to an analysis of whether there is a reasonable probability of anticompetitive effects resulting from an acquisition is an examination of the nature of the interest acquired, including whether the acquisition will allow the acquiring company to influence significantly or control the management of the acquired firm.
While the Supreme Court has held that control is not a prerequisite to a finding of a violation under Section 7, Denver Rio Grande West R.R. v. United States, 387 U.S. 485, 501 (1967) ("A company need not acquire control of another company in order to violate Section 7 of the Clayton Act"), it is necessary that the acquisition cause anticompetitive effects, or that "the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly." 15 U.S.C. § 18. Thus control becomes important with respect to causation, because a finding of causation is made less likely when the company who has acquired stock in both subject companies does not have the ability to be at all involved in the decision-making that forms the basis of the alleged anticompetitive effects. See FTC v. H.J. Heinz Co., 246 F.3d 708, 725 (D.C. Cir. 2001). See also Smith-Victor Corp. v. Sylvania Electric Products, Inc., 242 F.Supp. 315 (N.D. Ill. 1965) (plaintiff's alleged harm was not associated with the challenged acquisition).
Some courts, in analyzing control in this causation framework, have found an illegal acquisition solely because what was acquired gave the acquiring party the ability to influence competitive behavior. Such holdings typically find acquisition percentages and post-acquisition decision-making authority instructive. See United States v. E.I. du Pont de Nemours Co., 353 U.S. 586 (1957) (du Pont's acquisition of 23% interest in General Motors, coupled with sharing of Chairman of the Board, and evidence of use of that interest over an extended period of time to ensure that it was the primary supplier of finishes and fabrics (i.e., the Anticompetitive effect alleged) violated Section 7); McTanney v. Stolt Tankers Terminals, S.A., 678 F.Supp. 118 (E.D. Pa. 1987) (denying a motion to dismiss a Section 7 claim against an unconsummated agreement to acquire another company because the plaintiff had alleged that defendants already controlled the business activities of the acquired company); Nelson v. Pacific Southwest Airlines, 399 F.Supp. 1025, 1029 (S.D. Cal. 1975) (holding that even if the defendant had not acquired stock of a competitor, a Section 7 acquisition could be found "if the plaintiff is able to demonstrate that [the defendant] achieved significant control over the decision making process or the property of [the competitor]").
The reverse is also true. Courts have found no violation of Section 7 in partial acquisition cases where the holder of the partial interest is prohibited by contract from exercising control and influence. In Tracinda Inv. Corp., 477 F.Supp. 1093, 1097-1112 (C.D.Cal. 1979), the United States challenged Kirk Kerkorian's acquisition of a 25% interest in Columbia pictures in light of his clear control of MGM. Kerkorian had a stockholders' agreement that limited the amount of shares that Kerkorian could acquire and obligated him to "vote in favor of the nominees for election of directors as proposed by the management of Columbia, and [to] cast this vote proportionally to the other shares present at the meeting and voting in favor of such nominees." Id. at 1098. The United States argued that the three-year contract did not provide adequate protection and that Kerkorian could still dominate or influence Columbia because Columbia would be required to consult with him on major financial matters and top management choices.
The court rejected the United States' position: Kerkorian was "limited in [his] use of the stock in question and the day-to-day operation of Columbia is and will remain in the hands of the present management. Accordingly, at the present time it is absurd to talk of merger." Id. at 1106. With regard to Kerkorian's access to information, the court explained that the stockholders agreement specifically restricted Kerkorian's access to competitively sensitive information and that it was "ludicrous to argue that the defendant would do anything to competitively hurt either company." Id.
Similarly, in United States v. International Harvester Co., 564 F.2d. 769, 777 (7th Cir. 1977), the Seventh Circuit upheld the dismissal of the United States' Section 7 claim because of the existence of a stock purchase agreement that expressed the "clear understanding . . . that Harvester had no intent, nor was it to seek control of [the acquired firm] through the stock acquisition" and by trial, "Harvester [had] not controlled [the other firm's] business activities." As the court noted, the agreement provided that the International Harvester could "not prevent [the acquired firm] from undertaking financially sound business activities" and "Harvester has not interfered with [the acquired firm's] manufacturing or sales efforts in the past, and the court found that there is no likelihood that Harvester will do so." Id. at 777. In fact, the court found that the agreement between the two competitors actually "strengthened" competition in the industry. Id. at 778.
The United States, in arguing that DFA's interest in Southern Belle violates Section 7, focuses not on control, but rather on the incentives and opportunities. The United States asserts that DFA's interest in Southern Belle and NDH gives the dairies incentive and opportunity to collude and to diminish competition among themselves: "the focus, therefore, should not be on DFA's ability to "force" the dairies to do what is in all three's [Southern Belle, DFA, and NDH] interest, but whether the transaction makes it easier to lessen competition between the two dairies, either through tacit means or otherwise. By giving the three plenty of legitimate reasons to talk to one another, greater incentives for cooperating, and grounds for trusting each other more than independent firms in a marketplace, the transaction does just that." See Plaintiff's Opposition to DFA's Motion for Summary Judgment and Reply to DFA's Opposition to Plaintiff's Motion for Partial Summary Judgment, p. 18.
