On August 27, 2013, the U.S. Fifth Circuit Court of Appeals issued an opinion reversing a judgment in excess of $25 million in favor of more than 90 contract poultry growers who alleged that Pilgrim’s Pride Corporation attempted to manipulate chicken prices in violation of Section 192(e) of the Packers and Stockyards Act, 1921 (“PSA”) by idling certain chicken processing plants and terminating the growers’ poultry grower agreements. The Fifth Circuit’s decision, styled Agerton, et al. v. Pilgrim’s Pride Corporation, No. 12-40085, 2013 WL 4523500 (5th Cir. Aug. 27, 2013), reverses and renders judgment in Pilgrim’s Pride’s favor nearly two years after a magistrate judge issued findings of fact and conclusions of law imposing liability on the company because the plant idlings and concomitant termination of the growers’ contracts presented the likelihood of an anticompetitive effect.
The growers’ Section 192(e) claims stem from Pilgrim’s Pride’s restructuring efforts after seeking voluntary bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in December 2008. According to the Agerton opinion, “[t]he primary reason” for the company’s weak financial condition “appeared to be the company’s over-extension into the commodity chicken market,” of which Pilgrim’s Pride apparently “held an estimated 50% market share.” Id. at *1. Pilgrim’s Pride targeted for idling operations “unnecessarily producing a surplus of commodity chicken at great cost to itself.” Id. As Pilgrim’s Pride idled the facilities, it also terminated the poultry grower agreements of local poultry growers who raised poultry for processing at the plants. Id. Despite evidence demonstrating that “the total domestic supply of commodity chicken actually increased” after the idlings (id. at *4 n. 11), liability was imposed under Section 192(e) on the grounds of a likelihood of harm to competition. Id. at *2.
On appeal, the Fifth Circuit characterized the magistrate judge’s analysis as “simple” because it imposed liability under the PSA merely because Pilgrim’s Pride “hoped to increase chicken prices by reducing the quantity of chicken offered on the market.” Id. at *2. The Agerton court wrote that “Section 192(e) does not forbid all conduct which might affect prices, but only conduct that is designed to manipulate or control prices.” Id. at *3. According to the panel, “[t]he relevant question” was whether Pilgrim’s Pride’s reduction of its chicken output “was improper and anticompetitive.” Id. Ultimately, the Fifth Circuit concluded that Pilgrim’s Pride’s “conduct was merely the legitimate response of a rational market participant to changes in a dynamic market. If a firm inadvertently overproduces a good and drives down prices, it does not break the law by cutting production so that prices may recover.” Id. at *4. Consequently, the Court held that Pilgrim’s Pride did not violate PSA Section 192(e) by reducing its commodity chicken output. Id.
This opinion marks the second time in less than four years that the Fifth Circuit addressed poultry grower claims under the PSA. In December 2010, the Fifth Circuit, sitting en banc, held in Wheeler v. Pilgrim’s Pride Corporation, 591 F.3d 355 (5th Cir. 2009) that proof of an anticompetitive effect or likelihood thereof is necessary to prevail under PSA Subsections (a) and (b). Notably, in addressing how to determine whether Pilgrim’s Pride’s conduct in Agerton resulted in harm to competition or likelihood thereof, the Fifth Circuit applied a “rule of reason” analysis to the poultry growers’ PSA Section 192(e) claims. Agerton, 2013 WL 4523500, at *3.
This update is courtesy of Clayton E. Bailey of Bailey Brauer PLLC, who served as Pilgrim’s Pride Corporation’s trial and appellate counsel in Agerton v. Pilgrim’s Pride Corporation and Wheeler v. Pilgrim’s Pride Corporation.