The United States of America, acting under the direction of the Attorney General of the United States, and the States of Wisconsin, Illinois, and Michigan, by and through their respective Attorneys General ("Plaintiff States"), bring this civil action for equitable relief against Defendant Dean Foods Company ("Dean") for violating Section 7 of the Clayton Act, 15 U.S.C. § 18. The United States and the Plaintiff States allege as follows:
1. This lawsuit challenges Dean's acquisition of the Consumer Products Division of Foremost Farms USA, consummated April 1, 2009 (the "Acquisition"). Foremost Farms USA ("Foremost") is a dairy cooperative owned by approximately 2,300 dairy farms located in seven states, including Wisconsin. Through the Acquisition, Dean acquired two dairy processing plants owned by Foremost, located in Waukesha and DePere, Wisconsin. Dean's acquisition of these plants violates Section 7 of the Clayton Act because "the effect of such acquisition may be substantially to lessen competition." 15 U.S.C. § 18.
2. The Acquisition adversely affects two types of markets. The first are the markets for the sale of school milk to individual school districts located throughout the State of Wisconsin and the Upper Peninsula of Michigan (the "UP"). The second is the market for the sale of fluid milk to purchasers located in Wisconsin, the UP, and northeastern Illinois.(1)
3. The Acquisition eliminates one of Dean's most aggressive competitors--a competitor that engaged in pricing that Dean considered "dangerous" and "irrational." In recent years, Dean and Foremost have been the first and fourth largest sellers of school milk and fluid milk in Wisconsin, the UP, and northeastern Illinois. With the Acquisition, Dean will account for more than 57 percent of fluid milk sales in the region. In the most recent school year, Dean and the two plants it acquired sold more than 50 percent of the school milk purchased in Wisconsin and the UP.
4. Numerous school districts have benefitted from vigorous competition between Dean and Foremost. Dean and Foremost have frequently been the two lowest bidders for school milk contracts at numerous school districts in Wisconsin and the UP and, in some school districts, have been the only two bidders for those contracts.
5. Grocery stores, convenience stores, and other purchasers have also benefitted from vigorous competition between Dean and Foremost for fluid milk contracts. Dean and Foremost have been the only two bidders for some contracts and two of only three bidders for other contracts. The aggressive competition between them has lowered purchasers' costs. For example, in 2006, a retailer with hundreds of stores in northeastern Illinois held an auction for its fluid milk business in which the competition between Dean and Foremost saved the retailer approximately $1.5 million.
6. The Acquisition's elimination of head-to-head competition between Dean and Foremost will hurt school milk and fluid milk purchasers. The loss of this head-to-head competition leads directly to what are referred to as anticompetitive "unilateral effects."
7. In the fluid milk market, the Acquisition is also likely to produce coordination among the remaining competitors. This coordination gives rise to what are referred to as anticompetitive "coordinated effects." The fluid milk business in this region is already conducive to coordination among competitors. Notably, when deciding whether and how much to bid for an account, Dean and other dairy processors often consider the reactions of their competitors. Eliminating Foremost, which Dean describes as an "irrational" pricing competitor, will leave only a few remaining competitors, whose competitive decision-making Dean has described as "more predictable" and "rational." Consequently, the Acquisition will make coordination easier and more durable.
8. As further described below, the Acquisition is likely to substantially lessen competition in the school milk and fluid milk markets at issue here in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. Entry is unlikely to restore competition in a timely or sufficient manner. To date, Dean has not integrated Foremost's plants into its operations in light of the pendency of the United States' investigation. The United States and Plaintiff States ask this Court to declare this Acquisition unlawful and require Dean to divest the acquired assets to restore competition in the markets at issue.
II. JURISDICTION & VENUE
9. The United States brings this action under Section 15 of the Clayton Act, as amended, 15 U.S.C. §§ 4 and 25. The Plaintiff States bring this action under Section 16 of the Clayton Act, 15 U.S.C. § 26. Plaintiff State of Wisconsin brings this action under its authority in Wis. Stat. § 165.065.
