BY ALAN BORST
Ag Economist USDA Rural Development
Rural Business-Cooperative Service
What tools allow businesses - in
particular, cooperatives - to work together to market products overseas? As
businesses increasingly compete in a global economy, it's critical they
understand the "ins" and "outs" of U.S. Regulations that can help them avoid
antitrust litigation and capture higher export earnings.
Agricultural cooperatives have joined with cooperative- and investor owned
competitors to form joint exporting groups throughout the past 100 years.
These export groups have been able to capture economies of size, to spread
export marketing risks and costs across all members, and to increase each
groups ability to deal with foreign importers which are frequently organized
as buyer cartels or state trading enterprises. However, such cooperative
efforts may be curtailed or not even undertaken because of the threat of
costly antitrust litigation.
Possible antitrust plaintiffs can include competitors who are inside the
group, farmers who supply either non-member firms, trading companies or other
marketing intermediaries which have some commercial relationship with the
group, state attorneys general, Federal antitrust regulations, or even
disgruntled firms from within the group. The threat of antitrust litigation is
serious if the case is weak, because the lawsuits are among the most costly.
Cooperative executives must consider the time and resources that could be tied
up and the prospect of paying triple damages is they are unsuccessful in
defending a lawsuit. Nearly all the antitrust cases are filed by private
plaintiffs.
Export Trade Certificate of
Review
U.S. policy makers have long recognized the benefits of horizontal export
coordination on member export earnings and competitiveness, and they have
promoted it through the granting of limited antitrust exemptions-- notably the
Webb-Pomerene Act (WPA) of 1918. Agricultural cooperative members are also
covered by the Capper-Volstead Act (CVA) of 1922, which grants limited
protections against antitrust litigation in both domestic and foreign joint
marketing operations. By the early 1980's, U.S. policy makers had concluded
that the WPA protections were inadequate, and thus passed the Export Trade
Certificate of Review (COR) antitrust pre-clearance program as Title III of
the Export Trading Company Act of 1982.
The COR program is administered by the U.S. Department of Commerce's Office
of Export Trading Company Affairs.
Certificates are issued by the Secretary of Commerce, with the concurrence of
the Attorney General. This program allows the U.S. exporters to submit
specific joint export plans to Commerce and the U.S. Department of Justice's
Antitrust Division. Certified firms or associations are provided with immunity
from federal and state government antitrust suits with regard to approved
export conduct. (It is important to note that the COR program does not protect
holders from foreign antitrust litigation.) In addition, certified exporters
receive the following procedural advantages related to private antitrust
actions.
- There is presumption that certified export conduct complies with U.S.
antitrust laws. Plaintiffs bear the burden of providing wether that the
agencies erred in their initial issuance of the Certificate or that
conditions have changed so that an originally correct Certificate is no
longer correct.
- If a Certificate holder is found liable, its liability is reduced from
treble to single damages for damages resulting from the certified export
conduct.
- If the Certificate holder prevails, it may recover attorney's fees.
- Finally, there is a shorter statute of limitations within which
plaintiffs can bring an antitrust action (relative to that found in other
U.S. antitrust laws).
Additional COR Advantages
Cooperative exporters seeking protection or clarity regarding antitrust
exposure have various options from which to choose, including the WPA, the CVA
and the Business Review Letter (BRL) programs at the Justice Department and
the Federal Trade Commission. Depending on the exporters' needs, the COR
program may provide the following additional advantages over some of the other
alternatives.
- WPA only covers joint exporters of goods, COR allows for coverage of
both goods and services.
- WPA is limited to export associations; COR immunizes over or more firms
in any organizational configuration.
- WPA associations are limited to exporting; COR exporters may conduct
import or domestic businesses, through only their export business is
covered.
- WPA is ambiguous leaning toward negative on exclusive contracting
arrangements; COR could immunize them.
- WPA is a general exemption; COR immunizes specific joint export
activities through a pre-clearance procedure, which provides greater
certainty.
- WPA, CVA, and BRL do not provide any of the procedural advantages
allowed for in COR coverage.
- BRL is a specific but non-binding statement of the Department of
Justice's position on reviewed conduct; COR pre-clearance is binding on the
Justice Department and other potential public plaintiffs (unless
circumstances have changed).
