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In re Dairy Farmers of America, Inc.

United States District Court, N.D. Illinois, Eastern Division

August 18, 2014



ROBERT M. DOW, Jr., District Judge.

This matter is before the Court on Defendant Schreiber Foods, Inc.'s motion for summary judgment [430]. For the reasons set forth below, the Court grants Defendant Schreiber's motion for summary judgment [430].

I. Background

This MDL action was reassigned from Judge Hibbler's docket to this Court's docket on April 30, 2012.

A. Procedural History for Direct Purchaser Actions

Named Direct Purchaser Plaintiffs ("Plaintiffs") are Indriolo Distributors, Inc., a cheese distributor; Knutson's, Inc., a dairy farmer and Class III milk futures trader; and Valley Gold, LLC, a raw milk purchaser. Plaintiffs initially sued the following Defendants: Defendant Dairy Farmers of America, Inc. ("DFA"), a dairy marketing cooperative consisting of more than 18, 000 dairy farmers in 48 states; Defendant Keller's Creamery LP, a butter manufacturer headquartered in Kansas City, Missouri, and wholly owned by DFA; Defendant Gary Hanman, the President and Chief Executive Officer of DFA from January 1, 1998 until December 31, 2005; Defendant Gerald Bos, the Chief Financial Officer of DFA from January 1, 1998 until December 31, 2005; Defendant Frank Otis, the Chief Executive Officer of Keller's in 2004; and Defendant Glenn Millar, the Vice President of Procurement and Operations for Keller's in 2004.

The direct purchaser cases have been consolidated for pre-trial proceedings in this docket. The direct purchasers' amended corrected consolidated class action complaint ("initial complaint") [86] alleged that Defendants violated Sections 1 and 2 of the Sherman Act (Counts 1-3), violated the Commodity Exchange Act ("CEA"), 7 U.S.C. §1 et seq, (Count 4), were unjustly enriched at Plaintiffs' expense (Count 5), and violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") (Count 6). The initial Defendants collectively filed motions to dismiss, which Judge Hibbler denied in part and granted in part [141 and 142]. All parties named in the initial complaint have reached a settlement with Plaintiffs. The Court has issued an order granting preliminary approval of the settlement and a fairness hearing is set for August 19, 2014.

On March 22, 2012, Plaintiffs filed a second amended class action complaint [245], which added Schreiber Foods, Inc. ("Schreiber") as a named Defendant and added a Cartwright Act claim under California law. Defendant Schreiber is an employee-owned manufacturer and distributor of natural cheese, process cheese, and cultured dairy products, such as cream cheese and yogurt, headquartered in Green Bay, Wisconsin. Schreiber moved to dismiss the second amended class action complaint. The Court granted in part and denied in part Defendant Schreiber's motion to dismiss, dismissing Counts 2 and 3 (monopolization and attempted monopolization in violation of § 2 of the Sherman Act) and allowing Plaintiffs to go forward with their claims arising under § 1 of the Sherman Act, 15 U.S.C. § 1 (Count I), § 22 of the Commodity Exchange Act, 7 U.S.C. § 25 (Count IV), and the Cartwright Act (Count V), as well as a claim labelled "unjust enrichment and restitution" (VI). Schreiber now moves for summary judgment on these remaining claims.

B. Discovery

This litigation has been going on for five years, and Schreiber has been a Defendant for at least two. Although Plaintiffs understandably have been preoccupied with settling the portion of the case that relates to the DFA Defendants, Schreiber also understandably wants its role in these events adjudicated. To that end, in order to satisfy on the one hand Plaintiffs and DFA in pursuit of an expeditious settlement and on the other Schreiber in pursuit of a declaration as to which side of the "v" it belongs on, the Court set the parties on the path of "focused" discovery.

Fortunately for Plaintiffs, they have had in their possession for ample time documents and deposition testimony from the Commodity Futures Trading Commission ("CFTC") investigation. Even if the CFTC investigation was focused on manipulation by Defendants, and not a conspiracy including Schreiber, the massive amount of information collected, both in the form of documents and depositions, undoubtedly provides a window into the conduct of the relevant players in the market during the relevant time period.

