Tuesday, March 19, 2019
This week’s two posts will be devoted to the Packers and Stockyards Act (PSA). 7 U.S.C. §181 et seq. Recent news of a sale barn bankruptcy in Kansas has brought renewed attention to how the PSA works and its various provisions. In today’s post, I will detail a bit of the history of the PSA and several of the basic provisions of the law. In Thursday’s post, I will deal specifically with the PSA trust that is created to protect unpaid cash sellers of livestock when a buyer files bankruptcy – the problem facing some Kansas cattlemen at the present time.
The PSA – it’s history and basic provisions, that’s the topic of today’s post.
History of the PSA
The PSA is enforced by the USDA’s Packers and Stockyards Administration which regulates the livestock and poultry marketing system in the U.S. The stated purpose of the PSA is to assure the free flow of livestock from livestock farms and ranches to the marketplace. See, e.g., Stafford v. Wallace, 258 U.S. 495 (1922). The PSA regulates both packers and stockyards.
The genesis of the PSA dates back to 1888. That’s when the U.S. Senate authorized an investigation of the buying and selling of livestock to determine if anti-competitive practices were present. The investigation revealed that major meatpackers were engaging in unfair, discriminatory and anti-competitive practices by means of price fixing, agreements not to compete, refusals to deal and similar arrangements. The Senate report contributed to the political support for the Sherman Act of 1890.
In 1902, an injunction was sought against the major meatpackers alleging antitrust violations. The injunction was issued in 1903 and the Supreme Court sustained it in 1905. Swift & Company v. United States, 196 U.S. 375 (1905). The injunction, however, was not successful in correcting the situations deemed anti-competitive. The same defendants or their successors were indicted and tried for alleged violations of the antitrust laws but were acquitted after trial in 1912. The dominance and anti-competitive activities of the packers continued, and in 1917, President Wilson directed the Federal Trade Commission (FTC) to investigate the packing industry. The FTC report documented widespread anti-competitive practices involving operations of stockyards, actions of commission persons, operation of weighing facilities, disposal of dead animals and control of packing plants.
During congressional debate of the PSA, the major packers signed a consent decree in an attempt to ward off the new legislation. The consent decree was entered into on February 27, 1920, and it enjoined the “Big Five” meatpackers (Swift & Co., Armour & Co., Cudahy Packing Co., Wilson & Co., and Morris & Co.) from certain activities. The Big Five were prohibited from maintaining or entering into any contract, combination or conspiracy, in restraint of trade or commerce, or monopolizing or attempting to monopolize trade or commerce. The consent decree also prohibited the Big Five from engaging in any illegal trade practice as well as owning an interest in any public stockyard company, any stockyard terminal railroad or any stockyard market newspaper or journal. The injunction also prohibited the Big Five from having an interest in the business of manufacturing, selling or transporting, distributing or otherwise dealing in any of numerous food products, mainly fish, vegetables, fruits, and groceries and many other commodities not related to the meatpacking industry. Similarly, the injunction prohibited the Big Five from using or permitting others to use their distribution systems or facilities for the purchase, sale, handling, transporting or dealing in any of the enumerated articles or commodities. The injunction also prevented the owning or operating of any retail meat markets except in-plant sales to accommodate employees. Because the Big Five controlled all the warehousing in their exercise of monopoly power, the injunction prevented them from having an interest in any public cold storage warehouse or engaging in the business of selling or dealing in fresh milk or cream.
Even though the Attorney General of the United States personally appeared before the House Committee on Agriculture and recommended against the proposed legislation on the ground that the consent decree would eliminate the evils in the packing industry and make legislation unnecessary, President Harding signed the PSA into law on April 15, 1921. Consequently, some of the “Big Five” filed suit seeking to have the consent decree either vacated or declared void. However, in 1928, the United States Supreme Court upheld the consent decree. Swift & Co. v. United States, 276 U.S. 311 (1928). Similarly, the Supreme Court turned down requests to modify the decree in 1932 (Swift & Co. v. United States, 286 U.S. 106 (1932)) and 1961. Swift & Co. v. United States, 367 U.S. 909 (1961). The decree, however, was terminated on November 23, 1981. United States v. Swift & Co., 1982-1 Trade Cas. (CCH) ¶64,464 (N.D. Ill. 1981).