- CVA covers only joint marketing activity of farmers; COR potentially
covers any exporting firm, including investor-owned co-op competitors and
other related channel members.
The COR program is voluntary and there are no application fees. Although
many applicants use legal counsel, the application form is intended to be easy
to complete by the applicant, and the Office of Export Trading Company Affairs
is available to provide pre-application counseling to interested applicants at
no cost. Decisions on certification are done, except in extraordinary
circumstances, within 90 days from the day a completed application is
accepted. Analysts, economists, and attorneys from both the Commerce and
Justice Departments review and process the applications, with Commerce being
the contact point for the applicant. The process is intended to be
user-friendly and additional information from applicants is normally sought
through conference calls.
Protection at a Modest Cost
The COR program has been criticized for failing to meet inflated
expectations regarding its macroeconomic impact that surrounded its 1982
passage by Congress. But, critics are misguided if they assess the program's
success or value by whether it has had an impact on the trade deficit or U.S.
unemployment rates.
It is best to consider this program as one useful tool, among many,
available to U. S. Exporters. The success of any export venture depends on
business realities and the efforts export partners put into the venture.
Nevertheless, if the threat of antitrust liability is of any concern, the COR
program offers some certainty and protection at a relatively modest cost. It
should be noted that the costs to the government for running this program, are
likewise, modest (particularly when compared with the potential liability to
exporters using it). In addition, obtaining a COR sometimes serves as a
catalyst for renewed export activities by certificate holders.
Congress made agricultural exporters a major target group for this program.
In Title I, Section 102 (a) (5) of the Export Trading Company Act of 1982
Congress stated:
"The Congress finds that... although the United States is the world's
leading agricultural exporting nation, many farm products are not marketed as
widely and effectively abroad as they could be through export trading
companies."
An important target sub-group of these agribusinesses were agricultural
marketing cooperatives. In 1986, Janice Payt, attorney advisor at the Commerce
Department's Office of the Assistant General Counsel for Trade Development,
made the case in the Journal of Agricultural Taxation & Law that
cooperatives could benefit from the COR program to strengthen their market
power:
"It may be advantageous to organize an ETC (export trading company) as a
cooperative, and cooperatives can, as members, form or otherwise participate
in ETCs. Generally, cooperatives can use the ETC Act to obtain antitrust
protection not available under the CVA alone and can combine the two statutes
to obtain optimum protection for export activities... To obtain optimum
benefits from joint exporting, cooperatives may desire to enter into
arrangements with non-producers. Such arrangements fail to qualify for the CVA
exemption, inasmuch as the CVA requires all members of a
cooperative to be agricultural producers. For example, courts have held that a
non-producer processor is not an eligible agricultural producer within meaning
of the CVA... By using Title III certification, cooperatives can obtain
immunity for their export activities with non-cooperatives, while still
retaining the CVA exemption for domestic (and foreign) cooperative
activities."
Co-ops use antitrust pre-clearance
It should also be noted that, in the 1996 Farm Bill, Congress encouraged
the U.S. dairy industry to "establish and maintain one or more export trading
companies under the (ETC Act)" and authorized the Secretary of Agriculture to
provide his advice and assistance as necessary.
Agricultural marketing cooperatives have used the Export Trade Certificate
of Review antitrust pre-clearance program for many purposes. Over 40
cooperatives have been certified in 18 different export groups since the first
certificate was issued in 1983. Much has been written about the potential
benefits which COR offers to prospective joint exporters, while little has
been said about the experiences which certified firms have had with this
program.
A series of interviews were conducted with executives from cooperative
members of a majority of certified joint export marketing groups with
cooperative membership. Questions were asked about how COR pre-clearance
influenced their export grouping activities and what limits existed to
undertaking the certified conduct. Some cooperatives reported that
certification played a central role in enabling their export grouping venture
by resolving serious antitrust threats which would have otherwise stopped the
venture. Others reported that the certification was valuable as inexpensive
legal insurance, but not absolutely needed for their venture's joint exporting
activities.
