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ADM, HIGH-FRUCTOSE CORN SYRUP MARKETERS
ALLEGATIONS SPOTLIGHT ANTICOMPETITIVE
BEHAVIOR IN MIDST OF ACCOUNTING SCANDALS
GREG BURNS, CHICAGO TRIBUNE: For all its problems of the 1990s, Archer Daniels Midland Co. caught at least one big break.
A massive price-fixing lawsuit brought by some of its largest customers was stopped in its tracks last year when U.S. District Judge Michael Mihm of Peoria threw out the dispute over the huge market for high-fructose corn syrup. Well, now the case is on again, and according to the respected Appellate Judge Richard Posner, it never should have been sidetracked at all.
Posner's decision last month to reinstate the class-action litigation is a plus for those who believe this somewhat esoteric area of the law needs greater enforcement--even in the midst of the crisis over faulty bookkeeping.
High-profile antitrust cases involving ADM and Microsoft Corp. are still alive, though perhaps overshadowed by the Enrons and WorldComs. And considering the current worries about restoring confidence in corporate America, the Bush administration has a strong political motive to take an aggressive stance toward anticompetitive behavior.
Companies, too, may be more likely to pursue civil antitrust litigation given the difficulties of the business climate, says veteran attorney Terry F. Moritz of Chicago's Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz Ltd. "If anything, there will be more scrutiny," he predicts.
The attention is needed. Far from the victimless crime its perpetrators make it out to be, price fixing undermines the foundations of a free-market economy just as surely as cooked books. For the system to work, businesses must be able to compete on as level a playing field as possible, and consumers need to have their faith affirmed in the benefits of a competitive marketplace.
Of course, these cases can be devilishly hard to prove. The targets usually can afford to put up a strong fight, and the evidence often is complicated and vague. "It tends to be very complex," says Randal Picker of the University of Chicago's law school. "When you're chasing big companies, they're going to have resources. They are difficult cases."
So it's gratifying to see the Cokes and Pepsis of the world getting another crack at what they say is a multibillion-dollar corn-syrup cartel with deep roots in Illinois. Like all price-fixing cases, the key allegation is that supposed competitors agreed among themselves to carve up a market at the expense of their customers. The syrup producers are said to have used the Corn Refiners Association trade group as a cover for an agreement to set prices and share production data, the lawsuit alleges.
Because of the pervasiveness of corn syrup in processed foods and soft drinks, virtually every household in America paid the price, the suit says. ADM and other producers have disputed the allegations. No one from the company responded to requests for comment.
Part of the evidence comes from undercover tapes made by the FBI in the early 1990s, with senior ADM executive Mark Whitacre acting as a mole. The company pleaded guilty to antitrust charges stemming from the investigation of its lysine and citric-acid food additives in 1996, paying a then-record $100 million fine. Whitacre, Vice Chairman Michael D. Andreas and corn-processing chief Terrance Wilson all went to prison.
Though the corn-syrup evidence is weaker, Posner still found that Mihm erred in disregarding it, a decision likely to encourage additional cases based on suspicious circumstances rather than direct confessions. For instance, Posner quotes a profane remark from Andreas caught on a secret tape recording. The soon-to-be-jailed executive sarcastically suggests that someone should simply explain to the president of Coca-Cola that ADM has a deal with its biggest competitors to cheat him.
Andreas also describes a Cargill executive as a "friendly competitor," and mentions "an understanding between the companies that causes us not to make irrational decisions."
Other evidence involves the A.E. Staley Manufacturing Co., now owned by Tate & Lyle, including a plant manager's remark that, "We have an understanding within the industry not to undercut each other's prices." A director of Staley was reported to have said, "Every business I'm in is an organization." As Posner explains, "That sounds innocuous enough, but he said it in reference to the conspiracy to fix the price of lysine, and so in context it appears that `organization' meant `price-fixing conspiracy'."
Shortly after the FBI raided ADM's Decatur headquarters, Wilson said he didn't know if the FBI had raided Staley, too. Since Staley made corn syrup but not the targeted lysine or citric acid, Posner writes in his June 18 opinion, "Wilson may have been expressing a concern that the FBI would uncover evidence of a high-fructose corn syrup price-fixing conspiracy as well."