While the PSA was “the most far-reaching measure and extend[ed] further than any previous law into the regulation of private business with few exceptions,” (61 Cong. Rec. 1872 (1921) and the powers given to the Secretary of Agriculture were more “wide-ranging” than the powers granted to the FTC, the Act was upheld as constitutional in several court cases from 1922 to 1934. Unquestionably, the PSA extends well beyond the scope of other antitrust law.
Selected Provisions of the Act
Registration Requirement. The PSA requires all marketing agencies that handle livestock to register with the USDA which has the authority to suspend registration for violations of the Act for insolvency. 7 U.S.C. Sec. 181 et seq.
Bonding. Packer bonding is required except for those with average annual purchases of $500,000 or less. Thus, there is a danger posed to persons or entities selling livestock to relatively small buyers. Selling to a local locker does not provide the protection that the PSA affords had the sale been to a packer purchasing at least $500,000 worth of livestock per year.
False Weighing. False weighing of livestock is also prohibited. False weighing of livestock had been a serious longstanding problem. “Back balancing” had been a relatively common practice (failure to empty the scales to show a balanced condition). False weighing is viewed as a serious offense and the regulations impose several detailed requirements to discourage false weighing. See 9 C.F.R. §§ 201.49-201.99. For example, whenever livestock is weighed for the purpose of sale, a scale ticket must be issued which must be serially numbered and used in sequential order. 9 C.F.R. §201.49(a). The scale tickets must be retained as part of the market agency's or dealer's business records to substantiate each transaction, and must include: 1) the name and location of the weighing; 2) the date of the weighing; 3) the name of the buyer and seller or consigned, or a readily identifiable designation thereof; 4) the number of livestock; 5) the kind of livestock; 6) the actual weight of each draft of livestock; and 7) the identity of the person who weighed the livestock, or their signature if required by State law. 9 C.F.R. §201.49(b).
Gratuities. The Packers and Stockyards Act also prohibits the practice of a stockyard owner or market agency giving gratuities to truckers, consignors or shippers. Providing free trucking to consignors as an inducement to consign livestock to a particular market is an unfair practice and a willful violation of the PSA that discriminates against those consignors not given free trucking. The practice also constitutes an unfair and unjust practice against competing markets, forcing them to give free trucking in order to remain in business.
Coordinated Buying. The “turn system” of selling livestock has been held to violate the PSA. Berigan v. United States, 257 F.2d 852 (8th Cir. 1958). Under the “turn system” of selling livestock, livestock dealers engage in the practice of flipping coins to establish the “order” or “turn” in which they would look at, bid on and have the opportunity to buy stocker and feeder cattle consigned for sale to a market agency. This method of selling livestock limits the number of buyers or prospective buyers which increases the value of the position or turn of those not eliminated with the effect of restricting competition and depressing the market.
Bribery. The PSA also prohibits the bribery of weighmasters. Likewise, bribing employees of a market agency by a dealer to obtain favored treatment in sale of livestock has been held to violate the PSA. See, e.g., In re McNulty, 13 Agric. Dec. 345 (1954). Other violations of the PSA include market agencies purchasing animals from consignments for resale, price discounts being offered to some purchasers of meat products, and the use of “bait and switch” tactics in selling meat.
Recordkeeping. The PSA requires that books and records be kept. Penalties for failure to do so include a $5,000 fine or three years in prison or both. Private actions may be brought for “reparations” under the Act by filing a complaint with the USDA within 90 days after the cause of action accrues. USDA issues the order requiring payment.
Other Prohibited Practices. The Act prohibits any “unfair, unjustly discriminatory, or deceptive practice or device. 7 U.S.C. §192(a). But, in Kinkaid v. John Morrell & Co., 321 F. Supp. 2d 1090 (N.D. Iowa 2004), the court held that hog contracts containing a deduction charge for hogs dying in transit was not an unfair or deceptive practice and did not constitute an unauthorized sale of insurance under state (Iowa) law because the primary purpose of contracts was the sale of hogs.
Enforcement. Enforcement of the PSA is either by a civil action, initiated by the person aggrieved by the violation of the PSA, or by an action taken by the U.S. Attorney upon request of the Secretary of Agriculture. Jurisdiction is in the federal district court.
In part two on Thursday, I will dig into the PSA trust provision and the protection it provides for unpaid cash sellers of livestock. That’s a provision that is of particular importance when a livestock buyer files bankruptcy after buying livestock but before making payment for them. I will also look at some PSA market competition issues. Stay tuned.