United States: Sixth Circuit Holds Acquisition of Non-Controlling Partial Ownership Interest in Competitor May Violate Antitrust Laws

An important – and largely unresolved – question in the antitrust law has been whether the acquisition of a partial, non-controlling, ownership interest in a competitor raises serious issues under the Clayton Act. On October 25, 2005, the United States Court of Appeals for the Sixth Circuit held in United States v. Dairy Farmers of America, Inc., Docket No. 04-6318,¹ that such partial acquisitions may raise substantial antitrust issues. The Sixth Circuit’s decision reverses the decision of the United States District Court for the Eastern District of Kentucky, which held that the acquisition of a non-controlling partial ownership generally does not raise antitrust issues, absent direct evidence to the contrary. The Sixth Circuit concluded that the acquisition of a non-controlling ownership interest in a competitor may raise antitrust concerns, and therefore presents a question of fact for resolution at trial. The long term implications of the Sixth Circuit’s decision are unknown, but the decision may encourage the antitrust enforcement agencies to continue to investigate and, when appropriate, challenge partial acquisitions.

The Dairy Farmers case concerns a Department of Justice ("DOJ") lawsuit alleging that Dairy Farmers of America, Inc. ("DFA") violated Section 7 of the Clayton Act by acquiring non-controlling partial ownership interests in two competing dairy cooperatives in Kentucky, Southern Belle and Flav-O-Rich. Southern Belle and Flav-O-Rich own the only two, or two of only a few, milk processing plants that bid to supply school milk cartons to school districts in parts of Kentucky and Tennessee.

Until February 2002, DFA operated the Flav-O-Rich dairy in competition against Southern Belle. DFA acquired its ownership interest in Southern Belle in February 2002 in a transaction that was not reportable pursuant to the Hart-Scott-Rodino Antitrust Improvements Act. Pursuant to DFA’s original purchase agreement, DFA was entitled to participate in the management of the affairs of Southern Belle, and Southern Belle’s other shareholder held a "put option" that entitled it to sell its interests to DFA after three years. During the course of its litigation with the DOJ, DFA restructured its ownership interest in Southern Belle to distance itself from the management of Southern Belle. Under the new structure, DFA was not entitled to sit on the Southern Belle management committee or vote on operational matters.

At the trial court, DFA moved for summary judgment in its favor, arguing that there could be no violation of Section 7 of the Clayton Act because DFA does not control the operations of either Southern Belle or Flav-O-Rich. DOJ argued, however that "control" is not required to establish a Section 7 violation, and that DOJ can satisfy its burden by demonstrating that DFA’s acquisition of a partial ownership interest in Southern Belle gave DFA an incentive and opportunity to lessen competition, and that there is a reasonable probability that the acquisition will in fact lessen competition. The District Court considered only competitive implications of Southern Belle’s revised ownership structure, and the court granted summary judgment in favor of DFA, holding that DOJ’s "‘incentive and opportunity’ theory deals in ‘ephemeral possibilities,’ and does not establish a reasonable probability of diminished competition." United States v. Dairy Farmers of America, Inc., 2004-2 Trade Cas. (CCH) 74,537, at 100,131 (E.D. Ky. 2004).

On appeal, the Sixth Circuit reversed the District Court decision and held that (a) the District Court erred by not considering the competitive implications of DFA’s original ownership agreement with Southern Belle, and (b) the DOJ presented sufficient evidence to survive summary judgment and create a material issue of fact on the question of whether DFA’s partial ownership interest in Southern Belle creates a reasonable probability of anticompetitive effect. The Court of Appeals determined, therefore, that the DOJ is entitled to a trial on the key factual question of whether DFA’s partial ownership interests in Southern Belle and Flav-O-Rich actually lessen competition.

In particular, the notable findings of the Court of Appeals are:

• "The district court erred in its focus on control, as opposed to the effect on competition; because control was not present in DFA’s relationship with Southern Belle, the district court reasoned that the effect of a lessening of competition was also not present. This logic ignores the possibility that there may be a mechanism that causes anticompetitive behavior other than control."

• "[I]n this case, DFA purportedly cured any potential antitrust problems in the agreement with Southern Belle by giving all of its voting rights to AFLP [its co-owner]. This cure, however, ignores the fact that AFLP and DFA have closely aligned interests to maximize profits via anticompetitive behavior."
  In short, the Court of Appeals held that "a genuine issue of material fact exists as to whether there is a reasonable probability that the revised agreement would substantially lessen competition, through DFA’s control or otherwise."

The District Court decision in this action raised the prospect of potentially reduced antitrust scrutiny in the future of non-controlling partial ownership acquisitions. The Sixth Circuit’s decision, however, reaffirms the DOJ’s traditional view and analysis of partial ownership interests. The decision therefore does not reflect a material change from DOJ’s longstanding view of the law, but it potentially could have the effect of encouraging the antitrust enforcement agencies to continue to investigate and, when appropriate, challenge the acquisition of non-controlling partial ownership interests.²

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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