10. Dean and the assets it obtained through the Acquisition produce dairy products for sale in interstate commerce. Accordingly, Dean and the Acquisition assets are engaged in activities affecting interstate commerce under Section 7 of the Clayton Act. The Court has subject matter jurisdiction over this action pursuant to Section 15 of the Clayton Act, as amended, 15 U.S.C. § 25, and 28 U.S.C. §§ 1331, 1337(a) and 1345.
11. Dean is present in the State of Wisconsin, and it transacts substantial business and commerce in the State. Accordingly, Dean is subject to personal jurisdiction. Venue is also proper in this District pursuant to Section 12 of the Clayton Act, 15 U.S.C. § 22, and 28 U.S.C. § 1391(b)(1), (b)(2) & (c). The acquired dairy processing plant in Waukesha is located within the territory of the Milwaukee Division of this Court.
12. Dairy processors purchase raw milk from dairy farms and agricultural cooperatives, pasteurize and package the milk, and distribute and sell the processed product. Fluid milk is raw milk that has been processed for human consumption. It does not include extended shelf life milk, ultra high temperature milk or aseptic milk, which are produced by different processes, generally cost significantly more than fluid milk, and have numerous significant physical differences that, compared with fluid milk, affect shelf stability and taste.
13. Dairy processors supply fluid milk directly to retailers, distributors, broad-line food service companies, and institutions such as hospitals and nursing homes. The vast majority of fluid milk is sold directly by processors to retailers. The balance of sales is made to distributors, food service companies, and institutions. Distributors and food service companies resell the milk that they purchase from processors to small retailers, restaurants, and institutions. Retailers in Wisconsin, the UP, and northeastern Illinois do not resell fluid milk to other retailers or institutions in any substantial quantity. Retail demand for fluid milk is based directly on consumer demand.
14. Milk processors charge different prices to different purchasers for the same product based on a variety of factors, including the number of competitive alternatives available to the purchaser. Large retailers typically request bids from milk processors. Distributors, institutions, and small retailers generally purchase their milk from price lists that dairy processors issue. However, these customers sometimes obtain rebates, discounts, or other forms of price relief, so that two customers covered by the same price list may pay different prices. Bid prices are based on the processor's product, transportation, and service costs, the processor's capacity utilization, and the number and strength of processors likely to offer competing bids, among other factors.
15. Distance between processors and purchasers is an important consideration in fluid milk pricing because fluid milk has a limited shelf life and is costly to transport. These costs result in most customers purchasing fluid milk from nearby processing plants. For example, more than 90 percent of the milk sold to customers in Wisconsin and the UP traveled less than 150 miles from the plant in which it was processed.
16. School milk is fluid milk packaged and distributed for sale to school districts, typically in half-pint containers. Dean, Foremost, and other school milk suppliers often use distributors to supply and service school districts. Dairy processors generally use one distributor per service area. While school milk contracts occasionally include other products, school milk accounts for the vast majority of the dollar value of these contracts.
17. School milk delivery is not just a matter of dropping product off at the curb. Different school districts specify their individualized service requirements in contracts with processors. For example, some school districts require multiple deliveries per week because they have limited refrigerated storage space; some require guaranteed emergency deliveries. Most school districts require the capability to deliver to all of the schools in the district. Many require early morning or other specific delivery times to avoid conflicts with the arrival of schoolchildren and buses. Other services can include milk reordering, cooler supply, cooler restocking, cooler cleaning and maintenance, carton rotation, retrieval of spoiled and damaged product, and automatic allotment of credit for retrieved product.
18. The number of processors from which a school district can successfully solicit competitive bids is often very small. Given the limited volume of milk delivered to each school, the extensive and highly individualized service requirements, and the seasonal nature of school milk demand, among other considerations, it is almost always uneconomic for a dairy processor to supply a new contract unless the processor already has significant fluid milk distribution in or near the school district's area. Dairy processors that do not already distribute fluid milk locally can rarely bid competitively. This is particularly relevant in sparsely populated areas such as northern Wisconsin and the UP.