Another part of the evidence is surely a reach. After Andreas and Wilson were imprisoned and their appeals exhausted, they still refused to answer questions about whether they had fixed corn-syrup prices, asserting their right against self-incrimination. "The issue is whether there is a conspiracy," Posner writes, and the executives' silence suggested "there was, and that it involved their former employer, ADM."
Besides relying on those statements, the plaintiffs say they have turned up evidence that corn-syrup manufacturers would sell to each other in an effort to stabilize their agreed-upon market shares. And when customers sought to shift their business from one producer to another, they found no one would quote a lower price even for a higher volume of business.
Sales executives at the companies would complain about their inability to freely pursue new customers, the suit alleges. And when other companies investigated entering the market, existing players discouraged them --- an improper barrier to entry, in the plaintiffs' view.
Mihm was profoundly unimpressed. "Plaintiffs have simply failed to uncover sufficient facts to adequately support their allegations of a seven-year, multibillion-dollar antitrust conspiracy," he wrote in his opinion dismissing the case. "No reasonable jury could find in their favor on the record presented in this case without resorting to pure speculation or conjecture."
Posner concedes the evidence is too weak for criminal charges, but by asserting that plenty exists for a civil matter, he sets the stage for more action in this case and others.
Even now, ADM is being investigated by the Justice Department for an alleged price-fixing scheme that involved turning surplus European wine into the gasoline additive ethanol during the 1990s. The company's chief executive recently downplayed the probe and pledged ADM's cooperation. Yet the case remains unresolved, and it may presage a new round of multinational lawsuits. Indeed, as European Union competition policies clash with U.S. antitrust doctrine, many cases could be spawned, notes University of Chicago's Picker.
The same goes for the tension between intellectual property and the tendency
of its owners to monopolize parts of information-technology industries, a la
Microsoft, he says. So once the current bout of accounting fever runs its
course, watch the docket for allegations of anticompetitive behavior. Enron,
WorldCom and the like just pushed it to the side, not off the table.
TYSON FOODS FINED $150,000
FOR SHIPPING $250,000 WORTH OF CHICKEN PARTS
TO IRAQ IN VIOLATION OF U.S. EMBARGO
ANITHA REDDY, WASHINGTON POST: Ikea International A/S, the Swedish furniture maker, bought 150 handwoven rugs from Afghanistan's former Taliban government. Harper's Bazaar magazine sent supermodels Naomi Campbell and Kate Moss to Cuba for a week-long photo shoot.
And Tyson Foods Inc. shipped $250,000 worth of frozen chicken parts to Iraq through a broker in Jordan.
These are among the 105 companies, banks and other entities that together have paid millions of dollars in recent years to settle federal government allegations that they had violated U.S. trade embargoes against rogue nations, according to Treasury Department documents . . . .
The department's Office of Foreign Assets Control, which helps enforce economic and trade sanctions, normally does not disclose such settlements. But it began to in March after Russell Mokhiber, editor of Corporate Crime Reporter newsletter, and Public Citizen sued to obtain the records. The agency said then that it had identified more than 100 such settlements reached between March 1998 and March 2002, and it provided a few examples.
Mokheiber said that he received OFAC documents on 115 other settlements last week, which he made available to The Washington Post . . . .. and that he will release them publicly . . . He added that he expects to receive information on about 180 more cases in coming months.
Most government agencies post such results daily on their Web sites. OFAC recently proposed a rule that would require its settlement information to be released at least quarterly. "The Treasury Department is committed to transparency, and we are taking steps to move forward on this front," said spokeswoman Tasia Scolinos.
OFAC helps enforce sanctions against terrorist organizations, drug traffickers and foreign countries such as Cuba, North Korea and Sudan. Since the September 11 attacks, it has been coordinating efforts to track down and freeze terrorist funds. The OFAC settlements reveal some strange bedfellows. . . . .
Tyson Foods paid the office $150,000 in September to settle allegations that
its shipment of chicken parts violated the U.S. embargo on trade with Iraq. A
Tyson Foods spokesman said the shipment was made by Hudson Foods, which was
later acquired by Tyson in 1998. "When we purchased Hudson we acquired all the
assets and liabilities, this being a liability," said the spokesman, Ed
Nicholson. "We weren't aware this activity occurred until after the purchase." .
