IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF NEW YORK

____________________________

CERTAIN DAIRY FARMERS               )

Plaintiffs                                     )

                                                  )

v.                                                )

                                                  )           Case No. _______          

DAIRY FARMERS OF AMERICA, INC., )

TOGETHER WITH THE INDIVIDUAL   )

DIRECTORS, OFFICERS, AND AGENTS)

THEREOF,                                     )

Defendants                                   )                                              

_____________________________)

 

COMPLAINT AND JURY DEMAND

By means unfitting a law-abiding corporation, let alone a farm cooperative organized for member benefit, Defendants have been operating a milk cartel which has shattered our nation’s crucial dairy industry. Prior to the current pandemic, much of the U.S. dairy industry faced full-scale collapse with record farm failures and rural communities drained of economic activity and drowning in red ink.

Now at this critical moment for public health, the food supply chain created by the Defendants’ illegal conduct is failing both the farmers and the consumers. Grocery shelves are empty, farm milk is being dumped into fields and manure pits, dairy products are rationed, and producer pay prices are crashing even as consumer prices soar. During the height of the pandemic, this collapse spread from Main Street, Rural America to Wall Street, New York City as Defendants extorted substantially all assets from publicly-traded Dean Foods Company after forcing its bankruptcy.

Defendants’ solution proposed to the United States Department of Agriculture presents the ultimate extortion: either the federal government agrees to subsidize the production and sale of the cartel’s product, or the cartel oversees the complete collapse of the centralized U.S. consumer dairy supply chain.

Accordingly, the above-named Plaintiffs through their undersigned counsel file this Complaint and Jury Demand under the Racketeer-Influenced and Corrupt Organizations Act requiring divestiture and dissolution together with all damages available under law. Plaintiffs hereby complain and allege as follows.

 

PLAINTIFFS

  1. Plaintiff are shareholders of Dean Foods Company (“Plaintiff Shareholders”) and dairy farmers who produced USDA Grade A milk during Defendants’ conduct alleged herein (“Plaintiff Dairy Farmers”).

 

DEFENDANTS

  1. Dairy Farmers of America employees Sharad Mathur, Karen Cartier, James Kelleher, Amber Brown, Dave Iceter, and Earl Dehmey jointly and severally performed the pattern of racketeering activity set forth herein.

  2. Dairy Farmers of America, Inc. managers Rick Smith, Alex Bachelor, Martin Bates, Alan Bernon, Andrew Brummel, Kristen Coady, David Darr, Doug Glade, Keith Gomes, Brad Keating, Jackie Klippenstein, Monica Massey, Randy McGinnis, Pat Panko, Dennis Rodenbaugh, Kevin Strathman, Edward Tilley, Jay Waldvogel, Greg Wickham, and John Wilson jointly and severally administered and performed the pattern of racketeering activity set forth herein.

  3. Dairy Farmers of America, Inc. board members Byron Lehman, Craig Elder, Doug Nuttelman, Ken Birker, Larry Shover, Steve Strickler, Lilah Krebs, Tom Oelrichs, Bill Besancon, Dwight Nash, Garry Kibler, Greg Gibson, Jeff Raney, Larry Griffith, Terry Rowlett, Chris Kraft, Alan Gerratt, Brian Hardy, Rick Podtburg, Ron Shelton, Bruce Bartley, David White, Dean Handy, Jacques Parent, Jerrel Heatwole, Larry Bailey, Patricia Bikowsky, Sandy Stauffer, Scott Lackey, Todd Hathorn, Travis Fogler, Valerie Patten. Brian Rexing, Glen Easter, Jerry Spencer, Kent Herman, Larkin Moyer, Randy Mooney, Buster Goff, Dan Senestraro, John Woebler, Keith Broumley, Larry Hancock, Neil Hoff, Case Van Steyn, Leroy Ornellas, Melvin Medeiros, Perry Tjaarda, and Pete Olsen jointly and severally aided and abetted the pattern of racketeering activity set forth herein.

 

STATEMENT OF JURISDICTION

  1. This Court has subject matter jurisdiction over the Plaintiffs’ claims under 28 U.S.C. 1331 and 18 U.S.C. 1964 because these claims arise under the laws of the United States protecting trade and commerce against racketeering.

