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Knuth v. Erie-Crawford Dairy Cooperative Association

decided: June 28, 1972.


Adams, Gibbons and Max Rosenn, Circuit Judges. Max Rosenn, Circuit Judge (concurring and dissenting).

Author: Gibbons


GIBBONS, Circuit Judge.

This case is before us for the second time. Originally it came before us on the appeal of the class representative (the plaintiff) from an order dismissing his complaint for failure to state a claim. The complaint was in three counts and the appeal challenged only the dismissal of Counts I and III. Count I alleged violations of sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1, 2 and sought damages under section 4 of the Clayton Act, 15 U.S.C. § 15. Count III alleged a conversion under Pennsylvania law and claimed pendent jurisdiction. We held that the allegations of Count I, though confused and obscure, alleged a claim under § 4 of the Clayton Act sufficient to escape dismissal under Fed.R.Civ.P. 12(b) (6). We remanded with a direction that the court follow the procedures specified in Fed.R.Civ.P. 23(c) in determining whether a class action was properly involved, and if so, the proper ambit of the class.*fn1 We also held that the conversion count was within the district court's pendent jurisdiction. Knuth v. Erie-Crawford Dairy Coop. Association, 395 F.2d 420 (3d Cir. 1968).

Following the remand the district court caused notice to be mailed to 1200 Pennsylvania milk producers whom the plaintiff sought to represent. Approximately 900 of the 1200 opted out. Thereafter the case proceeded to trial before a jury on the issue of liability only. At the conclusion of the plaintiff's case the district court granted defendants' motion for a directed verdict on Count I and denied, except for two defendants, a similar motion on Count III. That count went to the jury at the end of defendants' case on written interrogatories which resulted in verdicts against each remaining defendant. Thereafter the district court, 326 F. Supp. 48, granted motions for judgments notwithstanding the verdict in favor of several individual defendants. It also granted a motion for judgment notwithstanding the verdict in favor of all defendants contrary to jury interrogatory Number 8 on the issue whether the Pennsylvania six year statute of limitations had been tolled. It ruled that damages would be limited to those suffered by the class members who had elected against opting out of the class action. The district court certified that there was a controlling question of law the disposition of which would materially advance the ultimate termination of the litigation. We granted a petition for an interlocutory appeal. 28 U.S.C. § 1292 (b). The plaintiff and those defendants against which a verdict was allowed to stand have appealed. The several appeals present a variety of issues.

The dispute arises out of the persistent and largely futile efforts of the Pennsylvania Milk Control Commission (the Commission) acting under a statutory mandate to insulate the Pennsylvania dairy industry from price competition.*fn1a The plaintiffs-producers are dairy farmers whose herds produce milk in Erie and Crawford Counties in western Pennsylvania. The defendant Erie-Crawford Dairy Coop. Association (the Cooperative) is a non-profit agricultural cooperative marketing association organized under Pennsylvania law, of which the plaintiffs are member-stockholders. The producers, during the relevant period, entered into contracts with the Cooperative whereby each agreed to consign all milk and cream produced by him to the Cooperative for sale ". . . to such parties and by such methods as the Board of Directors shall deem to be to the best advantage of the Producer." (Exhibit 109, Article Third). Under the standard contract the Cooperative has the right to pool the proceeds of sale of milk or cream derived from all the producers. It then must pay each producer his share of the proceeds of sale ". . . after making all authorized deductions hereinafter provided for or authorized by law." (Exhibit 109, Article Third). The agreement provides for deduction from the proceeds of sale of amounts to cover statutory reserves, dividends on preferred or common stock, and ". . . all operating expenses including transportation, selling and processing costs. . . ." (Exhibit 109, Article Fourth).

The individual defendants (the directors) are producers who served as directors of the Cooperative between the years 1957 and 1965. With the exception of Howard Yost none were officers of the Cooperative during those years. Two individual defendants made a successful motion for a directed verdict. The jury verdict found the remaining individual defendants liable for conversion, but with the exception of Yost all were granted judgment notwithstanding the verdict.