. . .
BLACK FARMERS CALL FOR AG SECRETARY VENEMAN
TO BE FIRED AFTER RECENT SNUB; STAGE SIT-IN
DARRYL FEARS, WASHINGTON POST: Black farmers called [on July 3] for the removal of the U.S. agriculture secretary and vowed to continue their occupation of one of her department's loan offices in west Tennessee through the Fourth of July holiday.
In a tersely worded letter to President Bush, the farmers requested that Secretary Ann M. Veneman be fired for refusing to accept their telephone calls during a sit-in that began Monday.
"Farmers who have taken over the USDA office . . . are not `terrorists,' as referred to by one of your political appointees," wrote Gary Grant, president of the Black Farmers and Agriculturalists Association. "But rather we are hard-working, tax-paying citizens who know that it is time for your USDA to do the right thing by black farmers."
The Bush administration declined to comment on the request. On [July 3] Veneman had responded to the farmers for the first time, addressing Grant in a letter that applauded the agency's effort to right historical injustices to black farmers.
"USDA is deeply committed to treating all of its customers in a fair and equal manner," Veneman wrote to Grant. "We have demonstrated that our civil rights program is a top USDA priority by increasing staffing and funding of the office of civil rights." Grant said he would prefer that the department increase funding to black farmers.
In 1999, the USDA settled a class action lawsuit in which African American farmers claimed that they had been denied loans by regional bureaus for decades when white farmers had not been. As of February, the agency had paid more than $615 million on slightly less than half of the 22,600 claims filed, according to statistics posted on the agency's Web site.
But current loan applications from black farmers continue to be processed slowly, the farmers said. They staged this week's protest in support of five Tennessee farmers who were still waiting for their Farmer Service Agency loans to be processed when planting season ended July 1.
Veneman told Grant in her letter that she had asked for a immediate update on the status of the five loan requests. "We take all suggestions of unfair treatment very seriously," Veneman's letter said.
Grant was unimpressed. "I appreciate your untimely response to our requests," he shot back in his own letter. "I am extremely disappointed that you have once again established another process by which to address these issues at the USDA top echelon. Your letter is unacceptable, as it does not provide us a date or time to meet with you," Grant wrote.
Meanwhile, the atmosphere at the protest site lost its confrontational edge. Federal workers at the bureau returned to work Tuesday, answering telephones and reviewing loan applications. The farmers sequestered themselves in a conference room, peeking around corners and walking through the office from time to time. A federal police officer stopped by the site to evaluate the situation and told the protesters that they would not be arrested.
Tom Burrell, a Tennessee farmer who serves on the board of the BFAA, said black families were allowing the 25 growers who continued the protest to shower and breakfast at their homes. Other farmers showered in the Days Inn room of an attorney, James Myart.
"Looks to me like we'll be here through Independence Day," Burrell said. He said some of the 300 farmers who had started the protest would return from Kansas, Arkansas and Georgia to rejoin the demonstration. Burrell said the group was planning a Fourth of July picnic.
Inell Farrington Keller, whose husband owns a successful farm, came by to
show support. "I heard about it on the radio and thought it was the right thing
to do," said Keller, who is black. "There would be other farmers here, but this
is the harvest season and they must be out taking care of their crops."
PENDING CALIFORNIA FARM WORKER LEGISLATION
MAY RESOLVE PICTSWEET MUSHROOM DISPUTE
FRED ALVAREZ, LOS ANGELES TIMES: Workers embroiled in a long-running contract dispute with owners of Southern California's largest mushroom farm are pinning their hopes on proposed legislation that could force a settlement in the stalemate.
The bill, written by state Senate leader John Burton (Dem.-San Francisco) and backed by the United Farm Workers union, would permit binding, third-party arbitration in cases where farm labor negotiations reach an impasse.
That appears to be the case at the Pictsweet Mushroom Farm in Ventura, where workers have been without a contract since 1987 and talks in recent years between the company and the UFW have failed to progress. The standoff has turned nasty at times. The UFW has accused the company of bad-faith bargaining and violating other labor laws in a flurry of charges filed with the state's farm labor board.
