Legal implications in coordinating activities of bargaining associations


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Legal implications in coordinating activities of bargaining associations
Series Title:
United States. Farmer Cooperative Service. Information ;
Physical Description:
13 p. : ; 23 x 10 cm.
Volkin, David, 1916-
United States -- Farmer Cooperative Service
Farmer Cooperative Service, U.S. Dept. of Agriculture
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Agriculture, Cooperative   ( lcsh )
Collective labor agreements -- Agriculture   ( lcsh )
federal government publication   ( marcgt )
non-fiction   ( marcgt )


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Cover title.
General Note:
"June 1969"--p. 2 of cover.

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University of Florida
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aleph - 028028335
oclc - 64051411
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Farmer Cooperative Service
U.S. Department of Agriculture
Washington, D.C. 20250
Farmer Cooperative Service conducts research;
advises directly with cooperative leaders and
others; promotes cooperative organization and
development through other Federal and State
agencies; and publishes results of its research,
issues News for Farmer Cooperatives, and other
education material.
This work is aimed (1) to help farmers get better
prices for their products and reduce operating ex-
penses, (2) to help rural and small-town residents
use cooperatives to develop rural resources, (3) to
help these cooperatives expand their services and
operate more efficiently, and (4) to help all Ameri-
cans understand the work of these cooperatives.

FCS Information 63 June 1969

Forms of coordinated activities .... 2
I. Integrated service activities .... 3
The federated route ....... 3
The merger route ........ 4
II. Advisory price committee .... 5
The federated route ....... 5
The merger route ......... 6
III. Price sanction committee ..... 6
The federated route ....... 6
The merger route ......... 7
IV. Coordinated sales .......... 8
The federated route ....... 8
The merger route ......... 9
V. Operating a single pool ...... 9
The federated route ....... 10
The merger route ......... 10
Federal income tax implications .. 10
Other observations by attorneys 11

Legal Implications in

Coordinating Activities of

Bargaining Associations

by David Volkin
Cooperative Development Program
A challenge of particular importance to bargaining
associations interested in coordinating their activities
is to see if they can create a sound legal basis for such
action. Objective of such coordination falls right in line
with growers primary objective in first setting up a
bargaining association-that is, to provide themselves
with leverage to improve the level of prices they receive.
Such further coordination can range all the way from
a simple form of informal cooperation by two or more
cooperatives in one local market to the formal and
legal merger or consolidation of two or more associa-
tions. Or as an intermediate step, bargaining associa-
tions might first work out a formal contractual arrange-
ment to use the services of a common representative or
broker in a market and then, second, form a separate
corporation to do their marketing or sales function.
This publication focuses primarily on the broad legal
aspects of five types of coordinated activities bargaining
associations can consider. It does not go into the feasi-
bility of mergers from the standpoints of economics
and marketing or of the human elements involved.
Nor, except in a general way, does this report cover
detailed rules of the game that may be included in
relevant contracts, agreements, or organization papers
that authorize such coordinated efforts and that protect
the rights of members under such arrangements.
These technical matters are best left to management
and legal counsel. They would be familiar with the
peculiar operating problems and economic objectives
of such coordinated efforts.
The ultimate direction bargaining associations take

should be chosen after the benefit of competent legal
counsel on such matters as:
1. Basic statutory authority of the respective organi-
zations to enter into a merger, consolidation, or other
form of coordinated action.
2. Preparing plans and agreements, as well as guid-
ance through the mechanical and technical procedures,
including membership approval, where necessary, of
such plans and agreements.
3. Preparing new or revised member-association
agreements as well as processor-association agreements.
4. Compliance with tax, antitrust, blue sky, agri-
cultural fair practices, and other laws.
5. Assurance that cooperative character is main-
tained through provisions in the organization papers
dealing with such matters as the producer and patron-
age status of members, democratic control, service at
cost, and methods of financing.

