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KNUTH v. ERIE-CRAWFORD DAIRY COOP. ASSN.

April 15, 1971

Robert M. KNUTH, on behalf of himself and all others similarly situated, Plaintiffs,
v.
ERIE-CRAWFORD DAIRY COOPERATIVE ASSOCIATION, and others, Defendants


Weis, District Judge.


The opinion of the court was delivered by: WEIS

"Milk and honey" sounds of sweetness and serenity in story and song but "milk", "Commission" and "Co-Op" in conjunction connote confusion, contradiction and controversy in this case in court.

 This is a class action brought on behalf of approximately 300 of a total of 1200 farmers who were members of the Erie-Crawford Dairy Co-Operative Association during the years of 1957 to 1965. The defendants are the Co-Op itself, its individual directors who served during that period of time, and a number of dairies or dealers to whom Erie-Crawford made sales of milk during the period in question.

 Erie-Crawford was an agricultural cooperative organized under the laws of Pennsylvania whose members and dairy customers, sometimes called "handlers", were primarily from the Western Pennsylvania area, concentrated mainly in the Pittsburgh and Erie areas.

 The plaintiffs, also designated as "producers", had consigned their milk to Erie-Crawford for sale to the various dairies and claim that as a result of rebates or refunds granted by the Co-Op to the various dairies, the class has been deprived of monies rightfully belonging to it.

 Suit was filed on two theories, first, that of violation of the antitrust laws and second, that of a conversion based upon state law.

 During the period of time in question, each of the plaintiffs sent his milk to Erie-Crawford in accordance with a form contract providing that the Association was to sell the milk to such parties and by such methods as the Board of Directors deemed to be to the best advantage of the farmer. Authority was also given to "pool" proceeds derived from the sale of milk consigned by other members and to authorize the deduction of certain overhead expenses by the Co-Op. The result was that each milk producer would receive the same adjusted price for his milk regardless of the dairies to whom sales were made, even if at varying prices.

 In Pennsylvania the price of milk, both at retail and on sale from the producer to the dairy, is subject to regulation by the State Milk Control Commission. *fn2" Free and open competition in the industry, therefore, did not exist in Western Pennsylvania during the period under study.

 However, the Commission's authority and jurisdiction extended only to sales made in Pennsylvania by Pennsylvania farmers to Pennsylvania dairies. Milk sold by the Co-Op or its producers to customers outside the state was not subject to the milk control price nor was milk shipped into the Erie or Pittsburgh area from outside Pennsylvania subject to control by the Commission.

 Western Pennsylvania milk farmers were adversely affected by economic conditions in the early 1950's which developed in this area as a result of the unrealistic prices set by the Milk Control Commission. The mandated price for Class 1 milk (the fluid drinking milk) was higher than that of the similar product which was available in the adjoining States of Ohio and New York.

 During this same period, production rose substantially and consequently there were increasing quantities of milk in Ohio and New York which were available to Pennsylvania dairies at prices substantially below that set for the Pennsylvania farmers by Commission fiat.

 Although the Commission regulations specified the minimum prices at which sales could be made to the dairies, the Co-Op nevertheless during this period by various methods lowered its prices so that they would be at a similar level to those available to dealers who purchased out of state. This was done by the use of "price adjustments", as the defendants say, or "rebates", as the plaintiffs choose to term the arrangements.

 The method of varying the price and the amount of the reduction was accomplished in a number of different ways. However, in each instance the Co-Op would collect the entire amount called for by the Milk Control Commission schedule and then refund the amount of the agreed concession to the dairy by means of a check.

 The total amount of the refunds granted by the Co-Op during the years in question totaled more than one and a half million dollars.

 Not all of the customers of Erie-Co-Op were granted this price relief and the testimony disclosed that only those customers who complained of lower prices available from out of state producers were given favorable treatment. The reductions were not uniform and the Co-Op did not inform any of its customers, including participants in the arrangements, that some were being given financial preferences.