An opposition group has launched a campaign aimed at decertifying the UFW, contending it no longer represents the will of the workers. And the company has laid off workers in response to a union-led boycott of Pictsweet products that has driven away some of its most valuable customers.
The state Senate passed the binding arbitration legislation in May. The bill is now making its way through the Assembly, where 40 members --- one short of the majority needed for passage --- have pledged support by signing on as co-authors.
That puts it on track to reach Gov. Gray Davis' desk in coming weeks, presenting what some say is a potential election-year dilemma for the governor as he tries to balance the interests of organized labor and California's farm industry. "The governor is going to have to demonstrate whether he is with the people or with the corporations," said mushroom picker Jose Luis Luna, who has worked at the Pictsweet plant for 21 years. He testified before the Legislature earlier this year on the bill's passage.
"It is of monumental importance that this law go through," he said. "The company has the economic strength to prolong this dispute to try to wear us down."
Farm industry groups say no other private enterprise is required to use binding arbitration to settle labor disputes. Only public safety employees, such as police officers and firefighters who are barred by law from striking during labor negotiations, have that remedy available.
Growers say the Agricultural Labor Relations Act, adopted by the state Legislature in 1975 to referee farm labor disputes and oversee union elections, has remedies in place for cases in which growers refuse to negotiate fairly. The proposed legislation would amend that landmark farm law for the first time since its passage 27 years ago by imposing binding arbitration in agricultural labor disputes.
Pictsweet workers seeking to oust the UFW say that the union does not represent their interests and that a majority of laborers would support decertification, if the matter were put to a vote. In such an election, workers could decide whether they wanted the UFW to continue to represent them.
Those workers have submitted three decertification petitions to the farm labor board since 2000. The first was rejected because it contained invalid signatures. The others were blocked after the labor board found evidence to support charges by the UFW that the company was engaging in unfair labor practices. Those charges included allegations that the company supported the decertification effort, which is not allowed.
The anti-UFW workers contend that the union filed the charges only because it feared that it would be ousted in a representation election. They have launched a letter-writing campaign aimed at making state and local elected officials aware of their views. A letter sent to Sacramento last week urged Assembly members to reject the binding arbitration legislation.
"If that law passes, we are automatically going to have a contract that we don't want and we don't need," said Pictsweet employee Guillermo Virgen, who gathered last week with more than three dozen opposition workers outside the plant. "We don't have the economic force or the political force that the union has, but we want the public to know that all we want is an election so that the workers can express what they want to have happen at this plant," Virgen said.
Company officials did not return phone calls seeking comment.
The UFW first won a contract at the Ventura mushroom farm in 1975, in one of the first elections held under the Agricultural Labor Relations Act, union officials said. The agreement paved the way for the union to negotiate contracts with half a dozen other mushroom growers in California and Florida.
The union maintained contracts with a series of owners at the Ventura plant over the years, but that ended when Tennessee-based United Foods Inc. bought it in 1987. Since then, UFW officials say they have tried a number of times to hammer out a new contract, kicking the effort into high gear two years ago. But they say they have made little headway in their demands for higher wages, dental and vision coverage for the workers, less-costly medical insurance and a pension plan --- highlighting the need for the binding arbitration legislation.
"Pictsweet has become the poster child for the need for this legislative effort," said UFW spokesman Marc Grossman, adding that the Ventura labor dispute has been cited several times in testimony before Legislative committees. "The remedy under existing law doesn't work," he said. "We've seen tens of thousands of farm workers over the years not get what they voted for, which are union contracts."
Since 1975, farm workers voted for the UFW in secret ballot elections at 428 companies. Of those, only 185 have entered into union contracts. The UFW blames growers for the disparity, arguing that many of them dragged their heels at the bargaining table.
The bill seeks to circumvent that situation. It would provide a 90-day period for parties to negotiate and if an agreement cannot be reached, a mediator would come in for 30 days to try to resolve the differences. If an agreement is still not forthcoming, either side could petition the state labor board to submit the matter to binding arbitration before a neutral third party, who would conduct a hearing and impose the terms of a collective bargaining agreement.
