Dairies Rigged Their Milk Bids, Florida Charges
Seven of the nation's largest dairy producers illegally rigged bids for milk contracts with Florida's public schools, the state's attorney general charged last week in a federal lawsuit.
The civil suit filed in U.S. District Court in Miami charges that the milk suppliers and four local distributors violated federal antitrust laws by collaborating in a sophisticated conspiracy that has cost the state's school districts "millions of dollars" in overcharges over the past decade.
Bob Butterworth, Florida's attorney general, said he believes the antitrust action is the largest ever filed against major milk producers and that it will trigger similar investigations in other states.
"The ultimate effect of the conspiracy was to take coins from the pockets of schoolchildren," Mr. Butterworth said in a statement.
A spokesman for the the U.S. Justice Department said late last week that the department is conducting a grand jury investigation in Tampa to determine whether or not antitrust criminal violations may have occurred in the dairy industry. He would not provide details on the scope of the investigation.
The dairy processors named in the suit are: Borden Inc. of Columbus, Ohio; Dean Food Products Co. of Chicago; Flavorich Inc. of Lousiville, Ky.; Hart's Dairy of Ft. Meyers, Fla.; Kraft Inc. of Chicago, which markets dairy products under the brand name Sealtest; Pet Inc. of St. Louis; and Southland Corp. of Dallas, which markets dairy products under the Velda Farms label.
Spokesmen for five of the dairy processors named in the suit denied last week that they had engaged in any illegal actions.
"It is too early for us to comment on the specifics of the complaint as we have not yet received it," said Scott Horne, a spokesman for Kraft Inc.
"However, we knew that the investigation was under way," he continued, "and have cooperated fully with Florida authorities. Our checking indicates no circumstances of wrongdoing by Kraft employees and we plan to defend ourselves vigorously."
Similar--and in some cases identical--language was used by the spokesmen for Borden, Flavorich, Dean Foods, and Pet Inc., which is a subsidiary of Chicago's IC Industries.
Jim Sumner, spokesman for Dairymen Inc., a farmer-owned cooperative that distributes about one-third of its milk through its Flavorich subsidiary, added: "We feel very confident that these allegations against Flavorich are totally unfounded."
A spokesman for the Southland Corp. said, "We don't have any public comment to make since the matter is in litigation."
The seventh milk producer named in the suit, Hart's Dairy of Fort Meyers, Fla., was purchased by Dean Foods in 1985 and had no independent comment on the matter.
Some of the spokesmen noted that their companies were no longer selling milk in Florida or elsewhere, having sold parts of their operations during the past decade.
The Florida-based distributors named in the suit are Marshall Simmons Enterprise of Mango, Pierson Distributors Inc. of Opa Locka, H & T Distributors Inc. of Homestead, and Butler Foods of Naples.
Called a Classic 'Conspiracy'
While the companies involved are only being charged for their activities since 1978, state law-enforcement officials said they believe the alleged conspiracy began much earlier, in the late 1960's or early 1970's.
State officials noted that the investigation was continuing, and that the charges filed thus far apply only to activities in 32 of Florida's 67 counties.
The lawsuit alleges that the major dairy producers reached an agreement on the amount of half-pint milk production each desired for its local plants. Once that was decided, state officials maintain, the conspiracy was implemented on a contract-by-contract basis.
"There is evidence that there were meetings among the larger producers, at which they negotiated their shares of the market," said Tom Hillstrom, special assistant to the attorney general. "The smaller producers and distributors were enlisted to the extent necessary to carry out the conspiracy."
Legal authorities describe a classic bid-rigging conspiracy as one in which participants designate who will win each individual contract, and the other participants submit bids that are higher than that of the chosen winner.
Because the designated firm is virtually assured of gaining the contract, it is free to charge prices above the level that true competition might produce.
"Variations of that occurred here," Mr. Hillstrom alleged.
State law-enforcement officials said it would be "premature" to specify the actual monetary damages caused by the alleged conspiracy, giving instead a rough estimate of "millions of dollars."
Federal antitrust laws state that violators are liable for monetary damages amounting to three times the extent of actual damages. The lawsuit filed last week also seeks permanent injunctive relief, costs, and attorney fees.
The approximate annual cost of the 172 million pints of milk purchased in an average year by the 27 school districts totals nearly $26-million, according to the officials.
'Sophisticated and Complex'
No school officials have been implicated in the scandal. "We looked at the possibility of insider help, but found no evidence of that," said Mr. Hillstrom.
David Voss, the director of communications for the state department of education, said through a spokesman that "the department is not involved, therefore we don't have an opinion."
"The individuals involved went to extraordinary lengths to conceal their violations from government officials," said Mr. Hillstrom. "The fact that the conspiracy occurred for such a long period bears out its sophistication and complexity."
Mr. Butterworth said the alleged conspirators labored diligently to produce the "appearance of competition."
"The mix of suppliers from district to district or from school to school would change, often dramatically, from year to year," he explained.
Mr. Hillstrom pointed out that the natural volatility of milk prices also helped to reduce suspicions among purchasing agents.
"An individual purchasing agent might see a sudden jump in prices and not necessarily suspect that anything was amiss, because he or she lacked the big picture," he said.
Some dairy industry spokesmen discounted the charges, saying that in some cases milk prices remained stable or declined during the period of the alleged antitrust violations.
"The price could go down, and still carry an overcharge," responded Mr. Hillstrom. "We are saying the conspiracy led to overcharges regardless of the price of milk."
Grist for Other States
The possible ramifications of the lawsuit for other states are not yet clear.
State officials said the lawsuit could trigger investigations in other states, but Mr. Hillstrom would specify only that "we either have or will be in communication with some other states" regarding similar probes.
The alleged conspiracy was uncovered through the use of sophisticated computer analyses of the milk contracts in question, and Florida officials said they will share their investigative techniques with other states.
Officials of the U.S. Agriculture Department, which administers the federal school-lunch program, said they were aware of the Florida lawsuit but were not involved.
"We have no indication what losses, if any, there might have been for us," said Brenda Schuler, acting public-affairs director for the Southeast region of the department's food and nutrition service, which serves 8 states, including Florida.
Usda officials agreed that it was unlikely they would be drawn into the case, since school districts are reimbursed at a flat rate for the number of meals they serve, regardless of the cost.
But if the allegations of overcharging prove true, said Ms. Schuler, "that's money they could have spent for other foods."