With respect to DFA, the United States asserts that because DFA is entitled to 50% of the profits of both Southern Belle and NDH, has invested in the dairies for the express purpose of obtaining those profits, and has significant financial reasons to encourage those profits, it follows that DFA has incentives to reduce competition between the dairies such that said profits might be increased. The United States further asserts that Southern Belle and FOR will act to reduce their head-to-head milk competition because of pressure from DFA's common ownership interests. The United States argues that each dairy can recognize the joint benefit of not stealing customers from each other, and that conversations regarding how to do so will be more convenient and less susceptible to detection because of the common ownership interests.
It should go without saying that DFA has an interest in whatever affects the dairies, as DFA has a direct interest in each dairy's profitability. However, it is telling that, with respect to school milk bidding, DFA's involvement and even its access to information regarding same, is almost nil. DFA's 50% voting interest in NDH, which owns FOR, does not result in DFA's participation in any of FOR's school milk business decisions. In fact, FOR's actual bidding and pricing decisions on school milk are made at levels even below Allen Meyer, who owns the other 50% voting interest in NDH and acts as the Manager of NDH and thus FOR. See Deposition of Kathy Turner, pp. 57-65 (NDH has very limited involvement in the day-to-day operations of its dairies, including FOR, and that NDH has no involvement in the school milk bidding process of FOR and receives no information on the identity of the schools to which FOR submits bids, the prices bid, or the product mix offered).
With respect to Southern Belle, in addition to the fact that DFA has no voting rights, and thus cannot directly affect Southern Belle's school milk business decisions, its receipt of information regarding these decisions is limited, as Southern Belle's bidding and pricing decisions are made at levels below even Bob Allen, who serves as the sole Manager with authority for all operational decisions involving Southern Belle. See Deposition of Bob Allen, pp. 68-69, 102 (stating that he does not get involved with Southern Belle's school milk bidding, including setting bid prices and that he does not have to approve price changes). DFA's CEO, Gary Hanman, further testified that his presence on the committees of certain dairies gives him access only to high level information, such as annual budgets, operating budgets, and capital expenditure budgets — all information that would be typically found in the annual reports of corporations. See 2002 Examination of Hanman, p. 228.
Plaintiffs have herein simply substituted the concepts of incentive and opportunity, but without any explanation or evidence of how these might be exercised or whether they exist. Every investor, however small, has an incentive to achieve higher profits and perhaps even to communicate with management on these issues. But this obvious point does not establish the probability of anticompetitive effects that would render the investment illegal under Section 7. This is precisely what the Court recognized in United States v. Tracinda, 477 F.Supp. 1093 (C.D. Cal 1979), a case which this Court finds closely parallels the facts of the case at bar. As noted above, the Tracinda court found that Kerkorian's investment (which was restricted by a stockholders agreement) would not eliminate the incentive of management at Columbia to continue to compete with MGM. The Court noted that "a consultation provision" in the stockholders agreement still left Columbia with "absolute and unfettered discretion" over its business and hence "clearly convinces us that the power of control always has been, now is, and will continue to be in the present top management and the board of directors." Id. at 101. The court also rejected "the second main thrust of plaintiff's argument here, that Kerkorian will control Columbia through his influence over the present management and directors of Columbia." Id.
As the Plaintiffs note, Defendants cannot rely on promising not to act to reduce competition, Brown Shoe Co. v. United States, 370 U.S. 294, 329 n. 4 (1962), and Section 7 prohibits a transaction that confers the capacity to reduce competition regardless of whether a substantial lessening of competition is "intended." United States v. E.I. du pont de Nemours Co., 353 U.S. 586, 589 (1957). Furthermore, DFA cannot rely solely on the fact that it has not, since acquiring Southern Belle, become involved in school milk sales or taken specific acts that raised bids to specific school districts. See, e.g., Hospital Corp. of Amercia v. FTC, 807 F.2d 1381, 1384 (7th Cir. 1986). What DFA can rely on, however, in making its case for summary judgment, is evidence that DFA does not have the ability to influence or control Southern Belle with respect to school milk pricing decisions. Furthermore, it is unlikely that there will be increased incentives and opportunities to reduce competition as a result of this transaction given the removed nature of DFA's relationship with both dairies.
Additionally, the court found that because the defendants entered into an agreement that "specifically restrict[ed] the defendant's access to competitively sensitive information," it was "illogical to suggest," as Plaintiff do here, that defendants would be given access to such information. Tracinda Inv. Corp., 477 F.Supp. at 1106.