The bill mirrors a law passed last year by the Legislature providing binding arbitration to grooms and other stable hands at state racetracks. Because those workers are classified as agricultural laborers, the UFW and others argue that the same remedy should be made available to farm workers across the board. Gov. Davis has yet to take a position on the bill, but farm industry leaders say they remain hopeful that he will veto the legislation.
"I think the governor has been trying to strike a moderate position, not only with the agricultural industry but business in general, and this type of legislation does not fit well with that type of middle-of-the-road approach," said Rob Roy, general counsel for the Ventura County Agricultural Assn.
"It is a discriminatory piece of legislation that singles out agriculture," he said. "This is affirmative action for the UFW. They can't get the job done themselves, so they have to rely on the government to do it for them."
Assemblywoman Hannah-Beth Jackson (Dem.-Santa Barbara) doesn't see it that way. She is one of the 40 coauthors in the Assembly and believes the legislation is necessary to give farm workers who vote for a union the right to get what they've asked for. "The least we can do is provide that everybody has to come to the table and negotiate in good faith," Jackson said. "I don't think that is unfair to anybody. I just think it levels the playing field, and I think it's about time we did that for farm workers."
In Issue #168 of the AGRIBUSINESS EXAMINER it was inferred that the National Labor Relations Act was passed in 1937. A long-time friend and valued colleague Boren Chertkov, former chief counsel to the U.S. Senate Subcommittee on Migratory Labor and one-time counsel to California's Agricultural Labor Relations Board rightfully points out our error and adds a fascinating historical footnote:
"The National Labor Relations Act, called the Wagner Act, was enacted in
1935. I think you had 1937 in a recent newsletter. It was ruled `constitutional'
in about 1937 in the Jones and Laughlin case. Historically, farm workers were
included in Senator Wagner's NLRA bill, but it is my understanding that in order
to get votes in the House of Representatives, Mark Antonio, a New York
congressman, agreed to the exclusion of farm workers, but only upon reaching
agreement with Southern conservatives that agricultural interests would be
served by farm recovery legislation soon to be proposed, and would include farm
worker organizing and bargaining rights. A farm recovery bill was thereafter
enacted, but during the debate on the measure, there was absolutely no mention
of farm workers by `either side'."
SENATOR EDWARD M. KENNEDY:
"THE FOOD INDUSTRY CONTINUES TO BE UNABLE
TO COME TO GRIPS WITH THE HEALTH RISKS
ASSOCIATED WITH POTENTIALLY FATAL FOOD ALLERGIES"
GREG WINTER, NEW YORK TIMES : Henry Morrison slumped in his highchair like a rag doll moments after eating lunch, his head lolling on the plastic tray as if it were his favorite pillow.
"Gosh, how could you fall asleep so quickly?" Nancy Morrison, Henry's grandmother, recalled thinking last March while taking care of him in their hometown, Lenoir, North Carolina. At 1 1/2, Henry was apt to doze off after lunch, but this seemed almost comical, she said.
Only when she peeled off his clothes for a nap did she notice the hives, angry and red, signs that Henry's potentially fatal food allergies had seized control. From experience, she knew that Henry's blood pressure was falling dangerously low, and she raced for a shot of epinephrine to revive him.
"I almost lost him that day," she said, suspecting that the problem was a soy-based cheese alternative he had eaten. "I read all the ingredients, but how was I supposed to know that `caseinate' meant `milk'? You need to be a scientist to read a label."
Her complaint is echoed these days among consumer groups and members of Congress alike. More than a year after issuing new guidelines and pledging to overhaul labels to eliminate confusion about everyday ingredients that can cause severe allergic reactions, the food industry has only partly lived up to its promise. Critics say more is needed to disclose ingredients like milk, peanuts, eggs and fish that can provoke life-threatening reactions.
Though many products carry clear warnings, many others offer scant information, despite the industry's pledge to list ingredients by their most common names so as to alert the roughly seven million Americans with food allergies who depend on the accuracy of labels to keep them safe.
