Unpacking Antitrust Issues in the Food Industry During the Pandemic

BakerHostetler

COVID-19 already has had a significant impact on the food industry. Companies at all levels of the food supply chain long have been the focus of antitrust investigations and litigation, partly because there are relatively few major players in many food sectors.[1] Food production and sales impact not only consumers but also a myriad of industries in the supply continuum. In the midst of the pandemic, the Antitrust Division of the Department of Justice (DOJ) indicted four senior executives at major poultry producers for their alleged roles in a conspiracy to fix prices and rig bids for broiler chickens. While this investigation preceded the pandemic, it is indicative of the level of careful attention government antitrust authorities pay to the food industry. If anything, pandemic-related food shortages, price spikes and supply chain disruptions cause suspicion and will heighten the antitrust scrutiny of the food industry. It is more important than ever for companies in the food industry to evaluate and plan for their antitrust risk during these trying times.

Price Fixing, Bid Rigging or Market Allocation

Agreements to restrain trade in violation of Section 1 of the Sherman Act may be prosecuted criminally or civilly. So-called hard-core cartel agreements among horizontal competitors to allocate markets, fix prices or rig bids can be prosecuted criminally by the DOJ and can also lead to private treble-damage and class civil suits.[2]

As but one example, there have been price-fixing allegations in the packaged seafood and chicken industries from both private litigants and government enforcement agencies.[3] In May 2017, a tuna company pleaded guilty for its role in fixing the prices of shelf-stable tuna fish sold in the United States and agreed to pay a $25 million fine.[4] In October of that same year, a second tuna company pleaded guilty and was fined $100 million. The CEO also was convicted at trial and could face up to 10 years behind bars.[5] In June 2019, the DOJ intervened in a class action antitrust lawsuit filed in federal district court, asking the court to stay discovery for six months while the Antitrust Division pursued potential criminal charges against key players in the chicken industry.[6] Most recently, on June 3, the Antitrust Division obtained an indictment in Denver, Colorado, of four high-level poultry executives, including the CEO and former vice president of the second-largest poultry company and the president and vice president of another, for their role in a conspiracy to fix prices and rig bids for broiler chickens.[7]

Online Pricing Tools Can Lead to Price Fixing

The food industry’s utilization of online tools that compile information on pricing and supply across a market have formed the basis of price-fixing allegations. AgriStats, a good example of this kind of online repository, was an important element of the price-fixing claim in a chicken antitrust investigation.[8] While there is nothing per se illegal about these sites, they can raise suspicions by public enforcers and litigants as possibly facilitating or providing an opportunity to collude on prices; therefore, participation or utilization should be carefully considered.

Price Gouging Can Be Problematic in a Pandemic

Due to the pandemic, food suppliers, distributors and retailers also need to worry about both price-gouging allegations and hoarding of items designated by the government as essential – the same items most likely to be investigated for price gouging.[9] While there is no federal price-gouging law applicable to the food industry,[10] most states do have price-gouging laws, which are triggered by a state-declared emergency like the current pandemic, and the food industry is often subject to these laws. While the laws vary from state to state, they usually label excessive price hikes on certain products during an emergency as price gouging, which can result in fines and even jail time – something we have written about in the past. Most recently, the egg industry has been hit with multiple price-gouging lawsuits from both state governments and private litigants. The complaints allege that both wholesalers and retailers illegally increased prices in response to the COVID-19 pandemic.[11]

Supply Management Strategies May Be Challenged as Anticompetitive

Many food companies face supply challenges characteristic to the industry, with perishable products, seasonal availability and weather-determined supply a few of the challenges. The industry’s inherently unpredictable supply/demand dynamic is even more challenging in a global pandemic. While efforts to smooth supply can lead to efficiency, they also could be alleged to be anticompetitive. A variety of supply management efforts have been challenged as anticompetitive in recent years, including, for example, producers managing the supply of potatoes through implementation of planting quotas[12] and dairy entities managing milk supply by offering incentives for farmers to cull dairy herds.[13]

Consumer Initiatives May Attract Scrutiny

It is common for food industry participants to adapt their products to meet trends and evolving consumer preferences. Even this response to consumer demand can attract antitrust scrutiny from both public and private enforcers. For instance, the egg producers’ adoption of minimum hen cage standards in response to consumer preferences for more humane conditions resulted in antitrust cases by egg purchasers claiming unlawful supply restraints. Several producers paid millions of dollars to settle, while others engaged in costly litigation for a decade until a jury eventually determined the minimum cage standards were not unlawful.[14]

