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Three states and the federal government continues to aggressively pursue an antitrust complaint against dairy giant Deans Foods Company despite plans for a joint U.S. Department of Justice and Department of Agriculture workshop on competition in the dairy industry this June.
According to court documents, the DOJ Antitrust Division filed the case in January in cooperation with the attorneys general from the states of Wisconsin, Illinois and Michigan. The suit alleges that Deans Foods aquired Foremost Farms USA in April 2009 to “substantially lessen competition,” a violation of the 1914 Clayton Antitrust Act.
The plaintiffs specifically charge that the acquisition, which included two Wisconsin dairy processing plants, will impact school milk markets in Wisconsin and the Upper Peninsula of Michigan as well as sales of fluid milk in those locations and northeastern Illinois.
“Numerous school districts have benefited from vigorous competition between Dean and Foremost,” the government wrote in its original complaint. “Dean and Foremost have frequently been the two lowest bidders for school milk contracts at numerous school districts in Wisconsin and the [Upper Peninsula] and, in some school districts, have been the only two bidders for those contracts.”
For both school districts and retailers, the government argues, the “aggressive competition” between Dean and Foremost, which are often the only two companies submitting bids, “has lowered purchasers’ costs.” As an example the plaintiffs cite an Illinois retailer that auctioned its fluid milk business. The retailer, which operates hundreds of retail locations, contends that competition between Dean and Foremost resulted in roughly a $1.5 million savings.
The government also contends that Dean specifically sought to acquire Foremost because the company was less likely than others to cooperate in relation to pricing.
“Eliminating Foremost, which Dean describes as an ‘irrational’ pricing competitor, will leave only a few remaining competitors, whose competitive decision-making Dean has described as ‘more predictable’ and ‘rational.’ Consequently, the acquisition will make coordination easier and more durable,” wrote the government.
The pricing that Dean described as ‘irrational’ derived from the fact that Foremost had the most excess fluid milk capacity in the region. Because Foremost was operating at less than two-thirds of its capacity, the company was willing to reduce prices in order to secure more contracts with retailers, school districts and other outlets. The government argues that Dean was then faced with either losing market share or reducing margins, and that “neither approach was attractive to Dean.”
In a 2008 speech to top executives, Gregg Engles, chief operating officer for Dean, spoke about “irrational local” competition. “Why do we have irrational local competitors? Because we have too much capacity in this industry. … [T]hey default to the same game that gets played in industries that have little volume growth and too much capacity everywhere around the world. People play for share, and in this category, you play for share with price.”
Dean has filed a partial motion to dismiss the case or, alternatively, for the government to provide a more definite statement. The government answered that motion on March 11, requesting, of course, that both Deans’ arguments against the case be denied. The court has yet to rule on the motion.
Although Assistant Attorney General Christine Varney, who leads the Antitrust Division, was careful not to connect existing actions or investigations to the series of workshops planned by her agency and the USDA, cases like the one against Deans Foods were the elephants in the room during the first workshop held in Ankeny.
“I don’t want to link investigations that we undertake to the workshops, but as we become more knowledgeable about the industry works, that can lead to action,” Varney told reporters in Ankeny.
U.S. Attorney General Eric Holder noted that the workshops will help his team “refine” and “calibrate” their investigations into various sectors of the agricultural industry. So, while the case against Deans Foods may be the latest, it is hardly the only investigation underway that will impact agricultural sectors throughout the nation. Most importantly, however, it is highly unlikely that it will be the last.
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