Kraft, Kellogg Go After Egg Producers for Price-Fixing Scheme

Major US food companies go to trial this week over antitrust claims that egg producers Cal-Maine Foods Inc. and Rose Acre Farms Inc. conspired to inflate the price of eggs, the third attempt to prove the businesses violated antitrust laws.

The plaintiffs—a Kraft Heinz Co. unit,Kellogg Co., General Mills Inc., and Nestle USA Inc.—say egg producers controlled supply and artificially increased prices starting in the late 1990s through at least 2008, leading to higher costs for egg products used in food staples such as cake mix, cereal, and waffles. The argument jibes with recent regulatory and congressional scrutiny about the market power of large food producers.

The trial, set to begin Tuesday in Illinois federal court, comes years after two prior sets of plaintiffs failed to convince juries of an unlawful egg price-fixing conspiracy under the rigorous “rule of reason” test that balances market benefits against alleged harms. Cal-Maine and Rose Acre are the two largest egg producers in the US.

Food prices have skyrocketed in the wake of the pandemic’s supply chain disruptions, and are still up since before the pandemic, feeding into economy-wide inflation. Egg prices were particularly vulnerable to supply chain issues, with the price shooting up to record highs at the beginning of the year due in part to chicken-killing avian flu—though they have since tumbled, hurting egg producers’ revenues.

The lawsuit relates to alleged conduct from years ago, but it reflects the notion that infrastructure is in place for collusive conduct to occur, said Basel Musharbash, legal counsel for Farm Action, a nonprofit group that fights corporate control over the food and farming system.

“You have an industry that is fairly consolidated,” Musharbash said. “What it ends up meaning for consumers at a time of high inflation is that these companies can increase prices and control production in order to profit more off of the prices.”

Both companies have denied any wrongdoing or anticompetitive conduct.

Per Se Rule

The food producer plaintiffs’ success will hinge on whether they can convince the judge to instruct a jury to decide the case under a less rigorous approach to antitrust law that presumes anticompetitive effects. It is known as the “per se” rule, and it gives plaintiffs a leg up in their arguments.

The case moved forward in September after Judge Steven C. Seeger of the US District Court for the Northern District of Illinois determined there was a preponderance of the evidence that each of the four remaining defendants—Rose Acre and Cal-Maine, along with trade groups United Egg Producers and US Egg Marketers—conspired to restrain trade in violation of Section 1 of the Sherman Act, which prohibits such agreements.

Observers say food companies may see a more favorable judicial approach in the Seventh Circuit, which has a record of rejecting claims that cartel-like restraints can ever be reasonable. Prior cases were appealed to the Third Circuit, which rejected plaintiffs’ claims.

“Having succeeded in getting the case through summary judgment, the plaintiffs likely reasoned that they have a reasonable chance of convincing a new jury in a new district that defendants participated in conspiracy,” said Patrick McGahan, partner at Scott+Scott who specializes in private litigation involving agriculture and other industries. “In effect, the plaintiffs get to start the trial with a fresh slate.”

Third Kick at Can

Two other sets of egg buyer plaintiffs—grocery stores and another group of direct purchasers—have tried to prove the producers fixed the price of their eggs. Both attempts fizzled.

In 2020, the Third Circuit upheld a judgment on appeal rejecting a class action brought by direct purchaser plaintiffs. A Pennsylvania federal jury had returned a verdict in 2018 on the rule-of-reason test that found egg producers including Rose Acre participated in an agreement to reduce the supply of eggs—but that the restrictions weren’t unreasonable.

In 2019, another jury in Pennsylvania sided with Rose Acre and other egg producers over Kroger Co. and other grocers, saying the producers’ conduct didn’t violate antitrust laws. The jury found there was no agreement to reduce supply, and the Third Circuit upheld the jury instructions to review the case through the rule-of-reason test.

The favorable verdicts have emboldened Rose Acre to go trial a third time around, said Peter Carstensen, law professor emeritus at University of Wisconsin Law School and an expert on antitrust matters in the agricultural sector.