19. Individual school districts solicit bids for school milk, although groups of school districts will occasionally solicit bids collectively. However, even school districts involved in collective solicitations typically award their contracts separately. Consequently, dairy processors tailor their bids to each school district or school district group that solicits collectively. Bid prices are based on the processor's product, transportation, and service costs, the processor's capacity utilization, and the number and competitiveness of processors likely to offer competing bids, among other factors.
20. Dean is one of the largest food and beverage producers in this country, with revenues of $12.5 billion in 2008. Dean's Dairy Group is the country's largest processor and distributor of milk and other dairy products. Dean is a corporation organized under Delaware state law, with its principal place of business in Dallas, Texas.
21. The Acquisition is the latest in a series of acquisitions by Dean of smaller dairy processors across the United States. Since 1996, Dean has made more than 100 acquisitions, which have added to Dean's market share and increased its size substantially.
22. Foremost is a dairy cooperative headquartered in Baraboo, Wisconsin, and formed under Wisconsin state law. Like other agricultural cooperatives, Foremost is a member-owned business association. Foremost is governed by a 21-member Board of dairy farmers. Prior to the Acquisition, Foremost processed its members' raw milk at its DePere and Waukesha plants, as well as at other facilities. The DePere and Waukesha plants were owned and operated by Foremost's Consumer Products Division. On or about April 1, 2009, Dean bought substantially all of the Consumer Products Division's assets for $35 million. The Acquisition was not required to be reported beforehand to federal antitrust authorities under the federal antitrust notification statute.
23. While Dean's fortunes have been rising, the same has not been true for Foremost. In 2006 and 2007, Foremost lost some fluid milk customers that preferred a processor with a broader geographic reach. Consequently, Foremost's Waukesha and DePere plants were operating at less than two-thirds of their fluid milk capacity, giving Foremost the most excess capacity in Wisconsin, the UP, and northeastern Illinois.
24. Excess capacity creates an incentive to bid more aggressively for fluid and school milk contracts. Because of its substantial excess capacity, Foremost was pricing aggressively to secure new business. Unlike Foremost, Dean did not have substantial excess capacity and so did not have the same economic incentives as Foremost. As a result of Foremost's aggressive pricing, Dean faced the choice of losing business or cutting its margins. Neither approach was attractive to Dean.
25. The problem that Foremost posed was not unique. Dean saw competitors such as Foremost and other local competitors with excess capacity as posing a serious problem for Dean's profitability. Dean's Chief Executive Officer, Gregg Engles, articulated the competitive issue facing Dean in a September 2008 speech to Dean's top executives:
26. Dean's own internal documents confirm that Dean viewed Foremost as one of those "irrational" local competitors because of Foremost's excess capacity, among other reasons. In 2008, as part of an effort to develop a strategic growth plan for its fluid milk business, Dean's corporate headquarters asked the group vice presidents in each region to prioritize their key competitive issues. The Vice President for the North Central region (which includes Wisconsin) identified his key concern as "Midwest excess capacity lies with cooperatives with staying power." Cooperatives, such as Foremost, were competitive threats because their "earnings expectations [are] lower than Deans," because the "co-op goal is to move Member milk," and because "their plants are under utilized."
27. The problem this created for Dean was obvious. Competition with these cooperatives was predicted to "lower margins and condition clients [to] the benefits of shopping their business." Along with one other cooperative in the region, Foremost was identified as a particularly "dangerous" competitor because "they need to add volume to maintain their lo[w] cost strategy." In other words, according to Dean, Foremost was more willing to accept lower prices for processed fluid and school milk than Dean found acceptable.
28. In 2007, the general manager at Dean's Verifine plant in Sheboygan, Wisconsin, reported to his boss that he was "seeing alot [sic] of off the wall pricing coming from [Foremost]" and that he was "worried about them coming at us again at [WalMart] not to mention the rest of the market." In 2009, after receiving reports of very low Foremost prices in several grocery and convenience stores in the UP, the general manager of Dean's Marquette, Michigan, plant complained to his boss that "[t]his is the most aggressive pricing the UP has seen since probably the 60's. Our volume is off roughly 15 percent as the effects of this onslaught really kick in . . . I know you're with me on this, so how can we cease / desist and regain some sanity?"
