BURLINGTON — Milk testing and the control it gives Dairy Farmer’s of America (DFA) and Dairy Marketing Services (DMS) over farmers’ milk checks took center stage Thursday at a fairness hearing held here in U.S. District Court.

Specifically, the hearing looked at a proposed settlement between DFA and farmers who have accused it and its affiliates of violating anti-trust law.

Plaintiffs, including two Vermont farmers Alice and Laurance Allen, filed suit against DFA, DMS and processor Dean Foods in 2009. They alleged that between them the corporations controlled access to processing plants and forced farmers to work through DFA and DMS to access markets for their milk.

Further, plaintiffs charged DFA and DMS were suppressing the price of milk in order to further the profits of DFA’s milk bottling operations.

Dean Foods settled for $30 million in 2011.

At issue Thursday was a proposed settlement in which DFA would pay $50 million to be divided between Northeast farmers who sold milk in the Northeast, since Jan. 1, 2002. Attorneys for the plaintiffs would receive $16.6 million in fees paid directly from the settlement.

In a class action suit such as this, the court appoints representatives to safeguard the interests of the class as a whole. In this case, the class was divided between members of DFA, including members of the St. Albans Cooperative Creamery, which is a cooperative member of DFA, and non-members.

All but one of the about half-dozen class representatives, Alice Allen, opposed the settlement. They took turns explaining their opposition to U.S. District Court Judge Christina Reiss.

Four farmers, including Paul Bourbeau of St. Albans and Bill Rowell of Highgate, spoke in support of the settlement.

Market control

Class representatives spoke about the control DFA has over the market and over their livelihoods.

New York farmer Ralph Sitts told Reiss “the decisions made today will affect all size dairies.” DFA, he said, controls the price farmers are paid for their milk, testing, marketing and transportation costs.

Dean Foods, the largest bottler of milk in the U.S., controls 70 percent of the milk market in New England, according to Ronald Cotterill, a University of Connecticut economist. The other 20 percent is controlled by Hood, in which DFA has been an investor.

Dean had required all farmers wishing to sell milk to do so through DMS, a marketing service founded and owned by DFA and Dairylea (St. Albans was later made a one-third owner in DMS). Dairylea has since merged with DFA. As part of its settlement, Dean agreed to end the practice.

“DMS should be abolished,” said Sitts. “Farmers who consciously made a choice not to join DFA should not have their milk check or testing controlled by DFA and DMS.”

Another class representative, Richard Swantak provided another example of DMS control over milk checks – hauling costs. Although gas prices have been dropping for months, farmers have not seen reductions in the fees they’re charged for hauling. When he called DMS, he was told it would take a few months for the drop in transportation costs to show up in farmers’ milk checks, Swantak told the judge.

Farmers, he said, are “the last to reap the positive effects of $45 (a barrel) oil.”

Garrett Sitts told the judge he would forego a monetary settlement in exchange for market relief, which he defined as “a market that is not controlled and manipulated by the defendant.”

“The defendants currently have a monopoly on bottle plant access,” he said. Farmers are paid more for milk sold to bottlers than milk that is turned into cheese, yogurt, butter or milk powder.

The settlement prevents DFA from entering into new exclusive supply agreements, such as the ones it previously had with Dean, but only for 30 months. However, DFA is allowed to renew existing sole supply agreements.

That, noted Sitts, is precisely the problem.

The agreement allows members to depart DFA without penalty, but with DFA likely renewing its sole supply agreements, the farmer who did so wouldn’t be able to find a market for his or her milk, Sitts pointed out.

DFA also has its own testing operation. Farmers who market their milk through DMS and DFA are tested by DFA. There is no independent corroboration of the test results.

Sitts and other expressed the view that DFA uses test results to punish troublemakers. The results of the tests for fat and protein content, as well as bacteria and somatic cells from the cow’s udder, determines how much farmers are paid for their milk, or whether they are paid at all.

While a member of DFA, Sitts told the court he was forced to pay for three ruined loads of milk. When a farmer’s milk is deemed to have ruined an entire load, the farmer is forced to pay for the full load, around $20,000. His milk also had 25 failed field tests.

He left DFA and began shipping to an independent processor. In the seven years since them he’s had zero spoiled loads or failed tests. “I changed nothing, your honor,” Sitts said.

Class representatives said the settlement leaves farmers vulnerable to retaliation by DFA through testing. DFA could also simply refuse to pick up the farmer’s milk, as plaintiffs allege it has done in the past.

Better cooperative

Mike Eby of Lancaster, Pa. is a member of Land ‘o Lakes cooperative, which has also marketed milk through DMS.

He felt the settlement, at about 16 cents per hundredweight of milk produced, fell far short of the damages, which plaintiffs’ experts calculated at 41 to 69 cents per hundredweight.

“More important than the dollar amount is the accountability,” he told Reiss. “We need to have confidence our cooperatives are truly acting in the farmers’ interests.”

“It should not be an option for defendants to pay a relatively small fee for the privilege of continuing that same behavior,” Eby stated.