From 1957 through 1965 the Cooperative sold milk and cream to various milk distributors (the handlers)*fn2 who processed the milk and sold it either as fluid milk or in manufactured milk products. During those years a portion of the milk industry in the Erie and Pittsburgh markets was subject to regulation by the Commission. The Commission specified minimum producers prices which handlers were required to pay for milk received at Pennsylvania plants from Pennsylvania producers. For purposes of state regulation the Cooperative is deemed a producer. Each of the handler defendants in all or part of the years 1957 through 1965 had a plant in Pennsylvania and bought milk for that plant from the Cooperative. At the same time, each handler defendant was at all times free under Pennsylvania law to purchase milk for its Pennsylvania plants from producers in adjoining states. The jurisdiction of the Commission did not extend to such interstate sales of milk. The only practical limitation on the ability of a Pennsylvania milk handler to purchase milk from producers in other states was the cost of refrigerated transportation.

Under the Commission's regulations the price paid by handlers to producers depended upon a system of classification reflecting the use to which the milk was put by the handlers, although all milk met the same standards of quality and purity. In western Pennsylvania in the years in question the Commission had established four use classifications:

Class I bottled Drinking Milk, Skim Milk, Buttermilk

Class II Fluid Cream, Ice Cream Mix, Cottage Cheese, Sour Cream

Class III Butter, Cheese, Skim Milk Powder

Class IV Evaporated Milk

Class I is called "fluid" milk. All other classes are called "non fluid" or "manufactured" milk. At all relevant times the Commission's fixed price for Class I of "fluid" milk was much higher than that for all other classes. Thus it was in the best interest of a producer to dispose of his milk to a handler whose resale business produced a high Class I utilization.

When the producer sent his milk to the Cooperative he did not know for what purpose it would be used. Moreover the proceeds of sale which he would ultimately receive were determined only after three steps:

(1) Calculation of the handler's blend price. At the end of each month the handler reported to the Commission and to the Cooperative its utilization in each class. The handler paid a price per hundred-weight calculated by applying to the class prices fixed by the Commission a percentage of utilization in that class. The result was a blend price per hundred-weight, which would vary downward from the Class I price depending on the percentage of "non fluid" uses to which the milk had been put. The blend price was further adjusted to reflect the butterfat content of the milk received from various sources.

(2) Calculation of the Cooperative's pool price. The Cooperative collected the monthly blend price from each handler. These receipts were all pooled. From the pooled receipts the Cooperative deducted the operating expenses and reserves referred to hereinabove. The total number of pounds of milk received each month was then divided into the net pool proceeds to derive the pool price per hundred-weight for each hundred-weight sold, calculated on the basis of a standard butterfat content.

(3) Calculation of each producer's share of the proceeds. The Cooperative would adjust each producer's share of the proceeds depending on the cost of collecting his milk on the farm and the butterfat content of the milk he shipped.

During the years in question milk production rose substantially throughout the Northeast. At the same time the prices fixed by the Commission for intrastate sale of Pennsylvania milk were substantially higher than the price of similar milk produced in Ohio, New York, and other states. Thus even when the cost of refrigerated transportation was taken into account each handler with a plant in western Pennsylvania could supply the fluid milk requirements of that plant with out of state milk at prices substantially lower than the Class I price fixed by the Commission.

This left the Cooperative with these choices:

1. It could sell its members' milk to handlers outside of Pennsylvania free of price control by the Commission, at the available market price which was lower than the Pennsylvania Class I Price.

2. It could sell its members' milk to Pennsylvania handlers for non-fluid uses at a price level where the Pennsylvania non-fluid price and the interstate price equalized.

3. It could seek to hold as customers those handlers whose resale business resulted in a high utilization of fluid milk by offering to meet the interstate price.

The third alternative was illegal under Pennsylvania Law.*fn3 It was, however, the course in fact pursued in a number of instances.

The Antitrust Claim

Plaintiff's antitrust claim, as explicated in our earlier decision, was that the defendants conspired to fix the price of milk shipped into Pennsylvania, to boycott out of state producers, and to suppress and eliminate competitors by a concerted refusal to deal with out of state producers, all to the damage of the Pennsylvania producers. While it was not then clear how the Pennsylvania producers would have been injured in their business or property by such activity, the complaint so alleged, and we held that the plaintiff should be given an opportunity to offer evidence. At the end of the plaintiff's case the factual picture had become much clearer.