  2. This Court has personal jurisdiction over the Defendants because the Defendants purposefully and continuously conduct substantial business within the United States and within this District.

  3. Joinder is proper because the Plaintiffs’ claims arise out of the same series of transactions or occurrences and the action involves questions of law and fact common to all plaintiffs.

  4. Venue is proper in this District under and 28 U.S.C. 1391 because Defendants reside or transact substantial business herein.

  5. Defendants’ activities which give rise to this Complaint are within the stream of and substantially affect interstate commerce in a commodity in which there is a substantial public interest.

 

THE ENTERPRISE

  1. In 1977, the Department of Justice entered a consent decree dissolving Mid-America Dairymen on antitrust grounds. However, the members reorganized (with former Mid-America Dairymen CEO Gary Hanman as CEO) into Dairy Farmers of America, Inc. (“DFA”) formed in 1998.

  2. Dairy Farmers of America is by far the nation’s largest dairy cooperative by both membership and milk volume. DFA has nearly 14,000 members which is approximately half of the nation’s dairy producers. As an agricultural cooperative, it is required by law to operate solely for the benefit of its members. These members produce over 30% of U.S. milk.

  3. By comparison, the runner-up by membership, Associated Milk Producers, has approximately 2,000 members, and the runner-up by volume, California Dairies, produces approximately 8% of U.S. milk.

  4. In addition to marketing members’ milk to dairy processors, DFA owns and operates 42 dairy processing plants nationwide under DFA-owned brands, with an additional 44 processing plants and related brands from the bankruptcy estate of Dean Foods Company together with the largest direct-to-store distribution network in the nation.

  5. In New York, DFA’s Farmer Services control the majority of available livestock auctions in the state, even those of farmers who are not DFA members.

  6. Nationwide, DFA Farmer Services range from testing farmers’ milk, feed, soil, and water, sourcing energy, and supplying milking equipment to selling farm insurance and holding farm operating loans and other debt.

  7. Through National Milk Producers Federation (NMPF), Defendants control the dairy policies and market access of U.S. dairy farmers regardless of whether they are DFA members.

  8. NMPF’s membership comprises substantially all U.S. dairy cooperatives and includes Dairy Farmers of America as well as regional cooperatives Agri-Mark (850 farms), Associated Milk Producers (2,000 farms), California Dairies (400 farms), Cayuga Milk (30 farms), Ellsworth Cooperative Creamery (450 farms), Foremost Farms (1,000 farms), Land O’Lakes (1,850 farms), Lone Star Milk Producers (120 farms), Maryland & Virginia Milk Producers (930 farms), Michigan Milk Producers Association (1,300 farms), DFA member cooperative Mount Joy (316 farms), Prairie Farms (900 farms), Southeast Milk (140 farms), and United Dairymen of Arizona (69 farms).

  9. Mr. Randy Mooney is Chairman of the Board of Dairy Farmers of America. Mr. Mooney is also Chairman of the Board of National Milk Producers Federation.

  10. DFA’s Chief Executive Officer, Chief Financial Officer, Senior Vice President of Fluid Milk Marketing, Senior Vice President of Government, Industry, and Public Relations, and 13 DFA board members hold 18 of the 36 seats on the NMPF Board of Directors. By comparison, runner-up California Dairies holds 5 board seats.

  11. By all measures, those who manage DFA manage much of the U.S. dairy industry.

 

HISTORICAL DEVELOPMENT OF THE ENTERPRISE

  1. Despite its statutory requirement as an agricultural cooperative to operate solely for the benefit of its members, DFA’s leadership began milk processing activities soon after the cooperative’s formation. These activities incentivized the cooperative to offer a lower price to farmers for their milk so that management could generate higher profits by marketing finished products.

  2. In relation to these activities, DFA suffered a judgment for misreporting its members’ milk quality at processing facilities in Wisconsin.

  3. Aside from symbolic and discretionary “equity” payments of several cents per hundredweight of milk shipped, processing and other profits are never returned and have never been returned to the farmer members.