Online Delivery Platforms May Face Antitrust Lawsuits

Third-party delivery companies also have faced recent antitrust lawsuits. In April, a few popular food delivery companies were accused of forcing restaurants to charge “uniform prices for restaurants’” menu items throughout all purchase platforms, preventing “restaurants from charging different prices to meal delivery customers than they charge to dine-in customers for the same menu items.”[15] And although this lawsuit was not tied to the pandemic, delivery platforms face increased scrutiny during the pandemic, as they are used by so many to have food delivered to their homes.

Collaborations in the Food Industry – Expedited Review Available

Antitrust agencies have recognized the time-sensitive challenges brought about by the COVID-19 crisis and have issued guidance on such collaboration and provided for expedited review of such proposed collaborations.[16] This expedited review process was recently utilized in the pork industry. The National Pork Producers Council (NPPC) sought a DOJ business review regarding managing the farm-level surplus of hogs pursuant to an expedited, temporary business review procedure detailed in a joint DOJ/Federal Trade Commission (FTC) antitrust statement regarding COVID-19.[17] Soon thereafter, on May 15, the DOJ issued its business review, announcing that it had no present intention to challenge the proposed collaborative efforts of the NPPC and the U.S. Department of Agriculture to address certain hardships facing hog farmers as a result of the COVID-19 pandemic.[18]

Merger Scrutiny

Consolidation of companies through merger can be beneficial to struggling entities, but the fear of too much consolidation can often lead to scrutiny. In the early 2000s, the FTC blocked a merger between Heinz Foods and Milnot Holdings Corp., a maker of baby food, arguing that it would decrease competition in the baby food market.[19] In the mid-2000s, the DOJ moved to block and forced the abandonment of the proposed acquisition of National Beef by JBS. The DOJ alleged that the merger of the two beef-packing companies would result in lower prices paid to cattle suppliers and higher beef prices for consumers.[20]

Beware: Merger Review Can Get You Caught Up in the Antitrust Net

Merging parties should be aware that if there is anticompetitive activity occurring, a merger review may reveal it. Recently, the DOJ’s review of the proposed merger of two tuna companies uncovered price fixing, an action that ended with one of the tuna companies pleading guilty for its role in fixing the prices of shelf-stable tuna fish sold in the United States and agreeing to pay a $25 million fine.[21] The criminal investigation had its genesis in a potential merger between two major players the DOJ was reviewing when they became aware of suspicious conduct and the merger review spawned a criminal investigation.

Takeaways

Even though times may be difficult during the current pandemic, antitrust laws remain in full effect and businesses within the food industry need to be aware of potential antirust risks. Consider the following to avoid inadvertently running afoul of antitrust laws:

  • Always set prices independently. Competitors should not share sensitive information such as future pricing or supply amounts.
  • While collaboration can be helpful in these trying times, be wary of collaboration about future prices, supply or allocating markets, customers or suppliers.
  • If prices need to be raised due to increased costs or supply issues, be aware of state price-gouging laws as well as federal restrictions on hoarding due to the pandemic.
  • If considering a collaboration with competitors, seek legal advice and consider asking the DOJ and FTC for guidance through the expedited review process.
  • Have an effective antitrust compliance program in place so that employees are aware of antitrust risks and potential violations.