For example, Kraft's Stove Top stuffing, 4C bread crumbs, Keebler Fudge Stripes and Fleischmann's margarine use the word "whey" instead of "milk." Ronzoni spaghetti says "semolina" on the box, rather than wheat. And Heinz's HomeStyle Classic Chicken Gravy lists "sodium caseinate" on the jar but offers no other clue that the ingredient is a milk product.
"I am extremely disappointed," said Senator Edward M. Kennedy, the Massachusetts Democrat who has introduced a bill to require many of the allergy warnings that food companies pledged to adopt. "The food industry continues to be unable to come to grips with the health risks associated with potentially fatal food allergies."
A vote on the bill may come as early as [this] week in the Health, Education Labor and Pensions Committee led by Mr. Kennedy.
Trying to stave off such legislation, the food industry banded together in May 2001 to issue guidelines for the kind of "consistency in labeling" that represents "the only successful method" of preventing reactions. Current law requires that companies list all ingredients in a product; it does not require them to use simple language or to carry allergy warnings.
Yet the approach by many companies appears inconsistent, meeting the guidelines on some products but not others Kraft tells shoppers that whey comes from milk in Chips Ahoy cookies but makes no mention of that on boxes of Stove Top stuffing. Pillsbury's Moist Supreme Cake mix warns that the ingredients may accidentally contain traces of egg but does not note that the "whey proteins" it deliberately adds are from milk.
"We have thousands of products," said Claire Regan, a Kraft spokeswoman, adding that the company is committed to retooling its labels but that the overhaul takes time. "It's just a matter of getting it all done. We are diligently addressing the issue though."
The American Academy of Allergy, Asthma and Immunology published a study last week saying that the scientific terms for many foods that cause allergies baffle even the parents of allergic children, much less the teachers, baby sitters and camp counselors who sometimes serve meals in their absence. Fewer than one in ten parents of allergic children could identify, after reading a series of labels, all the products that contained milk, the study said. Only 22% could pick out the soy products; no more than 54% could tell the ones with peanuts.
Part of the problem, some experts say, is that most doctors tell patients to stay away from allergy-provoking ingredients without offering any tips on deciphering labels. "I don't think most doctors even know that the words `casein' and `whey' are even listed on products," Dr. Scott H. Sicherer, an author of the study, said.
The Grocery Manufacturers of America, one of the trade groups that issued the guidelines last year, said yesterday that it would survey food companies to see how many were following the new standard. The group is adamant that regulation is not needed to bring the industry in line, but some members of Congress disagree.
"It's just not enough to completely and accurately label some of the food
some of the time," said Representative Nita M. Lowey, a New York Democrat who
has introduced a bill to fine companies that do not list ingredients by their
simplest terms. "Too many bad food labels are still slipping through the
BEEF CHECK-OFF OPPONENTS WIN
MAJOR FIGHT IN SOUTH DAKOTA FEDERAL COURT
ROGER A. MCEOWEN, KANSAS FARM AND ESTATE LAW, LONGTREE PUBLISHING CO.: On June 21, 2002, the Federal District Court for South Dakota ruled that the mandatory assessment on cattle producers of one-dollar per-head of cattle sold violated the Constitution.
The mandatory assessment is contained in the Beef Promotion and Research Act. The Act authorizes the Secretary of Agriculture to promulgate a Beef Promotion and Research Order, to establish a Cattlemen's Beef Promotion and Research Board and an Operating Committee, to "carry on a program of promotion and research designed to strengthen the beef industry's position in the marketplace and to maintain and expand domestic and foreign markets and uses for beef and beef products."
The program is funded by mandatory producer and importer contributions of one-dollar per head on each transaction. The court's opinion appears to be squarely in line with recent Supreme Court pronouncements involving marketing orders for California tree fruits.
In Glickman v. Wileman Brothers & Elliott, Inc., the U.S. Supreme Court upheld a marketing order that was part of a larger regulatory scheme with respect to California tree fruits. The Court noted that producers in that case were compelled to contribute funds for cooperative advertising and were required to market their products according to cooperative rules.