  4. DFA’s leadership went on to obtain a stake in Southern Foods Group, then the third largest milk processor in the country. In 2000, Southern Foods Group merged with Suiza Foods, the nation’s largest milk processor, and the DFA stake in Southern Foods Group became an interest in Suiza. In 2001, Suiza merged with Dean Foods, the nation’s second largest dairy processor. Suiza was renamed “Dean Foods,” and DFA traded its Suiza stake through the merger for a 33.8% interest in the new Dean Foods (hereafter “Dean Foods” or “Dean” inclusive of all affiliates, subsidiaries, and related entities).

  5. In December 2001, DFA’s leadership traded this interest to Dean in exchange for a $40 million note. This note would accrue interest at an undisclosed rate up to a total of $96 million, but would expire in 2021 with no obligation to pay any portion of the principal or interest – provided that Dean did not terminate or materially breach its agreements to source its milk supply through DFA prior to that date. Those agreements required Dean to purchase much of its milk requirements from DFA at DFA’s price.

  6. DFA’s leadership used its exclusivity rights to Dean’s nationwide network of processing plants to initiate mergers with these plants’ other supplier cooperatives, both in the name of “efficiency” and via illegal sole-supply agreements which created local monopolies in favor of DFA. In the decentralized and highly competitive dairy industry of those days, this approach rapidly gained ground as small local cooperatives joined DFA in order to maintain access to their local processing plants.

  7. DFA’s sales personnel used predatory pricing to eliminate competition from smaller cooperatives and secure control of milk plants in Midwestern states.

  8. DFA’s leaders formed and directed nationwide marketing agency Dairy America with California Dairies and other cooperatives. From 2002 to 2006, Dairy America marketed 75% of U.S. nonfat dry milk powder and misreported prices to the USDA such that approximately $600 million was diverted from farmer milk prices to cooperative profits.

  9.  DFA’s leaders joined with Northeast cooperatives Dairylea and St. Albans to create Dairy Marketing Services (DMS), another nationwide marketing entity, in 1999.

  10. During the mid-2000s under DFA’s new CEO Rick Smith, a lawyer from Brooklyn, New York, DFA’s managers used DMS to take sole-supply agreements to a new level. DFA managers presented smaller local cooperatives with the choice of using a single entity (DMS) to handle trucking, testing, processing, and marketing their members’ milk – or of trying to compete with DFA and DMS for access to processing facilities.

  11. By 2011, access to processing facilities in the Eastern United States outside DMS was nonexistent for most small cooperatives. When Dean Foods agreed to purchase a portion of its Northeast milk from non-DFA/DMS sources as part of an antitrust settlement in Vermont, DFA’s CEO Rick Smith and DFA’s attorneys personally coerced the plaintiffs’ attorneys into dropping that part of Dean Foods’ settlement.

  12. In 2014, DFA’s leadership merged the cooperative with Dairylea, one of the Northeast’s oldest cooperatives. Dairylea owned DairyOne, LLC, the Northeastern United States’ leading milk testing lab. Since dairy farmers are paid based on their milk quality test results, DFA’s leadership now had a new means of managing the cooperative’s profit – one which was used to punish several farmers who spoke up with various concerns.

  13. In 2019, DFA’s leadership merged the members of Vermont’s St. Albans Cooperative Creamery into DFA - along with Vermont’s historical star creamery. Of the original three cooperatives that had formed DMS, only DFA remained.

 

FIRST PREDICATE ACTS OF EXTORTION

  1. Due to DFA’s size and breath of operations, its managers possessed significant power over milk market participants and individual farmers nationwide.

  2. Through its historical development of milk test tampering, arbitrary use of farm health inspections, and control of local milk market access, DFA’s leadership was able to instill fear into farmers industrywide, including members of “independent” cooperatives which marketed their milk through DMS. This conduct secured silence, compliance, and continued milk supply at below-market prices from farmers.

  3. DFA leaders’ ability to extort compliance was furthered by their control of NMPF as discussed above. NMPF administers the National Dairy “Farmers Assuring Responsible Management” (FARM) Program, under which cooperative leadership provides for on-farm inspections relating to areas including animal care and veterinary retention practices, employment and workforce development, and environmental impact.

  4. 98% of the U.S. milk supply is subject to the FARM inspection program. FARM standards are both voluminous and continuously evolving. Substantially all U.S. dairy farms are out of compliance with one or more FARM standards.

