Thursday, November 3, 2016
New Regulations on Marketing of Livestock and Poultry
The USDA has sent to the Office of Management and Budget (OMB) interim final rules that provide the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The USDA issued proposed rules in 2010, but is now taking steps to finalize the revised rules in the waning days of the current Administration. The proposed rules generated thousands of comments, with ag groups and producers split in their support.
Today’s blog post takes a look at the issues involved, what the courts have had to say in recent years, and what the USDA’s interpretation is. The matter has been a hot one in the livestock sector for quite some time.
The PSA Provisions at Issue
Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. The whole matter has been a distinct concern in the livestock industry.
In recent years, numerous courts have addressed the issue of whether the statutory language requires a producer to prove that a packer’s conduct had an adverse impact on competition. For example, in late 2001, a nationwide class action lawsuit was certified against Iowa Beef Processors (subsequently acquired by Tyson Fresh Meats, Inc.) on the issue of whether Tyson’s use of “captive supply” cattle (cattle acquired other than on the open, cash market) violated Section 202 of the PSA. The class included all cattle producers with an ownership interest in cattle that were sold to Tyson, exclusively on a cash-market basis, from February 1994 through and including the end of the month 60 days before notice was provided to the class. The claim was that Tyson’s privately held store of livestock (via captive supply) allowed Tyson to need not rely on auction-price purchases in the open market for most of their supply. Tyson was then able to use this leverage to depress the market prices for independent producers on the cash and forward markets, in violation of the PSA. In early 2004, the federal jury in the case returned a $1.28 billion verdict for the cattle producers. However, one month later the trial court judge, while not disturbing the economic findings that the market for fed cattle was national, that the defendant’s use of captive supply depressed cash cattle prices and that cattle acquired on the cash market were of higher quality than those the defendant acquired through captive supplies, granted the defendant’s motion for judgment as a matter of law, thereby setting the jury’s verdict aside. The trial court judge ruled that Tyson was entitled to use captive supplies to depress cash cattle prices to “meet competition” and assure a “reliable and consistent” supply of cattle. Pickett v. Tyson Fresh Meats, Inc., 315 F. Supp. 2d 1172 (M.D. Ala. 2004). On appeal, the U.S. Court of Appeals for the Eleventh Circuit affirmed (Pickett v. Tyson Fresh Meats, Inc., 420 F.3d 1272 (11th Cir. 2005)), and the U.S. Supreme Court declined to hear the case. Most of the other courts that have considered the issue have also determined that Section 202 of the PSA requires a producer to prove that a packer’s conduct adversely impacted competition. That includes the U.S. Court of Appeals for the Tenth Circuit, the Eleventh Circuit and the Sixth Circuit, among others. While the United States Court of Appeals for the Fifth Circuit, in a contract poultry production case, ruled that the plain language of Section 202 does not require a plaintiff to prove an adverse effect on competition (Wheeler, et al. v. Pilgrim’s Pride Corp., 536 F.3d 455 (5th Cir. 2008)) the court granted en banc review with the full court later reversing the 3-judge panel decision. The full court reversed because it believed that the PSA’s legislative history coupled with the interpretation of other courts on the issue required the plaintiff to show an anti-competitive effect to have an actionable claim.
In 2009, contract poultry growers in Texas, Arkansas, Oklahoma and Louisiana brought a PSA price manipulation case against the company that provided them with chicks, feed, medicine and other inputs. City of Clinton v. Pilgrim’s Pride Corporation, 654 F. Supp. 2d 536 (N.D. Tex. 2009). The company had filed for Chapter 11 bankruptcy and, as part of reorganizing its business activities closed certain facilities and terminated some grower contracts. The terminated growers claimed the defendant’s actions violated Section 192(e) of the PSA as actions that had the effect of manipulating the price of chicken by terminating those growers that were not near another poultry integrator so that they couldn’t sell their chickens to one of the defendant’s competitors, and terminating those growers who would not upgrade their chicken houses to include cool-cell technology even though not required by grower contracts. While the court held that the defendant could have a legitimate business reason for its decisions and might be able to show that the plaintiffs were not harmed by its actions, the court determined that the plaintiffs’ pleadings were sufficient to survive a motion to dismiss. In addition, the court held that the Texas growers had posed legitimate claims under the Texas Deceptive Trade Practices Act.
These cases (and other similar ones) spurred interest in revised PSA regulations by the USDA. Thus, in June of 2010, the USDA issued proposed regulations providing guidance on the handling of antitrust-related issues under the PSA. 75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010). Under the proposed regulations, "likelihood of competitive injury" is defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It includes, but is not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) is stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically note that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also note that a PSA violation can occur without a finding of harm or likely harm to competition, but as noted above, that is contrary to numerous court opinions that have decided the issue.
Move To Finalize the Regulations
Recently, the USDA took steps to finalize the regulations after receiving volumes of comments on the proposed regulations. The USDA sent to the OMB for review three rules, known as the “Farmer Fair Practices Rules.” If the OMB approves the revised rules, they will be published in the Federal Register and then will be subject to a comment period and could again be delayed or blocked by the same procedure that has previously been used.
The rules are revisions to the proposed rules that were issued in 2010 to implement certain 2008 Farm Bill provisions. On several occasions, the Congress included riders in the annual USDA funding bill to block finalization of the proposed regulations, but didn’t do so with the 2016 funding bill. That’s what spurred the USDA to move forward with finalizing the rules.
The rules basically do three things: (1) as an interim final rule, a producer would not have to prove injury to or diminished competition, but only show that a packer’s practice was “unfair” or “undue” or that an “unreasonable” preference or advantage was given to another producer or producers; (2) a proposed rule concerns packer contracts that offer price premiums that could create pricing preferences; and (3) a proposed rule that addresses poultry “tournament” pricing contracts (where growers are grouped together and then ranked on performance) by setting requirements for contracting companies to comply with to determine a grower’s payment.
Ag groups are split on how they view the revised rules. Some have pushed long and hard to get these new regulations that they believe would better protect livestock and poultry producers from buying practices of livestock packers and poultry suppliers. Others view the rules as doing nothing but adding cost to the production process, disrupting the current system for marketing livestock and poultry, and triggering more litigation. In any event, if the rules are ultimately finalized, they would be reviewed by courts under a deferential standard which would mean that they would likely be upheld. The would only be overturned under that standard if they were arbitrary and capricious and did not comport with any reasonable interpretation of the PSA.