In addition, the Court noted that the marketing orders had received an
antitrust exemption. Thus, the statutory framework that gave rise to the
marketing order for California tree fruits comprised a "marketing scheme" and
created a fairly comprehensive marketing program. The court reasoned that
because of the detailed regulation of the marketing aspects of California tree
fruits, producers no longer exercised the ability to make their own decisions as
to how to market their own product, and, as a result, a mandatory assessment for
advertising of California tree fruits did not violate the free speech rights of
any producers that might disagree with
Four years later, in United States v. United Foods, Inc., the U.S. Supreme Court held that the mandatory mushroom check-off violated the First Amendment free speech rights of certain mushroom producers. The statute in question, enacted by the Congress in 1990, was the Mushroom Promotion, Research and Consumer Information Act. The legislation authorized the Secretary of Agriculture to establish a Mushroom Council and allowed the council to impose mandatory assessments on handlers of fresh mushrooms in an amount not to exceed one cent per pound of mushrooms produced or imported.
Most of the funds raised by the assessments were spent for generic advertising. The Court noted that First Amendment concerns arose because of the fact that "producers subsidize speech with which they disagree," and that commercial speech is protected by the First Amendment to the U.S. Constitution. The court then analyzed how the mushroom check-off was regulated, and noted that greater regulation of the mushroom market could have been implemented, but was not. As such, the mushroom check-off only served the advertising scheme in question and was not part of a broader regulatory framework.
The advertising itself was the primary object of the regulatory scheme. As such, the regulatory framework for mushrooms was materially different than the regulatory framework for California tree fruits at issue in Wileman. In United Foods, the check-off funds were directed into generic advertising with nothing preventing producers from making their own marketing decisions, there was no antitrust exemption, and there were no marketing orders regulating mushroom production. In addition, mushroom growers were not required to associate as a group to make cooperative marketing decisions.
From the U.S. Supreme Court pronouncements in Wileman and United Foods, the following factors have been established for evaluating whether a mandatory assessment violates the constitution:
1. How are the marketing aspects of the subject industry regulated? Does the check-off embrace a fairly comprehensive marketing program already in place, or does the statutory framework do little more than levy the check-off rate against the commodity and provide for the disbursement of funds?
2. Do the compelled contributions serve only the advertising scheme in question, rather than serve as part of a greater regulatory framework? In other words, is the advertising the primary object of the regulatory scheme?
3. Has an antitrust exemption been granted for the marketing aspects of the industry?
4. Do producers decide how and when to market their products, or are producers compelled to associate as a group to market their products according to cooperative rules?
In 1998, the Livestock Marketing Association (LMA) initiated a petition drive seeking a producer referendum on the continuation of the beef check-off. Under the Beef Promotion and Research Act, ten percent of eligible producers must sign a petition calling for a referendum. The Cattlemen's Beef Board (CBB) reacted by spending approximately $3 million of check-off funds on "producer communications" designed to defeat the petition drive and any subsequent referendum.
The check-off division of the National Cattlemen's Beef Association (NCBA) committed an additional $935,000 for "producer communications" to defeat the petition and referendum. The South Dakota Federal District Court, in early 2001, held that the use of check-off dollars to fund such "producer communications" violated the Beef Promotion and Research Act, and enjoined the CBB from any further use of check-off dollars to create or distribute material for the purpose of influencing governmental action or policy with regard to the beef check-off or the board.
In 1999, LMA offered the CBB a proposal to end the petition drive in return for an immediate producer vote and subsequent periodic votes. The CBB rejected the proposal, LMA filed suit seeking a court-ordered referendum, and, during the pendency of the action, the USDA declined to order a referendum.
While the case was pending in South Dakota Federal District Court on the referendum issue, the United States Supreme Court rendered its opinion striking down the mushroom check-off. In the Mushroom check-off litigation, the government lawyers advocating for the constitutionality of the mushroom check-off, argued in briefs filed in that action that the beef check-off was identical to the mushroom check-off. Consequently, the judge asked both parties to the South Dakota action whether they wanted to address the constitutional issue. Both parties agreed to have the court resolve the constitutional question before addressing the referendum issue.