  5. If producers do not maintain FARM compliance, they can be barred (if the standards are enforced) from selling their milk regardless of whether they are DFA members or members of other cooperatives. DFA’s managers enforce FARM standards and inspections arbitrarily as a means of instilling fear in dissidents and solidifying its comprehensive control over the industry.

  6. Despite FARM’s stated purpose of using outside third-party inspectors for verification, DFA and other cooperatives subject to DFA’s control have their own in-house inspectors conduct both FARM inspections and routine non-FARM inspections.

  7. When DFA/DMS needed to be able to show farmer support in order to get its own antitrust settlement to clear federal court in Vermont in 2016, DFA’s managers sent these same inspectors to the farms with an offer: sign in support of our settlement or lose your milk market.

  8. DFA/DMS employees pressured dairy farmers with threats including; that if these dairy farmers did not sign in support of DFA’s settlement, they should consider switching to organic milk production; that they should start looking for new processing plants; that they could be dismissed from their cooperatives; and that their cooperatives could lose access to DMS-controlled milk markets.

  9. Over 1,200 farmers from DFA, St. Albans, Dairylea, small regional cooperatives which marketed their milk through DMS, and even “independent” dairy farmers selling through DMS to Kraft Heinz Company signed DFA’s form letters, and the suit against DFA was settled and closed.

 

SECOND PREDICATE ACTS OF EXTORTION

  1. Emboldened by the settlement of the Northeast and earlier Southeast antitrust actions, DFA’s leadership used the DFA/DMS’s market control to make it impossible for a mid-sized plant to find milk outside of DFA/DMS, or for an individual farmer or small cooperative to get their milk to such a plant. The DFA/DMS bloc was highly effective at merging small cooperatives into DFA, and in 2017 DMS ceased operations.

  2. DFA’s managers gave remaining independent farmers and cooperatives who had shipped through DMS a choice – market your milk through DFA and agree to a “market adjustment” deduction from your farmers’ pay price, or lose market access.

  3. For one Midwest cooperative, this market adjustment was over 25% of its farmers’ $16 per-hundredweight milk price. A Northeast farm had to choose between losing $2.50 of its $12 per-hundredweight price or having no market access for its milk.

  4. By comparison, the U.S. Department of Agriculture’s Economic Research Service estimated the 2018 milk per-hundredweight cost of production at $21.74, including land, equipment, and labor put in by unpaid owner/operator farmers.    

  5. DFA’ managers also used their cooperative’s position as the primary supplier of certain regional dairy processors to dictate the terms on which these processors could accept milk from smaller cooperatives or individual farmers. Thus, without exercising direct ownership, DFA’s managers controlled substantially the entire milk market.

  6. One Kentucky dairy farm switched milk buyers three times in an attempt to survive financially by staying out of DFA’s control. A New York farm switched cooperatives twice for the same reason. When the DFA cartel absorbed their new cooperatives leaving them unable to switch again, both families had no choice but to liquidate during depressed market conditions, losing thousands of dollars in dairy herd value and watching many of their milking cows leave directly for slaughterhouses.

  7. After DFA’s absorption of Vermont’s St. Albans cooperative in November 2019, Agri-Mark and its 850 members became the only significant alternative cooperative in the Northeast. Agri-Mark was and is forbidden from taking on members from DFA without DFA’s express permission.

  8. Using this control, DFA’s managers were able to charge milk buyers over-market prices for milk products while paying farmers less than the cost-of-production. DFA’s managers were able to continue doing so because substantially all new entrants were and are barred from the marketplace: prospective dairy farmers have no viable option to sell milk besides DFA, and prospective milk processors likewise have no other viable option to buy milk.

  9. Numerous dairy farmers, regardless of whether they are members of DFA or members of smaller “independent” cooperatives, were and are afraid to raise any concern regarding any of this conduct for fear of DFA reaching through their cooperative and terminating their milk market. Since DFA’s managers had already eliminated other milk marketing options, these farmers had no choice but to silently accept milk prices and comply with demands which a decade ago they would have scoffed at.