 The refunds were terminated some time in 1965 when minimum price schedules were reduced by the Milk Control Commission and hearings by that body on complaints of the rebating practice were held. Suit was filed by these plaintiffs on December 8, 1965.

 THE ANTITRUST COUNT

 At the time the Court of Appeals considered the plaintiffs' case, there were allegations of three types of conduct violating the antitrust laws, arranged under these headings:

 
I. Rebates;
 
II. Interstate shipping of Pennsylvania milk;
 
III. Boycott.

 The latter two of these counts were abandoned at time of trial and the plaintiffs proceeded only on the theory of rebate.

 The Appellate Court's analysis of the plaintiffs' Complaint was that "the defendants conspired to fix the price of milk shipped into Pennsylvania by the use of rebates to the processors on milk produced in Pennsylvania and purchased by them from Erie-Crawford. * * * Rebates given solely on Pennsylvania milk allegedly result in the suppression and elimination of competition by preventing the free flow of milk in interstate commerce from sources outside the State of Pennsylvania into the State of Pennsylvania. The object of this alleged combination and conspiracy was to accomplish the raising, fixing, controlling, setting, stabilizing and affecting the price of milk shipped in interstate commerce." (395 F.2d 420, 423-424.)

 It was because the plaintiffs failed to produce the facts to sustain these allegations that the dismissals of the antitrust counts were granted.

 Unquestionably the plaintiffs did prove that rebates were given to various dairies, in fact this was conceded by the defendants. It seems clear, also, that while the practice of selling milk at prices less than those set by the Commission was contrary to state law, the granting of rebates in and of itself does not establish a violation of the Sherman Act. Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319 (2nd Cir. 1969), cert. den. 394 U.S. 999, 89 S. Ct. 1595, 22 L. Ed. 2d 777.

 The plaintiffs failed to establish that prices were "fixed" within the meaning of the antitrust laws; evidence was lacking to prove that there was any restraint imposed upon interstate commerce; and there was no proof that the free flow of milk from sources outside Pennsylvania had been hindered or impaired by the price adjustments.

 What the plaintiffs' case did develop was uncontradicted testimony that prices outside Pennsylvania were lower than those set by the Milk Control Commission and that as a result of this unnatural and unfavorable economic climate, Erie-Crawford lost two of its large customers in the early 1950's. In order to prevent the loss of all its markets and to meet competition, Erie-Crawford did agree to lower its prices to meet those offered by Co-Ops which sold milk produced in Ohio and New York. In no instance was there a showing that Erie-Crawford had undercut its rivals but rather it seems that it was content to meet the competition on equal grounds.

 In a fact situation like this, to hold that a seller is helpless and must stand by watching its business being destroyed would be a perversion of the result sought to be obtained by the Sherman Act. The antitrust laws were designed to encourage competition and to prevent predatory action. To outlaw the action of the Co-Op in defending its markets by the time-honored and legally sanctioned method *fn3" of meeting competition would be to turn the shelter of the antitrust legislation into a weapon which would kill free enterprise instead of protecting and promoting it.

 Plaintiffs argue vigorously that they proved "price fixing" but actually what they showed fell far short of what was required, because to agree upon a price with a customer in the absence of other circumstances is not within the legal prohibition. Decisional law has established that "price fixing" within the intent of the Sherman Act is either horizontal (dealing with arrangements among competitors) *fn4" or vertical (attempting to control the resale price). *fn5" Neither was present in this case.

 The Co-Op was not a competitor of the plaintiffs but was simply their agent. It did not and could not attempt to control the resale price of milk since that was already preempted by the Milk Control Commission nor indeed was there any evidence to indicate that any attempts were made in this direction. There was no evidence that any of the dairies had agreed among themselves to set prices at which they would purchase milk from Erie-Crawford. To the contrary, all the evidence was that each price adjustment was set by Erie-Crawford individually with the particular dairy involved without the knowledge of any others. The adjustments were not the same and obviously the Co-Op was attempting to grant the smallest concession necessary in order to retain the business of the particular handler.