On June 21, 2002, the court, ruling on the constitutional issue, held that the beef check-off was unconstitutional and that cattle producers cannot be compelled to support a program with which they disagree. The petitioners objected to the use of check-off funds for generic beef advertising that implied that all beef is the same, and to the compelled contribution to advertising for products that they do not sell. The court noted that the language of the Beef Promotion and Research Act was identical in many respects to the Mushroom Promotion, Research and Consumer Information Act that was at issue in United Foods.
The court also noted that the beef industry is not subject to extensive marketing regulation, and that beef producers and sellers make all marketing decisions. [The court noted that the regulatory scheme with respect to beef dealt with meat safety, livestock auctions, and at least allegedly, conduct by packers and stockyards.] Likewise, the court pointed out that beef is not marketed pursuant to a statutory scheme or marketing regulations requiring an antitrust exemption, as were California tree fruits at issue in Wileman. The court also noted that the assessments were not part of a larger regulatory purpose and that approximately 90% of assessments collected over the life of the check-off had been spent on generic advertising. Thus, United Foods was the controlling authority rather than Wileman.
In an attempt to sidestep the First Amendment concerns, the government argued that the beef check-off amounted to coerced financial contributions for public purposes and, as such, promotional materials paid for by the beef check-off constituted government speech which were not subject to challenge under the First Amendment.
The court framed the issue as one of whether the government was the speaker or whether the government had permitted a private entity to promote its own program and agenda, and noted that the United States Court of Appeals for the Third Circuit had previously rejected the government speech argument in the context of the beef check-off. The court pointed out that the CBB was comprised of private persons rather than government employees, and that the USDA Secretary's only role was to certify that those elected to the CBB were qualified.
The court also noted that the CBB had always stressed to cattle producers that the Board was a "producer-controlled, independent Board," and that it was "accountable to producers." In addition, no government tax revenues funded the "speech" of the generic beef advertising. Rather, the generic advertising for beef was funded entirely by producer check-off dollars. Thus, the court rejected that contention that the government was "speaking" in encouraging consumers to eat beef.
The court ordered collection of beef check-off funds to stop as of the start of business on July 15, 2002, and ruled that any request for a stay of its opinion would be denied, thereby placing the request for a stay in the U.S. Court of Appeals for the Eighth Circuit.
The meaning of the court's opinion, along with the two previous Supreme Court cases, and the implications for other check-off programs will not be known for sure until challenges to the other check-offs are litigated, perhaps all the way to the Supreme Court. [A case is currently pending in the Federal District Court for the Western District of Michigan on the constitutionality of the pork check-off.]
However, the most likely interpretation is that each check-off will be evaluated on the basis of what is required and what is involved with the statute authorizing the check-off and related statutes, and whether the statutory framework comprises a "marketing scheme," as the Supreme Court noted in United Foods. If a check-off law embraces a fairly comprehensive marketing program, there is less likelihood that the check-off interferes with free speech. But, if the authorizing statute and the associated statutory framework does little more than levy the check-off rate against the commodity, and provide for the disbursement of funds, a challenge is more likely to be successful on constitutional grounds. That analysis would suggest that the pork check-off and, perhaps, the grain check-offs, might be in jeopardy.
The South Dakota court's opinion is clearly not just a temporary setback for the proponents of the check-off. The opinion appears to be so squarely in line with Supreme Court precedent on the issue that the Eighth Circuit is likely to affirm on appeal and, even if requested, the Supreme Court may not be inclined to hear the case.
Thus, check-off supporters will need to consider ways to reposition check-offs to better withstand a constitutional challenge. One option would be for the check-off to become part of a broader, comprehensive marketing program. A commodity marketing program would seem to be on firmer ground in resisting a challenge to the constitutionality of a check-off program which is ancillary to the marketing program. Also, greater government involvement in marketing of the commodity in question could help withstand a legal challenge. Check-offs in conjunction with government farm programs could, conceivably, be fashioned in such a manner as to create some protection from a First Amendment challenge. Another possible strategy would be to shift check-offs to a voluntary status.
Rodger A. McEowen is Associate Professor of Agricultural Economics and Extension Specialist, Agricultural Law and Policy, Kansas State University, Manhattan, Kansas. Member of Kansas and Nebraska Bars.
NOTE: Case citations have been ommitted.
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