29. As part of Dean's 2008 Strategic Growth Plan, Dean proposed future acquisitions, which included problematic local processors. Ed Fugger, Dean's acquisitions chief, highlighted that fragmentation "[d]rives margin compression," and that a significant part of the fluid milk market "remains highly fragmented." In handwritten notes he wrote in preparation for his speech to Dean's senior management, and later, Dean's Board of Directors, Fugger wrote that the "benefit of acquisition in these m[ar]k[e]ts is margin expansion" (emphasis added). In other words, by eliminating this fragmentation Dean could increase its profits.
30. The Strategic Growth Plan included "Potential Acquisition Targets" for each of Dean's regions. The targets for the North Central Region included Foremost, which Dean had identified as one of two "irrational competitors" that are "significantly short on volume."
31. Dean eliminated the competitive threat posed by Foremost by acquiring its two milk processing plants. Any efficiencies Dean may realize from acquiring the two plants are not likely to reverse the anticompetitive impact of eliminating a competitor responsible for the "most aggressive pricing" Dean had seen in 40 years. There was an alternative to this outcome. At the time Foremost accepted Dean's offer to acquire these plants, another potential buyer was pursuing Foremost's plants.
IV. THE COMPETITIVE HARM IN SCHOOL MILK MARKETS
32. School milk is a relevant product market and line of commerce under Section 7 of the Clayton Act. School districts have no reasonable product alternatives to school milk.
33. The United States Department of Agriculture sponsors several programs to reimburse schools for meals served to students from lower-income families. To qualify, schools must offer milk to every student, regardless of family income. Schools will not substitute other products for school milk even at substantially higher milk prices because they would lose their federal meal reimbursement.
34. Each school district in Wisconsin and the UP constitutes a relevant geographic market or section of the country within the meaning of Section 7 of the Clayton Act. As alleged in paragraph 19, individual school districts solicit school milk contract bids from processors. In response, processors engage in "price discrimination," i.e., charging different prices to different customers. Processors develop individualized bids based on both cost and non-cost factors (see e.g., paragraph 14). School districts are unlikely to engage in arbitrage, i.e., reselling among customers, to offset the processors' ability to engage in price discrimination among school districts. Therefore, a hypothetical monopolist supplying school milk to any particular district would impose (at least) a small but significant non-transitory price increase (e.g., five percent).
35. School districts in Wisconsin and the UP have only a few choices for school milk suppliers. There are numerous school districts, particularly in northeastern Wisconsin and the western UP, for which the Acquisition merged the two processors that were best situated to serve the district. In many cases, the Acquisition created a "merger to monopoly," leaving Dean as the only likely bidder. These school districts include those where Dean and Foremost were the only two dairy processors to bid in recent years. The elimination of head-to-head competition between Dean and Foremost will likely substantially lessen competition in these school milk markets and enable Dean to raise prices and/or reduce services.
36. In addition, in a separate set of school districts, either Dean or Foremost was the only bidder and the other processor was the next-lowest-cost supplier because of factors such as distance from the processing plant or the presence of an established distribution network. It is likely that prices will rise and/or services will be reduced in these school milk markets, regardless of whether both Dean and Foremost submitted formal bids before the Acquisition. There is also a substantial number of school districts in Wisconsin and the UP for which Dean and Foremost were two of only three recent or likely future bidders. For these school districts, the Acquisition represents a "merger to duopoly."
37. In addition, Foremost was an especially aggressive bidder. This forced its rivals to keep their bid prices as low as possible or risk losing substantial amounts of school milk business.
V. THE COMPETITIVE HARM IN THE FLUID MILK MARKET
38. Fluid milk is a relevant product market and line of commerce under Section 7 of the Clayton Act. Fluid milk is a product with special nutritional characteristics and has no practical substitutes.
39. Consumer demand for fluid milk is relatively inelastic, i.e., fluid milk consumption does not decrease significantly in response to a price increase. Demand by retailers, distributors, and other purchasers of fluid milk is also inelastic because it is based on consumer demand. As a result, a hypothetical monopolist over fluid milk would profitably impose at least a small but significant and non-transitory price increase (e.g., five percent).