Forms of Coordinated


In bargaining associations, loss of identity often
holds back membership approval of merger proposals.
And if the associations bargain for different commodi-
ties, their respective members may want to retain a
form of organization structure that retains degrees of
identity, flexibility, and independence in handling indi-
vidual commodities. This is necessary to satisfy the
growers of these commodities. But the form the organi-
zation takes must contain enough merged activity to
lead to more effective selling and improved returns.
Each of the five possible forms discussed in this
report is progressively tighter in terms of management-
membership control. The five are: (1) Integrated service
activities, (2) advisory price committee, (3) price sanc-
tion committee with decisional authority, (4) coordi-
nated sales, and (5) operating a single pool.

All five may be carried out under alternative mem-
bership structures, either federated or centralized mem-
Under a federated membership, present associations
would maintain their corporate identities.
Under a centralized membership, present organiza-
tions lose their identities and their grower-members
become direct members of a surviving or new bar-
gaining association.


Integrated Service Activities
The first form of coordinated activity includes in-
tegration of all or most service activities. These include
housing, secretarial, office equipment and facilities, field
staff, economic and statistical services, public and legis-
lative relations, accounting and auditing services, and
other similar services.
However, bargaining for price and other terms of
trade for each product would be handled, as they are
now and as they were in the past, by the present or-
ganizations in a federated organization, or by com-
modity sections within a centralized organization with
full and independent authority to carry out the bar-
gaining function.
The question is: Are there legal implications if these
service functions are performed on an integrated basis
by a new federated organization or by a new entity
emerging as a result of a merger or consolidation but
with the bargaining function performed by commodity

The Federated Route
The bargaining associations may form and compose
the membership of a new cooperative--one we might
call a Service Cooperative-to perform the above-
named services. In that case, some question may arise
on whether the new cooperative would qualify under
the Capper-Volstead Act.
The Capper-Volstead Act allows farmers to act
together in cooperative marketing associations without

the associations as such being held to be "illegal com-
binations" or "conspiracies in restraint of trade" as
they otherwise might have been in pre-Capper-Volstead
The Capper-Volstead Act provides that agricultural
producers may act jointly to process and market the
products of its members as long as the association is
operated for the mutual benefit of the members and
certain voting and other requirements are met.
There is a chance the Service Cooperative might not
be considered a marketing cooperative. In this event,
Section 6 of the Clayton Act might be the authority
that confirms its legal right to exist and "lawfully"
carry on its "legitimate objects," but the Section would
not exempt it from the anti-trust laws.
Section 6 of the Clayton Act still performs an im-
portant function in legitimizing the existence of farm
supply and service cooperatives.1

The Merger Route
To maintain full independence of the bargaining
function by commodity sections should associations
merge, the pattern followed by a Midwest dairy co-
operative might be considered.
The bylaws of the dairy co-op provide for a district
as well as a central board of directors. Growers in
separate commodity districts elect each district or
commodity section board. The district board derives its
authority from the association's bylaws. These provide
full independence within the realm of the powers and
authorities described in the bylaws. The commodity
section board of the merged organization could have
the authority to approve the form and contents of a
marketing agreement between the association and the
An alternative approach, if acceptable to commodity
section directors, would give the central board authority
to delegate the bargaining function to commodity sec-
tion directors. The central board can revoke delegations

1 Mischler, R. J., Agricultural Cooperative Law, Rocky Moun-
tain Law Review, 1958.

of authority, however, thus destroying the full inde-
pendent character of the commodity section board.


Advisory Price Committee

The second form of a coordinated activity, patterned
after the first, would provide fully integrated service
functions with independent bargaining functions.
The modification for the second form would be an
overall price committee to review the proposed price
offers of each commodity section. The committee would
have the authority to suggest, not require, changes in
the proposed price offers and other proposed terms of
trade if they are judged to be out of line.