Most of the certified groups with cooperative membership failed shortly
after start-up or have operated sporadically and at the margin, with very
limited sales volumes. A few of the certified groups, however, have been very
successful at their joint exporting activities. These are the groups which,
not coincidentally, have heavily used their certification. The threat of
antitrust litigation tends to be proportional to the potential market power
the exporters could collectively exercise through the group. The greater the
potential market power, the greater the potential damages to be won through
antitrust litigation.
There are natural checks to the exercise of joint export market power among
certified U.S. firms. Certification has almost always been sought for joint
exporting to new or underdeveloped markets. There are also strong vertical
market links between these established U.S. exporters. No examples were found
of competing exporters initiating horizontal coordination with respect to
established export markets. Further, once vertical relationships were
developed between individual U.S. exporters and foreign importers, horizontal
coordination tended to decline.
Business Rlationships Important
A large proportion of the certified joint exporting activities faced
little actual threat from potential antitrust litigation. Nevertheless, there
were industries with painful memories of past antitrust actions, and others
without a history of antitrust litigation, per se, but where relations among
competitors were otherwise strained and litigation of other sorts had been
threatened or taken. In these situations, certification enabled even low-risk
joint marketing activities by providing assurance to highly risk-averse
exporters.
Most of the respondents reported the importers with whom they dealt were
also horizontally coordinated, either as state trading enterprises with some
measure of publicly conferred authority, or as buyer cartels that presented a
united marketing front. Thus, certification enabled the exercise of
countervailing power against coordinated importers.
The business culture among the joint exporters was another determinant of
their capacity to actually undertake the activities for which they were
certified. The potential efficiencies some certified groups possessed went
unused when distrust and suspicion fueled rivalry over cooperation.
Conversely, where exporters knew and trusted each other well, some export
activities were successfully implemented.
Most of the certified export groups were coordinated by a commodity
association, which usually established a distinct entity to administer the
joint marketing activities. This served the purpose of preserving the
commodity association's eligibility to receive export promotion funds and
services.
One area in particular where certification has proved useful is in
legitimating political relationships between U.S. commodity associations and
foreign governments. Certification helped U.S. commodity groups to:1)
administer tariff export quotas granted by a foreign economic union; 2)
negotiate a suspension agreement to terminate an anti-dumping investigation
brought by a foreign government; and 3) implement phyto-sanitary requirements
imposed by importing country agricultural officials. This has allowed
commodity groups to take active and coordinated roles in governing their
export markets on important issues.
Several cooperative executives reported that certified joint exporting was
undertaken in conjunction with other horizontal coordination, as exercised
under Federal marketing orders, information-sharing cooperatives, and
bargaining cooperatives. Some of these other entities provided financing and
other support for the joint exporting efforts.
Some COR program applicants were third partied, such as economic
development specialists or trades association staffers, who were seeking to
facilitate horizontal coordination from outside the industry. These ventures
were typically less successful in promoting joint exporting than were
Certificates directly sought by exporters.
Overall satisfaction with COR
The COR program is a tool which has been used to free several cooperatives
from antitrust fears. Some cooperatives have been protected from the active
threat of non-member farmer lawsuits, while others have been freed from the
threat of litigation from other sub-sector stakeholders from the outside
group. However, antitrust litigation was ended in one instance when a
certificate holder used its certificate to protect its joint exporting
arrangement with a disgruntled cooperative supplier that had earlier
threatened the holder with antitrust legal action.
Most cooperative and ETC executives reported receiving certification for
almost all of their joint exporting plans, although a few compromises were
necessary. All expressed appreciation for Commerce's COR staff, and they had
no complaints about the overall process of obtaining and maintaining their
certification. Respondents valued the role of Commerce, which they perceived
as being business-friendly and as the main contact point in the process. They also view Commerce as the liaison for interactions with Justice,
which is perceived as less business-friendly because it is an enforcement
agency.
In summary, cooperatives and the certified export marketing groups to which
they belong have been generally satisfied with the protections provided by the
COR program against litigation. A majority of cooperative exporters have not
sought certification, and many of those who obtained it have never efficiently
used it. But for those who have used their certification to resolve active
antitrust threats or to assure otherwise anxious competitors, and who have
subsequently engaged in joint export marketing activities, the COR program can
be fairly credited with having enabled their higher export
earnings.
