Secretary Vilsack Announces Rules That Would Dramatically Alter Livestock Marketplace

United States Department of Agriculture (USDA) Secretary Tom Vilsack characterizes regulation by USDA's Grain Inspection, Packers & Stockyards Administration (GIPSA) to be released on Tuesday, June 22, 2010, as "aggressive" and noted that if the rules are implemented, they would constitute the most dramatic change to the regulation of the livestock marketplace since the Packers & Stockyards Act (PSA) was enacted in 1921.The proposed rule seeks to change the focus of livestock production regulation under the PSA. For the last several decades, the federal courts have interpreted the PSA as an antitrust statute. As such, enforcement of the PSA has been designed to foster the overriding goals of modern antitrust law: competition in the marketplace to promote lower prices, higher quality, and innovation that benefits consumers. The PSA has been enforced to promote consumer welfare by protecting the competitive process – not individual producers. This approach has led to the current law that adverse impact on competition must be proven to establish a violation of the PSA.

The proposed rules seek to reverse this trend and instead impose numerous, detailed regulations on packers designed to protect individual producers from "unfair" practices – without regard to whether those practices have been shown to have an adverse impact on competition. According to Vilsack, the rule will "ensure a level playing field for producers by providing additional protections against unfair practices and addressing new market conditions not covered by existing rules."

Vilsack stated that the new rules were driven, in part, by frequent reports of packer retaliation against producers who complained or asserted their rights under the PSA. He stressed that such retaliation was a violation of the PSA and that GIPSA would have no tolerance for it.

USDA releases and Vilsack's comments indicated that the proposed rule would:

• Enshrine in regulation the USDA's position that proof of an "unfair practice" in violation of § 202(a) or (b) of the PSA does not require proof of harm to competition. Instead, acts that are "unfair" to individual producers, but do not adversely impact competition may constitute a violation
• Require that the packer create and maintain records that prove legitimate, non-discriminatory cost-based reasons exist for any contractual terms or prices for an individual producer that deviate from the standard terms the packer offers to other individual producers. If a producer complains about differential treatment, GIPSA would then evaluate the packers file on its justification to determine if a violation of the Act had occurred
• Prohibit packers from purchasing livestock from another packer or another packer's affiliated company, including another packer's parent or subsidiary. This regulation seeks to preclude collusion in the slaughter market whereby it is alleged that sales between packers facilitate the manipulation of prices and that packers signal each other about the price they are willing to pay producers
• Require dealers who operate as packer buyers to purchase livestock for a single packer that identifies that dealer as its packer buyer in a given area
• Preclude a packer from offering better pricing terms to producers who can provide larger volumes of livestock than to a group of smaller producers who can collectively provide the same volume of livestock of equal quality
• Require packers to provide GIPSA with copies of sample contracts within 10 business days of contract formation. This rule is designed to "increase transparency" and allow similarly situated individual producers the ability to understand the terms that are being offered to other producers
• Limit a packer's ability to require an individual producer to make additional capital investments in his production facilities if he has recently made such investments or if other similarly situated producers have not been required to make such investments. Moreover, if capital investments are required, production contracts must be long enough that the producer can recoup 80% of his investment costs
• Prohibit packers from imposing contract terms on producers that require arbitration of disputes. Instead, the producer must be allowed to elect not to agree to arbitration
• Place restrictions on the tournament systems used by many poultry processors

Each of the proposed rules demonstrates USDA's desire to correct "unfair" practices toward individual producers and increase their bargaining power, without establishing an adverse impact on competition under traditional PSA and antitrust law. In short, the proposed rules seek to change the fundamental aim of PSA enforcement. Protection of individual producers, not the competitive process or the consuming public, appears to be the ultimate goal. This sort of radical shift will be controversial and hotly contested.

During the past several months, USDA has hosted a series of town hall meetings throughout the country to discuss market conditions and competition issues facing livestock producers. Many of the issues discussed in those meetings have been addressed in the proposed rules that GIPSA announced today. With similar meetings on the cattle and diary industries scheduled for later this summer, all eyes should remain focused on these meetings. They will provide a forum for further debate on the proposed rules and may provide indications about the future direction of regulation. Attorneys from Faegre & Benson's antitrust and agribusiness litigation practice groups will attend these meetings and continue to monitor, analyze, and report on these developments.