 There was no showing of any restraint upon interstate commerce. The mere fact that an inference might be drawn that because Erie-Co-Op met the price of out of state milk and that consequently some of it was not shipped into and sold in Pennsylvania does not establish an unlawful restraint upon trade in the circumstances of this case. To hold otherwise would be to legalize and sanction predatory activity by the out of state milk suppliers who could flood the Pennsylvania market with their product and remove the hapless Co-Op and its members from the ranks of effective competition.

 Much of the problem in the case was brought about by the collision of two antithetic philosophies -- free and open competition as espoused by the Sherman Act versus close and rigid supervision by the state via price control as set out in the Milk Control Law. Plaintiffs and defendants alike seek support in the particular statute which supports their position but both must struggle with the inconsistencies generated by the application of the incompatible legislative enactments. *fn6"

 Although it might be thought to be implicit in the earlier ruling of the Court of Appeals that the plaintiffs have standing to recover damages under the antitrust laws, the full development of the facts which were brought about by the trial tends to cast some doubt upon that assumption.

 There is a divergence of view expressed by case law as to the class of people which is entitled to invoke the provisions of the Sherman Act, with the not unusual caveat that much depends upon the factual background. *fn7"

 One of the more recent cases is Billy Baxter, Inc. v. Coca-Cola Company, 431 F.2d 183 (2nd Cir. 1970), cert. den. 401 U.S. 923, 91 S. Ct. 877, 27 L. Ed. 2d 826 (1971), which holds that the plaintiff must show a link indicating that his property loss was in the "target area" of the illegal conduct. The opinion in that case reads:

 
" There must be a causal connection between an antitrust violation and an injury sufficient for the trier of fact to establish that the violation was a 'material cause' of or a 'substantial factor' in the occurrence of damage. And this connection must also link a specific form of illegal act to a plaintiff engaged in the sort of legitimate activities which the prohibition of this type of violation was clearly intended to protect. While any antitrust violation disrupts the competitive economy to some extent and creates entirely foreseeable ripples of injury which may be shown to reach individual employees, stockholders or consumers, it has long been held that not all of these have the requisite standing to sue for treble damages * * * Consequently, a plaintiff must allege a causative link to his injury which is 'direct' rather than 'incidental' or which indicates that his business or property was in the 'target area' of the defendant's illegal act." (page 187) *fn8"

 As Judge Learned Hand put it in Bookout v. Schine Chain Theatres, Inc., 253 F.2d 292, 295 (2nd Cir. 1958):

 
"The action at bar will not lie because all claims under the Anti-Trust Acts rest upon wrongs done by the suppression of competition and must be initiated by a party whose commerce has been directly injured."

 See also Harrison v. Paramount Pictures, Inc., 211 F.2d 405 (3rd Cir. 1954).

 Here the concessions granted by the Co-Op were not to those in competition with the plaintiffs. If it be assumed, arguendo, that the effect of price reductions was to restrict to some extent the amount of milk flowing into Pennsylvania, this would not be a cause of harm to the plaintiffs but could only be a benefit by increasing their opportunities for sales.

 The damages claimed by the plaintiffs were the amount of the rebates. This loss was suffered by the plaintiffs not in an attempt by the Co-Op to restrict its markets but only to protect their very existence.

 The parties who might claim to be aggrieved because of the lowering of prices by the Co-Op would have been the out of state producers who were in the target area and who were the ones who could claim loss of sales because of this activity. Certainly the plaintiffs did not fall within this group.

 Recognition of the difficulties that are involved in proving conspiracy requires that wide latitude must be given to a party in his effort to prove his allegations but nevertheless the fact remains that the burden here is still on the plaintiffs. There was no testimony whatsoever from which the jury could have been permitted to infer that there was any plan or conspiracy among the various dairies to force a reduction of the price at which the plaintiffs had to sell their milk. The ...


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