Since the summary judgment motion was filed, Plaintiffs also have conducted additional (albeit limited) Rule 56(d) discovery.[1] Plaintiffs survived Schreiber's motion to dismiss because of allegations that "high-level" Schreiber personnel had a high degree of communication with "high-level" DFA personnel. Thus, after Schreiber filed its summary judgment motion, this Court initially (and Magistrate Judge Valdez subsequently) gave Plaintiffs leave to discover information regarding high-level Schreiber and DFA employees that might corroborate Plaintiffs' allegations that those employees agreed to coordinate their purchases of spot cheese on the Chicago Mercantile Exchange ("CME"). Plaintiff were given that discovery and then sought to depose additional employees who worked with those high-level employees, in the hopes of uncovering additional details about the sale of five million pounds of cheese from DFA to Schreiber. Both Magistrate Valdez and this Court concluded that there was no indication that additional depositions would reveal anything fruitful. As the Court previously noted in denying Plaintiffs' objections to Judge Valdez's 56(d) rulings, Plaintiffs deposed Gary Hanman and Larry Ferguson, the executives responsible for negotiating the deal, and Tom Goddard, the DFA employee responsible for implementing the deal. They also deposed Nancy Schwenke, the employee responsible for implementation on Schreiber's side. The Court also noted that the secretaries and purchasing personnel that were the subject of the protective order would be even less likely to provide useful testimony ten years after the events in question, as there are obvious limitations associated with taking depositions a decade after the fact. [2]

In total, Plaintiffs have taken twelve depositions of DFA employees, Schreiber employees, and third parties, reviewed the documents produced during the CFTC investigation, the transcripts of fifteen depositions taken by the CFTC, and additional documents and interrogatory responses from Schreiber and DFA produced in this litigation. As such, the fact that discovery on additional matters is not complete, at least in Plaintiffs' estimation, does not prevent the Court from resolving this central issue now. See Cowen v. Bank United of Texas, FSB, 70 F.3d 937, 941 (7th Cir. 1995) (noting the propriety of a defendant moving for summary judgment before class certification has been determined); see also Chambers v. Am. Trans Air, Inc., 17 F.3d 998, 1002 (7th Cir. 1994) ("[T]he fact that discovery is not complete-indeed, has not begun-need not defeat the motion. A defendant may move for summary judgment at any time" (internal quotation marks omitted)). The Court believes that Plaintiffs have had more than enough time and access to conduct the discovery needed to support their allegations in response to Schreiber's summary judgment motion. In sum, the Court concludes that the management of discovery and dispositive motions has given both sides access to the relevant universe of materials and has equitably accounted for Plaintiffs' insistence that the fairness hearing on the motion for final approval of the class settlement proceed in a timely fashion and Schreiber's insistence that its status-as absent class member or alleged conspirator-be resolved prior to the fairness hearing.[3]

C. The Parties' Fact Statements and Responses

Instead of filing a "concise" response to Schreiber's fact statements, Plaintiffs have submitted upwards of three-to-five-page responses to many of those fact statements, attempting to insert new facts into the record while also denying certain of Schreiber's statements. (In contrast, Schreiber's responses never exceeded one page and usually were limited to a concise paragraph.) Although many of Plaintiffs' responses are improper (see, e.g., De v. City of Chicago, 912 F.Supp.2d 709, 715 (N.D. Ill. 2012) ("It is improper, and a violation of Local Rule 56.1, for the nonmoving party to add additional facts to his Local Rule 56.1(b)(3)(B) response"); Prewitt v. United States, 2012 WL 5381281 at *2 (N.D. Ill. Oct. 31, 2012)), in the interest of efficiency, the Court has reviewed and considered the entire 113-page response to Schreiber's fact statements. However, it also is the function of the Court to eliminate from consideration any argument, conclusions, and assertions that are unsupported by the documented evidence of record offered in support of the statement. Thus, to the extent that Plaintiffs' response (i) inserts facts not included in their own lengthy statement of additional facts, (ii) asserts legal conclusions, or (iii) suggests inferences as opposed to asserting a fact supported by the record, the Court has not considered those "facts, " as they are not actually facts of record but instead are arguments that should be (and often were) made in the response brief.

D. Factual History

1. Schreiber's industry presence and general practices in the industry

In 2004, Schreiber sold more than 1.26 billion pounds of natural and process cheese to its customers, making it one of the largest cheese manufacturers and distributors in the world. The natural cheese sold by Schreiber is produced directly from milk or is purchased in large blocks and then cut into smaller sizes and packaged for sale. The process cheese sold by Schreiber can be made with cheese produced from milk that Schreiber purchases, or it can be made from cheese purchased in 500-pound barrels. Most of Schreiber's products are purchased for use by restaurants and other foodservice distributors or are produced as store brand ("private label") products for grocery stores.