The settlement includes requirements intended to make DFA a more transparent organization with increased accountability to members:

  • DFA board must approve any new sale agreements for milk or the renewal of any existing agreements;
  • members can request, in writing, a summary of the terms of any sale agreement from DFA or DMS “provided its disclosure is permitted by the terms of said agreement.”
  • members may exit DFA during the settlement period without penalty;
  • several documents in the case will be unsealed, allowing public access;
  • DFA will disclose the names of board and committee members and the per diem payments they receive for sitting on the boards;
  • DFA will disclose all transactions of more than $120,000 annually, “other than the sales of purchases of raw milk to of from affiliates;
  • DFA will disclose the financial results from its joint ventures and processing operations to delegates at its annual meeting “excluding the sales or purchases of raw milk to or from affiliates.”

The proposed settlement also includes auditing and accounting procedures DFA agreed to follow.

Class representative Jonathon Harr said, “We realized very quickly this settlement was inadequate, unreasonable and unfair.”

By excluding deals with affiliates from exposure, the settlement hasn’t “affected any of the key players in any way,” he said.

“This is the source of the damages,” he said of affiliate sales. “If we’re not talking about the milk business, why talk?”

Harr also took issue with the exclusion of deals under $120,000 from the reporting. “There’s no transparency here, and if you did find something out you can’t act on it anyway,” he told Reiss.

The reason farmers might not be able to act on new information is the release from liability included in the agreement. Reiss had previously expressed concern about the scope of the release, which exempts any Northeast farmers who take part in the settlement from ever raising the issues covered in the suit again. That release extends not only to DFA and its officers but also to unnamed affiliates of DFA.

“We the class are asked to forever release,” said Harr. “We don’t know exactly who and we don’t know exactly from what. I don’t think this is reasonable.”

The agreement also prevents, in perpetuity, DFA from entering into non-compete agreements with other cooperatives. One of the things exposed by the litigation – before all of the documents were sealed at DFA’s request – was an understanding among several cooperatives that when a farmer expressed interest in changing cooperatives, the farmer’s cooperative would be told. For example, documents revealed Agri-Mark would contact St. Albans if a St. Albans farmer showed an interest in joining Agri-Mark and vice versa.

Harr pointed out that cooperatives already knew this was unacceptable behavior and did it anyway.

Harr argued DFA should be required to sell its testing operation and all testing should be independent. He also wanted a third party to oversee delegate elections at DFA and to have a member of the board present at all negotiations with processors.

Pro-settlement side

Paul Bourbeau, of St. Albans, said he has repeatedly chosen to stay in the DMS system and is currently a member of DFA.

He supports the settlement, because he wants to see the lawsuit come to an end, but denies the allegations. “The stubborn Frenchman in me wants to fight this to the end and prove we didn’t do anything wrong,” he said.

Bill Rowell, of Highgate, also supports the settlement. He told Reiss DMS has done a good job of finding markets for milk under volatile conditions, particularly in times of surplus.

“I would hate to have to market it, and I don’t think I can do better than DMS,” he said.

The Northeast lacks adequate dairy infrastructure, in Rowell’s view. “We don’t have an overabundance of processors,” he said.

Some of the evidence against DFA and Dean including alleged collaboration between DFA and Dean’s predecessor Suiza in buying and closing bottling plants, including several in Vermont. With fewer outlets for milk, farmers had fewer options for selling their milk.

The judge

Reiss told attorneys that for the first time in five years she felt she had an understanding of the issues after hearing from the farmers themselves. “This is the first time I’m hearing about the control of the testing … and what happens if you terminate your agreement and have nowhere to market your milk,” she said.

In response to Reiss’ questions about milk testing, Kit Pearson, attorney for the plaintiffs, said the evidence of DFA using tests to punish members or diminish payments to farmers was anecdotal and often didn’t hold up to greater scrutiny. If the evidence of wrongdoing had been found, he’d have used it, he said.

Reiss, however, said the issue was one of control. Even without evidence of abuse, the arrangement gives DFA and DMS considerable control over farmers’ livelihoods, she pointed out.

Pearson also said DFA and Dean’s control over the entire Northeast market was not as expansive as believed.

Once again, Reiss expressed concern about the expansiveness of the release. “If the milk check was wrong and you could prove it, that would be extinguished,” she said, meaning the farmer would have no legal recourse if they accepted the release. “I don’t see how it squares off with the monetary settlement.”

Another plaintiff attorney, Robert Abrams, who served as the lead attorney in the Southeast antitrust case against DFA, assured her the release would be confined to those issues raised in the complaint. The complaint, however, was extensive.

When Pearson pointed out that of thousands of affected farmers only a few dozen had written to the court to oppose the settlement, Reiss responded, “These people control our livelihood. They have our milk checks in their hands… and you need to factor that in.”

Reiss will now need to take into consideration the information provided to her and either approve or reject the settlement.

If she rejects the settlement, DFA and the plaintiff’s attorneys can either come back with another settlement or proceed to trial. Prior to the settlement being reached, a month of court time had been scheduled for the trial.