"Both of these men are confident, intelligent, articulate, self-assured, alert responsible men. It is inconceivable that these men could be mere `toadies' or `lackies' serving anyone, even Kekorian." Tracinda Inv. Corp., 477 F.Supp. at 1101.
Here, as in Tracinda, the operating agreements for both Southern Belle and NDH did and do firmly leave the operational aspects of the company with the operational owners/partner (i.e., Bob Allen and Allen Meyer, respectively), not DFA. Plaintiffs have not set forth any case in support of their position that owning a totally non-voting capital interest violates Section 7. There must be some mechanism by which the alleged adverse effects in the sale of milk are likely to be brought about by DFA's acquisition of a non-operational interest in Southern Belle. Every case reviewed by this court that analyzes mergers has, either explicitly or implicitly, such a mechanism.
Based on the limited nature of DFA's ownership interest in Southern Belle, including the fact that DFA does not have the ability to become involved in Southern Belle's business decisions regarding the sale of school milk, and because DFA is not involved in the day-to-day operations of either Southern Belle or NDH, this Court finds that the incentives and opportunities for collusion are not substantially greater by virtue of DFA's dual ownership interests than they were prior to this challenged acquisition. The United States has not established a causal connection between DFA's acquisition and anticompetitive effects with respect to the sale of school milk in the relevant market — its "incentive and opportunity" theory deals in "ephemeral possibilities," and does not establish a reasonable probability of diminished competition.
IV. DEFENDANT SOUTHERN BELLE DAIRY CO., LLC'S MOTION FOR SUMMARY JUDGMENT
Southern Belle Dairy Co., LLC likewise moves for summary judgment based on the fact that it is the successor of the acquired corporation with respect to this transaction, and because its presence in this suit is not necessary for complete relief to be granted either party.
This Court finds that Section 7 of the Clayton Act is indeed directed solely against the acquirer in a transaction, see 15 U.S.C. § 18 ("No person . . . Shall acquire . . .") (emphasis added), and that neither the seller nor the acquired company can be liable for violating Section 7 of the Act. See, e.g., Dailey v. Quality School Plan, Inc., 380 F.2d 484, 488 (5th Cir. 1967). Thus, Section 7 liability cannot fall as a matter of law upon Southern Belle Dairy Co., LLC, the successor of the acquired corporation.
In February 2002, DFA acquired its interest in the Southern Belle dairy located in Somerset, Kentucky. Plaintiffs allege that Southern Belle Co., LLC actually acquired the Southern Belle dairy on behalf of DFA, presumably by purchasing the stock of Southern Belle Dairy, Co., Inc. The structure of the transaction, as evidenced by the pleadings and exhibits in this matter, demonstrates otherwise. First, DFA incorporated SB Acquisition Corp., and owned 100% of its stock. Second, Southern Belle Dairy Co., Inc., which owned and operated the Southern Belle dairy in Somerset, Kentucky, merged with SB Acquisition Corp. Southern Belle Dairy Co., Inc., was the surviving entity, and DFA's shares of SB Acquisition Corp. were converted into shares of Southern Belle Dairy Co., Inc. Third, DFA formed Southern Belle Dairy Co., LLC, the defendant in this case. Southern Belle Dairy Co., LLC merged with Southern Belle Dairy Co., Inc., with Southern Belle Dairy Co., LLC being the surviving entity. Since DFA was at the time the sole shareholder of Southern Belle Dairy Co., Inc., and was the sole member of Southern Belle Dairy Co., LLC, DFA simply cancelled its shares of Southern Belle Dairy Co., Inc. As a result of this reorganization, Southern Belle Dairy Co., LLC became the successor of Southern Belle Dairy Co., Inc. — the acquired corporation.
The record evidence proves that Southern Belle Dairy Co., LLC did not "acquire" anything. Southern Belle Dairy Co., LLC did not purchase the stock or assets of Southern Belle Dairy Co., Inc. There was no exchange of consideration between Southern Belle Dairy Co., LLC and Southern Belle Dairy Co., Inc. The merger of Southern Belle Dairy Co., Inc. with and into Southern Belle Dairy Co., LLC only reorganized the business structure of the company for tax planning purposes.
Furthermore, Southern Belle's presence in this case is not required for complete relief, given that Defendant DFA has been found to be entitled to summary judgment on all claims brought against it.
V. CONCLUSION
For the foregoing reasons, the Court, being otherwise fully and sufficiently advised, HEREBY ORDERS that:
1.) Defendant Dairy Farmer's of America's Motion for Summary Judgment [DE # 95] is GRANTED;
2.) Defendant Southern Belle Dairy Co., LLC's Motion for Summary Judgment [DE #100] is GRANTED;
3.) Plaintiff United States' Motion for Partial Summary Judgment with respect to Dairy Farmers of America, Inc.'s "Control" Affirmative Defense [DE # 84-87] is DENIED;
4.) the trial of this action is SET ASIDE; and
5.) judgment will be entered contemporaneously with this Order.