[1] Moss, Diana L., and Alexander, Laura, “When COVID-19 Is the Symptom and Not the Disease: Consolidation, Competition, and Breakdowns in Food Supply Chains” (May 7, 2020), available at https://www.antitrustinstitute.org/work-product/when-covid-19-is-the-symptom-and-not-the-disease-consolidation-competition-and-breakdowns-in-food-supply-chains/#_ftn18.
[2] BakerHostetler has represented various clients in the food industry as both plaintiffs and defendants in civil and criminal antitrust cases. This representation includes a certified class of dairy farmers alleging large dairy processors, a cooperative and others unlawfully conspired to eliminate competition for the marketing, sale and purchase of raw milk in 14 Southeastern states. The litigation recovered more than $300 million, plus nonmonetary relief, for the clients.
[3] MacFarquhar, Neil, “Coronavirus Eggs Price-Gouging Lawsuit,” The New York Times (May 7, 2020), available at https://www.nytimes.com/2020/05/06/us/coronavirus-eggs-price-gouging-lawsuit.html.
[4] “'Big Food’ Takes Its Turn in the Price-Fixing Spotlight,” Law360 (April 30, 2019), available at: https://www.bilzin.com/we-think-big/insights/publications/2019/04/law-360-swagner-llustrin.
[5] White, Cliff, “Chris Lischewski Hopes to Avoid Prison, While Prosecutors Push for 10-Year Sentence” (May 15, 2020), available at https://www.seafoodsource.com/news/business-finance/chris-lischewski-hopes-to-avoid-prison-while-prosecutors-push-for-10-year-sentence.
[6] “DOJ Subpoenas Tyson Amid Chicken Industry Antitrust Probe,” Law360 (Aug. 5, 2019), available at https://www.law360.com/articles/1185150/doj-subpoenas-tyson-amid-chicken-industry-antitrust-probe.
[7] DOJ, “Senior Executives at Major Chicken Producers Indicted on Antitrust Charges” (June 3, 2020), available at https://www.justice.gov/opa/pr/senior-executives-major-chicken-producers-indicted-antitrust-charges.
[8] “DOJ Subpoenas Tyson Amid Chicken Industry Antitrust Probe,” Law360 (Aug. 5, 2019), available at https://www.law360.com/articles/1185150/doj-subpoenas-tyson-amid-chicken-industry-antitrust-probe.
[9] The Secretary of the U.S. Department of Health & Human Services (HHS) has issued a notice designating categories of health and medical supplies that must not be hoarded or sold for exorbitant prices. The DOJ has set up a page that lists such items and the restrictions therein. You can read about it at https://www.justice.gov/coronavirus/combattingpricegouginghoarding/.
[10] On March 23, the president signed an executive order aimed at preventing price gouging and hoarding of crucial medical supplies needed to fight COVID-19, but it applies only to certain essential products designated by HHS and food items are not included. Our attorneys have written more about this at https://www.bakerlaw.com/articles/carl-hittinger-ann-obrien-article-examines-antitrust-risk-during-covid-19-crisis.
[11] Berg, Lauren, “Costco, Others Jacked Up Egg Prices Amid COVID-19: Suit,” Law360 (April 21, 2020), available at https://www.law360.com/articles/1265960?copied=1.
[12] “Potato Growers Strike $25M Deal To End Antitrust Claims,” Law360 (June 18, 2015), available at https://www.law360.com/articles/669423.
[13] “Dairy Cos. To Pay $52M in Cow-Killing Antitrust Settlement,” Law360 (Aug. 23, 2016), available at https://www.law360.com/articles/831495/dairy-cos-to-pay-52m-in-cow-killing-antitrust-settlement.
[14] “Pa. Jury Fries Egg Price-Fixing Conspiracy Claims,” Law360 (Dec. 12, 2019), available at https://www.law360.com/articles/1227838?scroll=1&related=1.
[15] Bomey, Nathan, “Door Dash, Grub Hub Accused of Exorbitant Pricing,” USA Today (April 14, 2020), available at https://www.usatoday.com/story/money/2020/04/14/doordash-grubhub-uber-eats-postmates-lawsuit-fees/2987724001/.
[16] “Joint Antitrust Statement Regarding COVID-19” (March 24, 2020), available at https://www.ftc.gov/system/files/documents/public_statements/1569593/statement_on_coronavirus_ftc-doj-3-24-20.pdf.
[17] Id.
[18] DOJ, “Department of Justice Supports National Pork Producers Council’s Ability to Combat Meat Shortage” (May 15, 2020), available at https://www.justice.gov/opa/pr/department-justice-supports-national-pork-producers-council-s-ability-combat-meat-shortage.
[19] Labaton, Steven, “Merger Blocked for Makers of Baby Food,” The New York Times (April 28, 2001), available at https://www.nytimes.com/2001/04/28/business/merger-blocked-for-makers-of-baby-food.html.
[20] DOJ, “Department of Justice on Abandonment of JBS/National Beef Transaction” (Feb. 20, 2009), available at https://www.justice.gov/opa/pr/department-justice-statement-abandonment-jbsnational-beef-transaction.
[21] “'Big Food’ Takes Its Turn in the Price-Fixing Spotlight,” Law360 (April 30, 2019), available at https://www.bilzin.com/we-think-big/insights/publications/2019/04/law-360-swagner-llustrin.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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