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A federal court has breathed new life into the U.S. government’s campaign against one of the country’s biggest dairy cooperatives. In a case that could buoy merger watchdogs by shoring up laws aimed at preserving competition, the U.S. Appeals Court in Cincinnati Tuesday ordered a Department of Justice case to trial after finding that a lower court wrongly granted summary judgment in favor of Dairy Farmers of America Inc. DFA faces charges of monopolizing the market for school milk in dozens of Kentucky and Tennessee school districts. The Justice Department’s antitrust division is seeking to break up DFA’s 2002 acquisition of Somerset, Ky.-based Southern Belle Dairy Co. LLC. A three-judge panel of the appeals court said the U.S. District Court in eastern Kentucky failed to adequately review whether the acquisition violated the Clayton Act’s prohibition on mergers that “may substantially lessen competition.” In originally dispensing with the case, the lower court’s ruling stood to weaken long-standing antitrust-related legal precedents under which even reduced control of a company could diminish competition. The Justice Department argues that DFA’s 50 percent ownership of Southern Belle harmed competition with other milk suppliers even though it had a nonvoting stake in the company. DFA also owns a 50 percent passive interest in Southern Belle’s nearest competitor, the Flav-O-Rich Inc. plant in nearby London, Ky. Rejecting that logic, the district court ruled in August 2004 that the government had failed to prove that DFA’s connection to Southern Belle was anti-competitive. By ordering a new trial, the appeals court “confirms the legal standard by which the department reviews partial ownership transactions,” said Acting Assistant U.S. Attorney General Thomas Barnett, whom the Senate Judiciary Committee is set to confirm as head of the agency’s antitrust division. “The department and the commonwealth of Kentucky will be able to demonstrate at trial how Dairy Farmers of America’s acquisition likely increases milk prices for school children across Kentucky and Tennessee.” DFA officials did not return phone calls requesting comment. According to testimony from expert witnesses called by the Justice Department in the case, milk prices in school districts where Southern Belle and Flav-O-Rich were the only competitors did not substantially differ before the merger but rose 9 cents per gallon after the deal. The lower court’s decision turned on DFA’s decision to switch its interest in Southern Belle from voting to nonvoting stock in July 2004, only six days before it filed for summary judgment. That reduced DFA’s control of the company by voiding its right to vote on business and other matters at Southern Belle and to sit on the company’s committees, the district court noted. But the appeals panel countered that despite DFA’s move to relinquish its voting rights, it was wrong to ignore DFA’s history of influence over Southern Belle. “Even without control or influence, an acquisition may still lessen competition,” the appeals panel wrote. “DFA’s acquisition of Southern Belle included a mechanism by which DFA exercised some control over the business activities of Southern Belle and resulted in its controlling an undue percentage of the relevant market, as well as a significant increase in the concentration of firms in that market.” DOJ and the commonwealth of Kentucky in 2003 filed a civil antirust lawsuit arguing that DFA’s acquisition of Southern Belle reduced the number of independent bidders for school milk from three to two in 54 school districts in Kentucky and Tennessee. The surprise defeat in the lower court was the second in a string of three court losses that befell federal antitrust enforcers during a four-week span in 2004. In August of that year, the U.S. District Court for the District of Columbia denied the Federal Trade Commission’s request for preliminary injunction to block Arch Coal Inc.’s acquisition of two Wyoming coal mines from Triton Coal Co. LLC. The Justice Department suffered a similar setback the following month, when the U.S. District Court for Northern California refused to stop Oracle Corp.’s takeover of business software competitor PeopleSoft Inc. DFA, based in Kansas City, Mo., has 22,000 member dairies in 49 states that produce roughly 57 billion pounds of milk annually, or 33 percent of the U.S. milk supply. Brands it controls or has an interest in include Borden and Breakstone’s, while a subsidiary bottles Starbucks’ frappuccino drinks. Copyright �2005 TDD, LLC. All rights reserved.

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