  10. A limited number of farmers were able to obtain better milk prices by selling milk directly to Dean Foods Company. One Dean Direct farmer compared notes with his DFA neighbors and found that Dean Foods was paying substantially more for his milk than DFA was paying its members for theirs.

 

THIRD PREDICATE ACTS OF EXTORTION

  1. Using its all-but-complete control over the national USDA Grade A raw milk supply, DFA’s management presented Dean Foods, now the nation’s largest dairy processing company and direct to store distributor of dairy products, with a demand of its own – pay DFA over-market prices for milk in order to maintain access to 60% of Dean Foods’ milk supply. Dean Foods was bound by its market share agreement of 2001 and at any rate had no prospect of obtaining such milk volume elsewhere.

  2. By late 2019, with cost of sales rising over 80% (while on-farm milk prices struggled well below cost-of-production), Dean Foods was facing a liquidity crisis.

  3. On November 12th, 2019, Dean Foods filed for chapter 11 bankruptcy[1], listing DFA as by far its largest trade creditor. DFA was owed $173 million; Land O’ Lakes (the runner-up dairy cooperative creditor) was owed $8 million.

  4. During the period of events directly leading to the Dean Foods bankruptcy filing, DFA was at substantially all times Dean Foods’ primary supplier of USDA Grade A raw milk. During such period, the amounts paid for USDA Grade A raw milk were at substantially all times Dean Foods’ primary input cost.

  5. During such period, the prices which DFA charged Dean Foods for its milk were consistently over-market relative to the prices charged by Dean Foods’ other smaller milk suppliers.

  6. During such period, Dean’s cost of sales rose continually both in dollar terms and as a percent of sales. This continual increase occurred regardless of fluctuations in the on-farm milk price which DFA paid farmers for the milk.

  7. During this time, DFA’s leadership knew that its charges were causing a liquidity crisis for Dean Foods.

  8. When Dean announced its bankruptcy filing, it also announced that it was in advanced discussions with DFA to transfer substantially all of its assets.

  9. Gary Rahlfs experience included serving on PepsiCo’s senior management in 2015 when PepsiCo turned over a $206 million plant in Batavia, NY to DFA for thirty cents on the dollar following the bankruptcy of a PepsiCo joint venture with Quaker Muller in dairy processing. In May 2019, Gary Rahlfs entered as Dean Foods’ SVP, Finance and Strategy. In September 2019, Rahlfs was appointed as Dean’s CFO, a position he held for the duration of the bankruptcy and sale to DFA.

  10. Despite the availability of financing for an out-of-court restructuring prior to the bankruptcy filing, Dean expressed no real interest in restructuring to avoid bankruptcy. Publicly stating concern over liquidity issues and potential loss of milk supply for its customers, Dean chose the bankruptcy to transfer the assets to DFA free and clear of claims on an expedited schedule.

  11. Dean Foods had no alternative source for the volume of milk which DFA provided during the period. Even had Dean located an alternative source for the volume of milk which DFA provided during such period, Dean could not materially breach or terminate its milk supply agreement with DFA without incurring a $96 million penalty. Had Dean continued operating into 2021, the penalty would have expired without any obligation to pay any portion of the principal or interest.

 

INJURY AND DAMAGES

  1. On April 3, 2020, Dean surrendered substantially all of its assets to DFA, leaving its bankruptcy estate bordering insolvency and its shareholders (including Plaintiff Shareholders), bondholders, and unsecured creditors – including USDA-pooled farmers who had sold milk to Dean prior to the bankruptcy – with hundreds of millions in losses.

  2. DFA was financially strong enough to undertake this purchase due to income and investments obtained through extortion of milk prices from dairy farmers (including Plaintiff Dairy Farmers). To purchase these assets, DFA’s leadership drew $433 million collateralized by dairy farmers’ future milk checks.

 

ONGOING EXTORTION

  1. In a mere two decades, DFA’s leadership extorted their way to control as both the exclusive market for dairy farmers’ raw milk and the exclusive source of finished dairy products for retail in numerous areas of the country – taking their current level of control at the worst possible time for both dairy farmers and retail consumers due to the coronavirus pandemic.