The Federated Route
An added function of the Service Cooperative in the
federated route is that the price committee would serve
in a purely advisory capacity. Bylaws of the Service
Cooperative could provide for the formation, purpose,
qualifications of its membership, and mode of opera-
tion for such a committee.
In the first example of coordinated activity, we
assume that the Service Cooperative is not a Capper-
Volstead cooperative.
The Agricultural Marketing Act of 1926 confirms
the legality of member associations of the federation
cooperating with the Service Cooperative in establish-
ing prices even if the service organization may not meet
Capper-Volstead requirements.
The 1926 Act provides that agricultural producers
and their associations might legally acquire and ex-
change past, present, and prospective pricing, produc-
tion, and marketing data "by direct exchange between
such persons, and/or such associations or federations
thereof, and/or by and through a common agent cre-
ated or selected by them." (Emphasis supplied.) The
common agent does not necessarily have to meet
Capper-Volstead requirements.

The Merger Route
An overall advisory, price committee established
within a merged organization would not appear to
present any legal problems. This is because all price
review discussions would be within the organization.


Price Sanction Committee

The third form of coordinated activity would be
patterned after the first and second except that the
price committee would have the authority to require
changes in price offers proposed by the commodity
sections if the price offers, or other proposed terms of
trade, are judged to be out of line. The veto power of
the overall price sanction committee would be duly

The Federated Route
Under these conditions, processors would still nego-
tiate directly with the bargaining associations. It would
be of little or no consequence to a processor if voluntary
or mandatory price committees were used by the
bargaining associations in determining price and trade-
term offers.
A nonmember bargaining association may want to
avail itself of the economies of scale derived from the
use of the Service Cooperative. This could be accom-
plished through a contractual relationship with the
Service Cooperative. As a matter of policy, however,
such services may not be available except to federated
The question thus arises: Could the nonparticipating
bargaining association have reason to complain that its
competitive position is being jeopardized because it is
not able to have the economies of scale that the Service
Cooperative affords?
The answer to this question appears to be no. The
objective of the Service Cooperative would be to achieve

economies of scale. The price sanction function may
give the Service Cooperative greater bargaining power
by improving price determinations. The nonpartici-
pating bargaining association would have no basis for
complaint if the federated cooperative could clearly
establish that its motives have always been to improve
its members' returns-not to foreclose competition or
restrain trade.
For example, if they became dissatisfied with their
association, the members of the nonparticipating bar-
gaining cooperatives could voluntarily terminate their
membership and, if eligible, reaffiliate with a member
of the federated group. The nonparticipating coopera-
tive would have no basis to complain if the action
complied with either Federal or State agricultural fair
practice laws.

The Merger Route
An overall price sanction committee, with power to
require changes in price offers and terms of trade
proposed by commodity sections, would derive its
power from agreements in the organization papers.
Members of the merged organization obviously would
have to abide by their own rules of the game.
Because a sanction committee would have this power
to make changes, somewhat less than full independence
in price bargaining would be maintained by the com-
modity sections. Over the long term, perhaps the price
sanction committee might ultimately assume the price
bargaining function.
In anticipation of such a development, perhaps some
growers might vote against the merger proposal. Thus,
the problem of compensating dissenting members must
be anticipated and dealt with according to the State
Another problem might be the insistence by some
growers that because a proposed merger would create
a new legal relationship between growers and the
surviving association, a new membership agreement
would have to be signed.
This problem can be anticipated and handled in the
merger agreement by a provision that assures continu-

ance of all membership and sales agreements held by
the constituent associations with their respective mem-
bers before the merger. Moreover, the statute authoriz-
ing the merger may expressly provide for continuing
the agreement.
The merger agreement could provide for adopting
a uniform membership agreement for all members or
for a certain class or classes of members such as in
commodity sections. The agreement would be effective
when executed by the surviving association and its
respective members.
Laws in most States provide that a surviving organi-
zation or consolidation succeeds "without other trans-
fer, to all the rights and property of each of the con-
stituent corporations, and shall be subject to all the
debts and liabilities of each, in the same manner as if
the consolidated or surviving corporation had itself
incurred them."
The court's decision in Stevens v. Selma Fruit Com-
pany, (1912) 123 P. 212, 18 C. A. 242, held that
contracts are assumed by the purchasers of a business
when the purchase contract includes a provision where-
by the buyer agrees to assume all contracts of the sell-
ing company. The Selma case, however, related to an
acquisition rather than a merger.