“Rose Acre will stand up and fight—they have litigated every antitrust cases they have been involved in,” Carstensen said. “They have been more of a risk-taker in terms of going to trial.”

Attorneys for Cal-Maine and Rose Acre didn’t respond to requests for comment. But in their court filings, they denied violating Section 1, and said the rule-of-reason test should largely be applied in the latest case because it was correctly applied to the two other cases with nearly identical claims that were defeated.

“Two prior juries weighed the same theories of antitrust liability advanced by these plaintiffs,” the defendants stated in court filings. “Both juries found no Sherman Act violation. Those verdicts are final.”

The fact that egg prices have tumbled this year should help the defendants argue they aren’t guilty of price-fixing, said Michael Santoro, professor of management and entrepreneurship at the Leavey School of Business at Santa Clara University.

“It’s a pretty poor price-fixing scheme if you can’t fix prices,” Santoro said.

Per Se Illegal

The rule-of-reason test places a far higher burden on plaintiffs to defend their allegations, including proving that the egg producers had power to influence prices in a specific market.

Per se, by contrast, is applied to a limited category of conduct such as price-fixing and bid-rigging, and dramatically simplifies the litigation of an antitrust case, said William Kovacic, law professor with George Washington University and a former chairman of the Federal Trade Commission.

Plaintiffs almost always prefer having a case decided with a per se analysis because it gives them a major advantage in proving collusive action, as long as they demonstrate there were two direct competitors that agreed to raise the price of a good, Kovacic said.

“It’s an important shortcut to establishing a violation,” Kovacic said. “It is far simpler to enjoy the presumption that comes with the per se prohibition than it is to go through the traditional process of defining a relevant market, showing that the defendant had market power, demonstrating that the behavior had net anticompetitive effects.”

Generally, courts are more inclined to apply rule of reason, especially when it comes to complex arrangements that could have pro-competitive benefits, said Matthew DeFrancesco, partner with FisherBroyles, LLP and an antitrust professor at New York Law School.

Plaintiffs claimed the egg producers participated in a certification program promoted to improve animal welfare, but that was in fact intended to reduce the supply of eggs by requiring fewer chickens in each cage.

The defendants argued the program wasn’t a restriction on supply and actually provided procompetitive benefits for consumers and producers by creating a quality standard.

Courts must be comfortable saying conduct is so clearly manifestly anticompetitive as a matter of record that it can be treated as a per se violation, DeFrancesco said.

“Obviously if competitors get in a room and agree to fix prices, that’s per se anticompetitive,” DeFrancesco said. “But when you have more complicated scenarios, business agreements, or structures where that’s not so clear, courts are reluctant to say this is per se illegal.”

Collusive Conduct

Though the claims in this case are based on alleged anticompetitive behavior going back years, the trial reflects recent concerns among regulators and private plaintiffs over the control major food producers have on the US food supply.

The Justice Department in late September filed a civil antitrust lawsuit against third-party data service provider Agri Stats Inc. for allegedly organizing and managing anticompetitive information exchanges among processors of broiler chickens, pork, and turkey. And lawmakers including Sens. Jack Reed (D-R.I.) and Elizabeth Warren (D-Mass.) have called for more scrutiny of egg companies’ behavior.

A trial is underway in Illinois federal court for a case that accuses the nation’s largest poultry firms of fixing the price of broilers.

Read More: Chicken Trial Signals Antitrust Warning to US Protein Industry

Carstensen, the antitrust and agricultural expert, said egg producers such as Cal-Maine have essentially become “oligarchies” that can tacitly collude without having to rely on a formal agreement prohibited by the Sherman Act. Cal-Maine Foods is the No. 1 producer and distributor of eggs in the US, and reported $3.15 billion in net sales for its fiscal year 2023. Rose Acre bills itself as the second largest egg producer in the US.

The plaintiffs are represented by Jenner & Block LLP. The defendants are represented by Porter, Wright, Morris & Arthur LLP; Troutman Pepper Hamilton Sanders LLP; and King & Spalding LLP.

The case is Kraft Foods Global Inc. v. United Egg Producers Inc., N.D. Ill., No. 1:11-cv-08808, 10/17/23.