Spartan Grain & Mill Co. v. Ayers

581 F.2d 419
CourtCourt of Appeals for the Fifth Circuit
DecidedOctober 3, 1978
DocketNo. 76-2845
StatusPublished
Cited by39 cases

This text of 581 F.2d 419 (Spartan Grain & Mill Co. v. Ayers) is published on Counsel Stack Legal Research, covering Court of Appeals for the Fifth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Spartan Grain & Mill Co. v. Ayers, 581 F.2d 419 (5th Cir. 1978).

Opinion

WISDOM, Circuit Judge:

Chicken feed transactions in northeastern Georgia produced this important antitrust litigation involving integrated poultry operations. Spartan Grain & Milling Company (Spartan), a seller of chicken feed, sued chicken producers (Virgil Ayers, W. C. Meaders, Jr., Boyce Blackmon, and Joe Acker) for the unpaid balances of their feed bills. The producers counterclaimed, maintaining that Spartan had violated several provisions of the antitrust acts. Joe Acker, the fourth producer, filed his own antitrust suit against Spartan. The district court directed a verdict for the producers on their antitrust claims. We reverse and remand.

I.

We must begin with an explanation of the broiler chicken industry.1 The industry was born about fifty years ago. Fresh chicken had been a seasonal by-product of egg production. Less productive hens and young cockerels were culled from laying flocks in the late spring and early summer. These “June fryers” were tougher, dryer, and gamier than the broilers we eat today. In 1934 the average American ate eight ounces of chicken.

During the 1930’s, enterprising egg producers realized that a market existed for chicken year-round. Broilers were raised independently of egg-laying flocks. Production of broilers quadrupled from 1934 to 1940, then doubled from 1940 to 1945. After World War II the expansion continued, largely as a result of capital investment by feed manufacturers and chicken processors. By 1954 Americans were eating an average of 13V2 pounds of broiler chicken a year. Supermarket distribution provided one boost; later, fast-food operations provided [421]*421another. By 1975 the Department of Agriculture reported per capita consumption of chicken in this country as 40.9 pounds. The World Almanac 143 (1978).

The bird in question is a young chicken, between seven and ten weeks old. Broilers, also known as fryers, may be male or female. The market distinguishes between broilers and other poultry. Production of broilers involves several distinct steps.

The process begins with the primary breeder. This step produces chickens which are used as breeders, not as broilers. The chicks are shipped to “producers”, such as those in this case, typically when they are one day old. Most of the birds shipped to the producers are pullets, although a few cockerels are included. After a week, the producers debeak the chicks. Soon, vaccinations begin. The birds are vaccinated for several fowl diseases, and tested for others. By the time they are twenty-four weeks old, they are ready to begin laying eggs. A good flock is productive for 38 to 40 weeks from the time they begin laying.

The third step takes the eggs to the hatchery. There, they become broiler chicks. These chicks then move to the fourth step, delivery to the growers. Each of the first four steps involves the feed merchants, providing grain for the flocks. In the fifth step the processor slaughters and dresses the broiler to prepare it for market. The customers for whom the broiler is prepared are often large supermarket chains or fast-food chains.

In the first years of the industry, each of the steps was taken by different people. Title to the product changed hands with each stage of the production process. After World War II the industry increasingly moved toward integrating the production process. The greater financial resources of the feed merchants and the processors enabled them to finance the expansion of the industry. The integrators expanded their control of the birds at each stage. Today, 99 percent of the broilers are raised either by “contract growers” or by the integrated firms themselves. Contract growers take the newly hatched broilers and raise them for a fixed price a dozen. Chicken feed and veterinary needs are provided by the integrated firm. Title to the birds rests with the integrated firm. And control over the production decisions rest with the integrated firm. Other stages in the process have also lost much of their independence.

The parties in this case were out of step with their industry. Spartan was a feed merchant, operating for the most part on a non-integrated basis. The producers owned hen houses and had been in the poultry business for up to twenty years. The producers had raised laying flocks both on a contract basis and on an independent basis. They preferred the independent contractor status: they made their own decisions, paid for the services they wanted, and had opportunities for greater return. Flock placements for that arrangement had not been available in their area since 1962. They would take flocks on a contract basis. They could not buy and raise flocks completely on their own. The risk that the hatching eggs could not be marketed would be too great. So, under either the independent or the contract system, the producers would produce only when they had someone committed to buy their hatching eggs.

In 1967 and 1968 the bottom fell out of the broiler industry in northeastern Georgia. Several firms had actively placed flocks on a contract basis in that area. Some terminated their operations entirely; others pulled out of the producers’ area, Franklin, Hart, and Elbert Counties. There were no flocks available with guaranteed markets for their eggs on either an independent or a contract basis. Then, Spartan stepped into the scene.

Integration of the industry caused problems for Spartan. As other feed merchants increased their control over producers and growers, Spartan’s markets were disappearing. Its solution to integration was to arrange its own contractual integration. Spartan negotiated with the broiler hatcheries in Pennsylvania and Ohio for commitments to take hatching eggs. It also arranged for primary breeders to produce flocks of laying chicks. Finally, it offered [422]*422these flocks, with guaranteed markets for their eggs, to the producers in northeastern Georgia. Title to the laying chicks was to pass from the primary breeder to the producer. ■ Spartan would then buy the eggs from the producers and sell them to the ha,tcheries. The producers received independent contractor status. They paid for their chicks’ feed and veterinary attention; they decided whether they wanted more flocks and when. Spartan paid several cents a dozen above the long term market price for eggs, and nine cents a dozen above the spot market price in Georgia.2

There was only one catch. Spartan pursued this contractual integration to keep its feed market. It required producers in its program to purchase only its feed. Its feed cost $15 to $20 more per ton than comparable feed.3

The producers could join Spartan or stop producing broiler eggs. They joined. Meaders signed four contracts covering the period from October 1968 to July 1972. Ayers signed four contracts covering the period from May 1969 to August 1971. Black-mon signed five agreements for the period from November 1968 to May 1972. Acker had been dealing with Spartan since 1965. During the time relevant to this suit, he signed three contracts covering the period from May 1969 to January 1972.

Spartan phased out this program in 1971 and 1972. In November 1972 it filed suit in federal court against Ayers, Blackmon, and Meaders for the unpaid balances of their feed accounts. Federal jurisdiction stemmed from diversity of citizenship. In December 1972 these producers answered and asserted antitrust counterclaims.

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