40. Fluid milk processors are able to charge different prices to buyers in different areas, i.e., they can price discriminate. In the presence of price discrimination, relevant geographic markets may be defined by reference to the location of buyers. In particular, a relevant geographic market for fluid milk refers to a region within which purchasers can be targeted for a price increase. A portion of the fluid milk supplied to the relevant geographic market comes from plants located outside of Wisconsin, the UP, and northeastern Illinois.
41. Wisconsin, the UP, and northeastern Illinois constitute a relevant geographic market and section of the country under Section 7 of the Clayton Act. As discussed in paragraph 15, most customers purchase fluid milk from suppliers with processing plants located near them because of the costs associated with transportation and shelf life. Prior to the Acquisition, Foremost sold virtually all of its fluid milk to purchasers located in the relevant geographic market. Dean competed to supply fluid milk to purchasers throughout this same area.
42. The Acquisition will result in a substantial increase in the concentration of processors that compete to supply fluid milk to purchasers located in the relevant geographic market. Some of these processors are located outside of Wisconsin, the UP, and northeastern Illinois. Prior to the Acquisition, Dean had the largest share of sales to purchasers within the relevant geographic market. Dean accounted for 44.6 percent of fluid milk sales; Foremost accounted for another 12.6 percent. As a result of the Acquisition, Dean now has more than 57 percent of all fluid milk sales in the relevant geographic market. There are only two other competitors with more than five percent of fluid milk sales in the relevant geographic market, Kemps LLC (a subsidiary of Hood LLC) ("Kemps") and Prairie Farms Dairy, Inc., which have 17 and 15 percent, respectively. Moreover, Dean's post-Acquisition shares are even higher in certain areas within the relevant geographic market: over 85 percent in the UP and over 60 percent in Green Bay, Wisconsin, and in northeastern Illinois (including Chicago).
43. As articulated in the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission, the Herfindahl-Hirschman Index ("HHI") is a measure of market concentration.(2) The Acquisition increases the HHI by 1,127 points to 3,830, indicating a substantial increase in concentration. The change in the HHI is even more pronounced in certain areas within the relevant geographic area. For example, in the UP, the HHI increased by 2,814 points to 7,510, and in Green Bay, the HHI increased by 1,728 to 4,777.
44. The Acquisition will likely substantially lessen competition among fluid milk producers in the relevant geographic market, resulting in higher fluid milk prices to purchasers than would exist in the absence of the Acquisition. The Acquisition will eliminate head-to-head competition that has benefitted and would otherwise continue to benefit purchasers and final consumers. The Acquisition will also result in easier and more durable coordinated interaction among Dean and its few remaining competitors.
45. Dean and Foremost often competed head-to-head to win fluid milk contracts because they were the nearest fluid milk processors to many of the purchasers in the relevant geographic market. As discussed in paragraph 15, proximity to the purchaser is an important factor in a processor's competitiveness. Prior to the Acquisition, Foremost competed with Dean throughout the relevant geographic market. The head-to-head competition between Dean and Foremost was most pronounced and pervasive in the UP and northeast and southeast Wisconsin, where the Dean and Foremost plants were the two closest plants to many fluid milk purchasers.
46. As discussed in paragraph 23, Foremost had substantial excess capacity, and as a result, was pricing aggressively to secure new business. The presence of Foremost as an aggressive pricing competitor to Dean and a constraining force on Dean's pricing is reflected in the internal Dean documents discussed in paragraphs 25 to 29. The elimination of this head-to-head competition likely will produce higher prices and/or reduced services for many purchasers in the relevant geographic market. These effects will vary among purchasers because, as discussed previously, different purchasers have different competitive options. Thus, the prices paid and services received will continue to differ among purchasers after the Acquisition, but for many purchasers the prices they pay and/or the services they receive will be adversely affected by the Acquisition.