Coordinated Sales
The fourth type of coordinated action by bargaining
associations is coordinated or package sales. Prices
would be negotiated as described in the second or third
suggested forms of organization, but quantities would
be coordinated through negotiations with processors.

The Federated Route
Section 3 of the Clayton Act makes package or
coordinated sales illegal "where the effect may be to
substantially lessen competition or tend to create a
2 Backman, Jules, Price Practices and Price Policies, The
Ronald Press Co., New York, N. Y. 1953.

For example, if one of the bargaining association
members of the federated organization-the X product
group-attempted to require a potential processor to
buy or bargain for certain quantities of product Y or
product Z, as a prerequisite for a contract to purchase
product X, a question could be raised on whether the
product X group would be complying with Section 3
of the Clayton Act.
If the buyer refused to buy or bargain with the
product Z grower bargaining group, thereby shutting
off his supply of product X, he may have a basis to
bring suit. Under his operating circumstances, he could
claim he was closed out of the product X market.

The Merger Route
Even though administering coordinated sales is easier
in a merged organization than a federation, there is
still the problem of possible violation of Section 3 of
the Clayton Act with the merger route.
For example, approximately 99 percent of all cling
peaches are grown in California, but tomatoes are
grown over widespread areas of the country. Thus, a
particular canner's refusal to buy or bargain with a
tomato bargaining division could possibly have the
effect of shutting off his cling peach supplies. Even if
a canner could get adequate supplies of cling peaches
from nonmember growers, there is a question about the
legality of coordinated sales.


Operating a Single Pool

The fifth, and final, type of merged organizational
activity assumes the existence of an overall price sanc-
tion committee with a specific authority. This committee
could require changes in the price offers or terms of
trade proposed by commodity bargaining sections under
any form of formal membership structure if it considers
these out of line.

In contrast to multiple or commodity pooling-a
system previously considered as the usual method for
making payments to producers-it is assumed that
returns to growers are based on a single-pool concept
comparable to that used by a canning cooperative.
For example, all commodities marketed by the or-
ganization are handled in one pool for final returns
made to growers.

The Federate Route
In the single-pool concept, the federation's board of
directors has the authority to establish the single pool.
This authority is generally found in the bylaws and
should be stated in membership agreements so members
fully understand. No particular legal problem precludes
Either the single-pool concept or the vesting of such
authority with the federation's board of directors.

The Merger Route
Giving the central board authority to establish a
single pool raises no legal problem. As long as members
and nonmembers, if any, are treated equitably, there
should be no federal income tax problem in either a
single or multiple pool operated under a federated or
completely merged organization.

Federal Income Tax Implications

Bargaining associations obtain financing through per-
unit capital retains and deductions for operating pur-
poses. Under per-unit retain financing, the patron agrees
to furnish capital based on the dollar value, or physical
volume, of products marketed through the cooperative.
These amounts are reflected in the association's net
On the other hand, deductions from marketing pro-
ceeds for operating purposes, as well as service charges
paid by processors, comprise a bargaining association's
primary income. After paying all operating expenses,

the balance is distributed, either as patronage refunds,
or retained.
If paid as patronage refunds, special rules for tax
treatment are given under Subchapter T of the Internal
Revenue Code (IRC) of 1954. In general, these rules
provide that if the patron consents, he is taxed. If not,
the cooperative pays a tax at the corporate level be-
cause it gets no current deduction for patronage re-
Amendments to Subchapter T made in 1966 make
per-unit capital retains subject to income tax treatment
at either the cooperative or the patron level similar to
that applicable to patronage refunds. Under the 1966
amendment, a cooperative pays the tax currently unless
its per-unit retains are evidenced by certificates that are
qualified under the law.
The patron is required to pay the tax if he gets a
qualified certificate. The certificate is qualified only if
the patron agrees to include in his gross income the
face amount of the certificate received. If he gets a
nonqualified certificate, he reports the amount received
only when it is redeemed, sold, or otherwise dis-
posed of.3
Under any form that joint or coordinated efforts may
take, association officials should clearly understand
Subchapter T as well as Section 521 requirements of the
IRS Code. They must understand the detailed require-
ments as a basis for their decisions if the bargaining
association or its members will pay Federal income
taxes on net operating savings generated by the co-
operative or the bargaining association, or its members
will pay Federal income taxes on per-unit capital