  2. Basic economics tells us that, even when operated by lawful means, a monopolist produces less of a good than is needed and charges more than is warranted. At our current moment of greatest need for locally available foods, dairy products are transported greater distances and command higher prices than at any time in our nation’s history – while dairy farmers are facing insolvency and liquidation in record numbers.

  3. Faced with this unfolding disaster, NMPF with its DFA representatives at the helm issued a proposal on April 6, 2020 that the USDA provide loans, loan forgiveness, and direct purchases to subsidize milk production and sale. Through fear of industry collapse and consumer shortages, Defendants are seeking to secure taxpayer subsidy for their unlawful course of conduct.

  4. In contrast, dissolution of the DFA enterprise and divestiture of the assets it now holds are the remedies prescribed by law. These remedies offer a fresh start for the critical economic and food supply infrastructure destroyed by the milk cartel.

  5. Following Defendants’ conduct and the lack of legal enforcement, the unfortunate chain of events which our dairy supply chain is now suffering was as predictable as it is regrettable. To render these events mere lessons of history, rather than a new state of affairs, judgment must be executed on Plaintiffs’ behalf. Should such judgment fail, the rest of the nation stands next in line to suffer Defendants’ extortion at the supermarket dairy cooler.

 

JURY DEMAND

Wherefore, Plaintiffs demand a trial by jury pursuant to Fed. R. Civ. Pro. 38(b) on all questions so triable.

 

PRAYER OF RELIEF

Wherefore, Plaintiffs demand judgment as follows.

  1. Adjudge and declare Defendants liable for damages for racketeering pursuant to 18 U.S.C. 1964.

  2. Order the receivership and divestiture of all processing operations or interests owned or controlled by DFA or its predecessors, successors, subsidiaries, affiliates, and insiders including any and all past and present officers, directors, agents, and controlling persons of such entities.

  3. Order DFA dissolved, with any equity returned to its member farms and said member farms released from any and all obligation to DFA or its predecessors, successors, subsidiaries, affiliates, parties to contract, insurers, members, owners, attorneys, and any and all past and present officers, directors, employees, agents, and controlling persons of such entities.

  4. Award damages, costs, and attorneys’ fees against all Defendants jointly and severally, to Plaintiffs respectively and to the maximum extent permitted by law.

  5. Award such further relief as the Court shall deem just and proper.

 

Dated:           West Edmeston, New York

May 6, 2020

Respectfully submitted,

Joshua D. Haar

Law Offices of Joshua D. Haar

1495 Paddock Road

West Edmeston, NY 13485

Tel. 315-825-8106

jhaar@fdwcpa.net

Counsel for the Plaintiffs

 

[1] Dean Foods and its related entities who collectively filed for bankruptcy (consolidated into a single action) were: Southern Foods Group, LLC; Dean Foods Company; Alta-Dena Certified Dairy, LLC; Berkeley Farms, LLC; Cascade Equity Realty, LLC; Country Fresh, LLC; Dairy Information Systems Holdings, LLC; Dairy Information Systems, LLC; Dean Dairy Holdings, LLC; Dean East II, LLC; Dean East, LLC; Dean Foods North Central, LLC; Dean Foods of Wisconsin, LLC; Dean Holding Company; Dean Intellectual Property Services II, Inc.; Dean International Holding Company; Dean Management, LLC; Dean Puerto Rico Holdings, LLC; Dean Services, LLC; Dean Transportation, Inc.; Dean West II, LLC; Dean West, LLC; DFC Aviation Services, LLC; DFC Energy Partners, LLC; DFC Ventures, LLC; DGI Ventures, Inc.; DIPS Limited Partner II; Franklin Holdings, Inc.; Fresh Dairy Delivery, LLC; Friendly’s Ice Cream Holdings Corp.; Friendly’s Manufacturing and Retail, LLC; Garelick Farms, LLC; Mayfield Dairy Farms, LLC; Midwest Ice Cream Company, LLC; Model Dairy, LLC; Reiter Dairy, LLC; Sampson Ventures, LLC; Shenandoah’s Pride, LLC; Steve’s Ice Cream, LLC; Suiza Dairy Group, LLC; Tuscan/Lehigh Dairies, Inc.; Uncle Matt’s Organic, Inc.; and Verifine Dairy Products of Sheboygan, LLC.