47. By eliminating Foremost, a significant, disruptive, and aggressive competitor, the Acquisition also will likely substantially lessen competition among the remaining competitors selling fluid milk in the relevant geographic market by facilitating coordination among them. Dean and its few remaining competitors will be more likely to decline to bid aggressively for one another's established customers out of concern for retaliation, thereby allocating customers among one another based on a mutual recognition of what supplier serves what customers. This form of coordination is easier when there are fewer competitors and they can identify one another's customers. With the elimination of Foremost, purchasers in many areas of the relevant geographic market will have only two or three significant suppliers of fluid milk. For example, in Wisconsin, Dean and Kemps, its next-largest competitor, now account for more than 80 percent of sales.
48. Even before the Acquisition, Dean and other dairy processors besides Foremost were at times content not to attack one another's large accounts. In a recent bidding event, Dean refused to bid aggressively for a major supermarket chain that was Kemps's largest account, despite the purchaser's complaint to Dean that Dean's bid was too high. A Dean executive testified that stealing the account from Kemps would have put a Kemps plant "out of business or to its knees" and that "we're not going to do that right now. You pick your fights." In contrast, Foremost was not content to pick its fights. When Foremost was bidding for the same large supermarket chain, it submitted a competitive bid, even though Foremost realized that the "cost" of winning that business could be high, due to the potential for retaliation. The general manager of Foremost's Morning Glory plant estimated that retaliation at five of his larger accounts could cost almost $500,000 per year.
49. Whereas Foremost was routinely labeled as an "irrational" competitor by Dean executives, the Group Vice President for Dean's North Central region labeled two other processors "good competitors" in his 2008 strategic growth planning document. By "good competitor," Dean's Vice President admitted he meant that, unlike Foremost, these competitors were "more predictable" in terms of "where they're going to poke you in the eye and where they're not, whereas the other . . . fellows [are] poking all the time." With this Acquisition, only the so-called "good competitors" will remain.
50. In at least one instance, Dean successfully sent price signals to its competitors. In 2008, Dean announced an upcoming fuel surcharge price increase, and one of its competitors followed suit. In reporting this to his boss, the Group Vice President for the region in which this occurred wrote, "[our competitor] followed us this week with a similar increase. The strategy paid off." His boss then declared that it is a good practice "to signal your intentions early and often." The Vice President for the North Central region, which includes Wisconsin, then instructed his staff to "get out early for July and signal the marketplace."
51. By reducing the number of competitors serving the relevant geographic market and eliminating an aggressive competitor with large amounts of excess capacity, the Acquisition makes coordination easier and more durable.
VI. ENTRY IS UNLIKELY
52. Entry is unlikely to be sufficient or timely enough to offset the anticompetitive effects of the Acquisition. Firms currently serving the fluid milk and school milk markets in Wisconsin, the UP, and northeastern Illinois are unlikely to expand their service area or presence sufficiently to substantially mitigate the loss of Foremost's head-to-head competition with Dean in the fluid milk and school milk markets, or to disrupt coordinated interaction by Dean and its remaining competitors in the fluid milk market. Firms not currently serving these markets are unlikely to enter in the foreseeable future.
VII. VIOLATIONS ALLEGED
53. The United States and the Plaintiff States hereby incorporate the allegations of paragraphs 1 through 52 above.
54. The Acquisition likely will substantially lessen competition in interstate trade and commerce, in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, in that:
55. The Acquisition likely will substantially lessen competition in interstate trade and commerce, in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, in that:
VIII. RELIEF REQUESTED
56. The United States and the Plaintiff States request that this Honorable Court:
Dated: January 22, 2010
Dated: January 21, 2010
Dated: January 22, 2010
Dated: January 22, 2010
Dated: January 22, 2010
1. "Northeastern Illinois" is defined as the following counties in the State of Illinois: Cook County, DeKalb County, DuPage County, Grundy County, Kane County, Kendall County, Lake County, McHenry County, and Will County.
2. See U.S. Dep't of Justice, Horizontal Merger Guidelines § 1.51 (1997), available at http://www.justice.gov/atr/public/guidelines/horiz_book/hmg1.html. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600). It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches a maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.