Other Observations By Attorneys

The preceding discussion primarily concerns the anti-
trust implications of the various forms of potential
coordinated activity. It is in these antitrust areas that
processors and canners would seek legal redress if
8 Volkin, D. and Neely, D. M., Tax Laws Changed on Capital
Retains, Reprint 328, News for Farmer Cooperatives, March,

growers make efforts to strengthen their bargaining
power through their bargaining associations.
We reviewed these functional alternatives with some
attorneys for bargaining associations. They could not
be too specific about the legal implications involved
for essentially two reasons.
First, the discussions had no specific organizational
or operational framework as a basis for analysis. Sec-
ond, the law itself is not clear as to the degree of
coordinated action that may be considered by the
Department of Justice or by the processors themselves
as an unlawful monopoly or conspiracy to monopolize.
In discussing the various kinds of coordinated activi-
ties, their responses showed a variety of concerns, not
all in antitrust areas. Their observations are summarized
as follows:
1. The complete merger of bargaining associations
would not violate State or Federal antitrust laws. Prob-
lems could arise, however, if the resulting or surviving
organization engaged in anticompetitive or predatory
practices. An example of a predatory practice would
be the refusal to sell to a processor for the express pur-
pose of driving that firm out of business.
2. Attaining substantial, even monopoly, control
over the marketing of certain agricultural products
should not create any problem so long as such control
does not have the effect of unduly enhancing prices or
causing the association to engage in predatory practices.
3. The Supreme Court's December 18, 1967, de-
cision in Case-Swayne Co. v. Sunkist Growers, Inc.,
affirms the need for cooperative marketing organizations
to periodically check their membership rolls to make
sure nonproducersl are not included if Capper-Volstead
requirements are to be met.
4. A merger agreement should provide for an equi-
table exchange of equity interests. The principle of
equity should especially be preserved in any kind of
pooling arrangement.
5. The single pool concept creates no legal problem
if the pooling methods are appropriately authorized.

6. Differences in marketing outlets, market order
protection, and pooling practices all contribute to plac-
ing grower-members of the respective bargaining co-
operatives in different legal relationships with their
Because membership agreements reflect these differ-
ences, one attorney expressed the strong opinion that
if a statutory merger occurred, a complete new sign-up
of members would have to take place. He believed his
view is strengthened because the present membership
structure of associations he represents include county
or area local associations that are either bargaining
cooperatives or cooperative shipping houses seeking
processing outlets. These association members further
complicate the problem and emphasize the need for a
new membership agreement.
7. Methods of financing, revolving out of capital
contributions or retained savings, maintaining allocated
or unallocated reserves, and related Federal income tax
problems are all matters that must be considered.


3 1262 08500 6061

Other Publications Available "

Farmers Rights Under the Agricultural Fair Practices
Act, Information 60.
Collective Bargaining for Poultry Feed Prices-{ali-
fornia, General Report 141. D. B. DeLoach and
J. A. Maetzold.
Cooperative Bargaining by Farmers-A Selected Bibli-
ography, General Report 123. Wendell M. McMillan.
Improving Farmers' Income Through Cooperative Bar-
gaining, Information 41. Wendell M. McMillan.
Some Facts About Fruit and Vegetable Bargaining
Co-ops, Information 11. Wendell M. McMllan.

A copy of each of these publications may be obtained
upon request while a supply is available from -
Farmer Cooperative Service
U.S. Department of Agriculture
Washington, D.C. 20250

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