Class actions in the pork and cattle industry foreshadow probable antitrust enforcement and defense strategies against the backdrop of COVID-19, which has caused meat processing plant closures, severe disruptions to the supply chain of consumer meat, and an increase in prices at your local grocery store. According to plaintiffs’ groups and some state enforcement agencies, however, the pandemic is merely exacerbating pre-existing problems within a concentrated meat-packing industry plagued by collusion and anti-competitive behavior.
Cattle ranchers and pork purchasers have been engaged in parallel antitrust class actions in Minnesota for years, litigating alleged market manipulation from both ends of the meat supply chain.1 Meanwhile, state attorneys general from 11 states recently requested that the U.S. Department of Justice (DOJ) investigate the industry for potential antitrust violations arising from vulnerabilities and opportunities for illegal coordination created by the pandemic — and President Trump echoed that request. How these class actions are decided — and what comes of the Justice Department investigation — may offer useful lessons on the bounds of pricing tools common to commodity industries, such as public pricing indexes, and signal how courts treat industries during crisis periods and the market uncertainty that follows.
Pork at the Plate
In the Minnesota pork purchaser class action, plaintiffs have struggled to state a claim for antitrust violations. The pork industry is “horizontally concentrated” and “vertically integrated” in that only a few companies buy, slaughter, and process the majority of live hogs in the United States. The defendant pork processing companies control around 80% of the market. Plaintiffs argue that beginning in 2009, defendants conspired to decrease production and/or limit production increases in an effort to raise prices. According to plaintiffs, this was accomplished by: (1) coordinating public statements and signaling collective intent to raise prices, and (2) using an industry reporting service, “Agri Stats” (also a named defendant), to exchange “detailed, competitively sensitive, and closely guarded non-public information about prices, capacity, sales volume, and demand.”
Judge John Tunheim originally dismissed the case in August 2019, finding that plaintiffs failed to state a claim under Section 1 of the Sherman Act2 because they did not provide enough facts to suggest that the defendants entered into an illegal agreement to restrain trade. He stated there was no “smoking gun evidence” of a conspiracy among the pork producers to collude, such as emails, notes or recordings showing that the defendants had reached some agreement to coordinate their actions.
This type of direct evidence, however, is rare at the pleading stage before discovery is allowed to take place. So, instead, complainants often point to parallel conduct between defendants as circumstantial evidence of an agreement — for example, coordinated price movements or other similarly timed activity. Some courts have accepted this type of evidence as long as it is accompanied by “plus factors” that support the plausibility that the parallel actions are truly the result of a preceding agreement, and not simply economic responses to market conditions. Examples of “plus factors” include: an industry structure with transparent pricing, defendants acting against their economic self-interest, information exchange among defendants, and market concentration.3
Judge Tunheim found that plaintiffs sufficiently alleged “undoubtedly strong” plus factors, such as the constricted nature of the pork industry, potentially collusive use of shared information through Agri Stats and frequent public market statements by defendants, the inelasticity of pork demand, trade associations attended by defendants, and actions taken by some defendants against their own self-interests. But, despite pleading a number of plus factors, the court found that plaintiffs had not actually alleged any coordinated conduct.
Except for one defendant that publicly stated that it discussed production cuts with other industry producers and took a leadership position by reducing herds, there were “no specific allegations in the complaints that plausibly establish that the [other] individual defendants decreased their own production of pork.” Plaintiffs offered evidence that supply had fallen across the industry, but had not pleaded that the individual defendants enacted parallel supply cuts. Even though defendants accounted for 80% of the industry, the court was unwilling to infer that the industry-wide evidence meant each defendant engaged in parallel conduct.