First, there is no evidence of any horizontal activity among any of the defendant handlers looking toward boycotting or toward price fixing on any level. Compare, e.g., United States v. General Motors Corp., 384 U.S. 127, 86 S. Ct. 1321, 16 L. Ed. 2d 415 (1966). The Cooperative dealt separately with each handler, and there is no evidence that any handler was aware of the arrangement for rebating worked out with any other. Next, there is no evidence that the Cooperative attempted to impose upon any handler or that any handler agreed to any vertical arrangement respecting resale milk prices. Compare, e.g., Sanitary Milk Producers v. Bergjans Farm Dairy, Inc., 368 F.2d 679, 689 (8th Cir. 1966); United States v. Milk Drivers and Dairy Emp. Union, Local 471, 153 F. Supp. 803 (D.Minn. 1957). The handlers' resale prices were actually fixed by the Commission. The evidence is that the Cooperative negotiated separately with each handler about the net price it would receive for the milk of its producers. Various methods or subterfuges for avoiding the Commission's wholesale fixed prices were resorted to. In each instance the pricing arrangement was agreed to between the Cooperative and the handler prior to the sale. In all cases the handler filed his utilization report with the Commission and paid the Cooperative the official blend price calculated on the basis of that report. In the case of some handlers the Cooperative had a prior agreement that the official blend price would be adjusted to reflect an agreed rather than actual utilization. Thus a handler who actually used 80% of the Cooperative's milk for Class I purposes might receive an adjustment on his blend price to reflect an agreed 60% Class I use. In other cases handlers received agreed adjustments at a fixed rate per hundred-weight, agreed adjustments to the price in the Youngstown federal milk marketing order, agreed adjustments of fixed amount per quart of milk sold at retail, a flat dollar amount per month, or an agreed adjustment for handling milk of low butterfat content. In each case the method of calculating the adjustment was negotiated separately between the Cooperative and a single handler prior to the sale. In each case the adjustment was made in the form of a rebate from the official blend price. The plaintiff's own evidence suggests that the economic effect of the price adjustments was that the Cooperative received more for its members milk than it would have received had it insisted on the official blend price fixed by the Commission and that it thereby lost as customers those handlers with high Class I utilization.

This evidence, the district court held, was insufficient to go to the jury on the antitrust claim. We agree. The plaintiff's case establishes that the Cooperative, a sales agent with authority to sell milk to such parties and by such methods as its Board of Directors deemed to the best advantage of its members, negotiated individual contracts of sale with individual handlers at the best prices it could obtain from time to time in the face of competition from out of state producers. The handlers did not act in concert for any purpose. The Cooperative and individual handlers acted in concert only with respect to the price of individual sales contracts. There is no evidence even of conscious parallel action on the part of the handlers to exact larger rebates, to stabilize prices at any level or to boycott out of state producers. Indeed the evidence is that some handlers negotiated for better prices than others. Undoubtedly the officers and directors of the Cooperative acted with the common purpose of obtaining the best price they could obtain for their members' milk. Each handler, on the other hand, exacted the best price concession it could obtain for itself. Such individual sales contracts, negotiated at arm's length without knowledge on the part of the purchasers of the prices being charged others similarly situated, cannot be regarded as contracts or combinations in restraint of trade. While the individual contracts may have been illegal under Pennsylvania law, they were not illegal under the antitrust laws.

Plaintiff argues that conscious parallel action among all of the defendants was sufficiently inferable from the evidence that the existence of a conspiracy was a jury question. No specific evidence is referred to, and our own review of the record discloses no evidence tending to show that any handler was even aware of the price arrangement of any other. Evidence from which a conspiracy may be inferred is simply absent.

Having advanced a contention not supported by an evidence plaintiff goes on to concede:

"However, the Plaintiffs are willing to rest their plea for summary judgment*fn4 on the undisputed and admitted facts that each of the Dairy Defendants [handlers] entered into a separate agreement with the Defendant Erie-Crawford [the Cooperative] to accept rebates on the price of milk sold and delivered to them which restrained commerce between the States in violation of Section One of the Sherman Act, thereby making each Dairy Defendant liable for the amount of money received by it as a ...

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