5th Circuit Reverses $25 Million Award For Chicken Growers After Plant Closures

by Tara Arick on September 3, 2013 · 0 comments

in Contract Law

A Texas federal magistrate judge erred in awarding chicken growers $ 25 million following a chicken processor’s decision to close plants in order to raise prices, a two-member Fifth Circuit U.S. Court of Appeals panel ruled Aug. 27 (In the Matter of: Pilgrim’s Pride Corporation, No. 12-40085, 5th Cir.; 2013 U.S. App. LEXIS 17921).

Pilgrim’s Pride Corp. (PPC) is one of the world’s largest suppliers of chicken and processed chicken products.

It does not actually raise the chickens it processes. Instead, PPC relies on the husbandry services of dozens of chicken growers. PPC provides the chicks, feeds and other supplies. The chicken growers provide the facilities and labor necessary to raise the chickens.

Facing economic difficulties in 2008, PPC evaluated its operations and concluded that it was unnecessarily producing a surplus of commodity chicken at great cost to itself. In an effort to reduce costs, PPC closed or idled several processing and distribution facilities, divested assets, restructured supply contracts and laid off a number of employees. Nonetheless, PPC ultimately filed for Chapter 11 bankruptcy relief in December 2008.

After filing for bankruptcy, PPC received approval from both the bankruptcy court and the unsecured creditors committee to idle or sell three of its processing complexes, including its El Dorado, Ark., facility. PPC was unable to solicit an offer that even approached the El Dorado facility’s appraised value, and the facility was officially idled in May 2009. As a result of the facility’s closure, the husbandry services of 163 contract chicken growers were no longer needed.

Manipulating Prices

In response to the termination of their growing agreements, a group of the affected chicken growers filed suit under the Packers and Stockyards Act of 1921 (PSA). Specifically, the growers alleged that PPC had engaged in a course of business for the purpose of “manipulating or controlling prices” in violation of PSA Section 192(e). The growers originally filed suit in the U.S. Bankruptcy Court for the Northern District of Texas. The case was transferred to the U.S. District Court for the Eastern District of Texas, where it was referred by consent to a magistrate judge.

The magistrate judge concluded that PPC’s actions were likely to lead to a competitive injury and, as a result, violated Section 192(e). The magistrate judge awarded more than $ 25 million to the chicken growers. PPC appealed.

Judgment Reversed

The Fifth Circuit panel reversed the District Court’s judgment.

“In the instant case, PPC had overextended itself into the commodity chicken market, was producing more chicken than the market appeared to need, and was thereby driving the market price of chicken down at great cost to itself. Recognizing the damage inflicted by its own excess production, PPC wisely decided to stop flooding the market with unprofitable chicken. Not surprisingly, we have located no case finding such conduct to be unfair, illegal, or injurious to competition; in truth, PPC’s unilateral conduct had nothing to do with competition. Even if PPC hoped that chicken prices would respond to the output reduction by settling at a higher equilibrium price, that would not alter our conclusion. Far from being a nefarious goal, higher prices are the natural consequence of a reduction in supply. If it is lawful for a business to independently control its own output, then it is also lawful for the business to hope for the natural consequences of its actions,” the panel wrote in its per curiam opinion.

Judge W. Eugene Davis and Jerry Edwin Smith comprised the panel.

Mark C. Brodeur of Brodeur Law Firm in Dallas; Eric M. Albritton and Michael A. Benefield of Albritton Law Firm in Longview, Texas; Robert L. Depper Jr. of Depper Law Firm in El Dorado, Ark.; and Johnny E. Dollar of Dollar Law Firm in Monroe, La., represent the chicken growers.

Clayton E. Bailey and Alexander M.D. Brauer of Bailey Brauer in Dallas, Jennifer P. Ainsworth of Wilson, Robertson & Cornelius in Tyler, Texas, and Michael A. Pollard of Baker & McKenzie in Chicago represent PPC.

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