Coming Back for Seconds
Plaintiffs have now amended their complaints and are facing a new round of motions to dismiss. The amendments attempt to cure the lack of alleged parallel conduct by including new assertions of coordinated production cuts using detailed economic data. The new data purportedly demonstrates the method, manner, means, and timing of each of the defendants’ supply cuts in furtherance of the alleged conspiracy. Plaintiffs also increased the emphasis on Agri Stats as a “central player” in the conspiracy. According to plaintiffs’ opposition to the most recent motions to dismiss, defendants used Agri Stats’ weekly and monthly benchmark reports to “monitor each other’s production and control supply and price in furtherance of their anticompetitive scheme.” In fact, Agri Stats marketed use of its platform with the statement that “the ultimate goal is increasing profitability – not always increasing the level of production.” Though Agri Stats data was supposedly anonymized, plaintiffs allege the other subscribers could decode the information.
Among other things, defendants’ motion to dismiss points to alternative explanations for supply movements, including the Great Recession and swine flu, as more apt indicators for the economic phenomena plaintiffs identified.
Judge Tunheim heard arguments via telephonic hearing on May 13, 2020, but has not yet made a decision about whether plaintiffs’ data-driven market analysis is sufficient to overcome antitrust pleading standards where more concrete evidence is lacking, and whether courts will accept the argument that use of market reporting services — that have become ubiquitous in many commodity industries, including oil and chemical manufacturing — is itself evidence of collusive behavior.
New Disruptions as This Little Piggy Goes to Market
Playing out in the background of this case is the COVID-19 pandemic’s impact on the meat supply industry. Plant closures at many of the same companies who are defendants in the antitrust suit reduced operational capacity to roughly 45 percent, bloating the supply of unsold animals for slaughter.
The result has been a growing disparity between the price of retail packaged meat on one end of the meat-packaging bottleneck, and the falling cost of live animals on the other. And state enforcement agencies are taking note. On May 5, 2020, state attorneys general from 11 states where ranching and cattle farming are significant industries wrote to the federal government asking the DOJ to open an investigation into the beef industry, fearing the industry is “particularly susceptible to market manipulation, particularly during times of food insecurity, such as the current COVID-19 crisis” and noting that during a downturn “manipulation and coordinated behavior exacts a greater toll” on consumers. And on May 15, 2020, Kentucky officials separately asked the DOJ to “investigate the meatpacking industry after local cattle farmers complained the price they are paid for their animals is continuing to drop at the same time beef prices are skyrocketing.” President Trump confirmed that DOJ will “take a very serious look into [the suspected price fixing] because it shouldn’t be happening that way.”
The pork purchaser plaintiffs highlighted the impact of the COVID-19 market conditions during their May 13 “motion to dismiss” hearing. They sought judicial notice of President Trump’s April 28, 2020 executive order deeming meatpacking plants essential infrastructure as evidence that even a small amount of constraint in the supply chain significantly impacts price, as a single plant closure can disrupt the supply to an entire chain of grocery stores.
But in times of economic turmoil, such as the COVID-19 and swine flu pandemics or Great Recession, it can be very difficult to attribute supply and price fluctuations to the actions of a specific group of defendants. And coordinated responses may in fact be considered pro-competitive, as the only way to maintain the health of an industry. In fact, the Justice Department issued a business review letter on May 15, 2020, blessing the coordinated euthanasia of as many as 700,000 hogs per week by the National Pork Producers Council, the nation’s largest association of hog farmers. This highlights the difficulty plaintiffs will have relying on parallel conduct to assert claims of collusive conduct under crisis circumstances.
1 In Re Cattle Antitrust Litig., Case No. 0:19-cv-01222 (D. Minn.); In re Pork Antitrust Litig., Case No. 0:18-cv-01776 (D. Minn.).
2 To establish a claim under Section 1 of the Sherman Act, a plaintiff must demonstrate (1) that there was a contract, combination, or conspiracy; (2) that the agreement unreasonably restrained trade under either a per se rule of illegality or a rule of reason analysis; and (3) that the restraint affected interstate commerce.
3 See e.g., Park Irmat Drug Corp. v. Express Scripts Holding Co., 310 F. Supp. 3d 1002, 1013 (E.D. Mo. 2018); Antitrust Pleading Standards, Practical Law Practice Note 5-535-3975.