During the first eleven of thirteen periods in fiscal year 2004, Schreiber purchased in the vicinity of 550 million pounds of bulk cheese, at a cost of approximately $1.2 billion. Most of Schreiber's cheese purchases were of block and barrel cheddar cheese. Schreiber purchased approximately 93 million pounds of that cheese from DFA, at a cost of approximately $179.9 million. DFA was Schreiber's second largest supplier in 2004, and Schreiber was one of DFA's largest customers. Schreiber also purchased about 1.2 billion pounds of milk in 2004 for use in the production of process cheese. By comparison, in fiscal year 2003, Schreiber purchased approximately 602 million pounds of bulk cheese, at a cost of approximately $841.5 million. Schreiber purchased approximately 116 million pounds of that cheese from DFA, at a cost of approximately $159 million.

Block and barrel cheddar cheese have different uses and come in different packaging (and also can have slight variations in moisture content and color). But to the undiscerning eye, they essentially are the same product: cheddar cheese. In 2004, Schreiber purchased most of its bulk cheddar cheese directly from suppliers, but it also purchased a small fraction (between 4-5 million pounds) of spot cheese on the Chicago Mercantile Exchange ("CME").[4]

The CME hosts the trading of commodity futures trading contracts, including Class III milk futures (Class III is the federal designation of milk used to make cheese and whey) and spot commodities, including spot block cheddar cheese, spot barrel cheddar cheese, and spot butter. Trading of spot block and barrel cheddar cheese is backed up by required immediate delivery of the commodity traded and cannot be cash-settled without the exchange of the underlying commodity. Each load of spot block or barrel cheddar cheese traded on the CME consists of 40, 000 to 44, 000 pounds of cheese. The CME spot block and barrel cheddar cheese markets serve an informal "price discovery" function, and many cheese transactions in the wider market are priced based on the CME block and barrel cheese prices.

In 2004, trading in spot cheese on the CME usually occurred Monday through Friday for ten minutes per day on the trading floor of the CME through a process called "open outcry." Open outcry is a method of public auction for making bids and offers in the trading pits of a futures exchange. Observers of the open outcry in 2004 could see each bid, offer, or sale, as well as the brokers proposing them, and could react to activity or follow price or sales movements as they occurred. Trading is conducted by floor brokers on behalf of traders. Although the identity of traders is not disclosed during the trading session, frequent participants and observers of the spot cheese open outcry often could identify a trader based on the floor broker making the trade. The prices of the final consummated transactions or the final unfilled bids or offers during each trading session determine the respective closing prices of blocks and barrels each day.

According to the evidence of record, block packaging costs typically are three to three and a half cents higher per pound than barrel packaging costs, suggesting that packaging is a significant factor as to why blocks traded on the CME historically sell for about three cents more per pound than barrels. The differential between the CME block and barrel closing prices is known in the industry as "the spread." The actual spread, however, is not always three cents. The prices of blocks and barrels move independently, so the spread can fluctuate to levels above and below three cents. Additional factors, such as supply and demand, affect the spread. And, as explained below, the CME cheese markets are far from perfect in comparison to other traded commodities with a greater and more diverse number of participants. According to Schreiber, it has an interest in maintaining a three-cent spread, because a larger spread between blocks and barrels can be damaging to barrel cheese producers and producers of process cheese.

Milk sold in the United States usually is subject to either federal or state pricing orders that set the minimum price that processors must pay for milk. The calculation of the federal order price for milk sold for making cheese (Class III milk) is based indirectly on the historical average spread between block and barrel cheddar cheese. In essence, the federal government averages the market prices of block and barrel cheese after adding three cents to the barrel price to account for the assumed spread, then factors that number into the calculation of the minimum Class III order price. Thus, it is no surprise that the parties agree that the price of cheese is the most significant commodity component in the United States Department of Agriculture ("USDA") Class III milk price formula.[5]

Traditionally, the CME spot cheese markets are thinly traded, and the actions of a few participants can increase or decrease the price of block or barrel cheese without changing the price of the other. Despite the fact that millions of pounds of bulk cheddar cheese are sold in the United States every day, on many days few or no loads of spot cheese are traded on the CME at all. Participants in the spot cheese markets possess a diverse array of interests that often motivate their trading activity. For example, as a milk producer, DFA, during the relevant time period, had an interest in high cheese prices, which increased the price of milk. It was a frequent purchaser of cheese on the CME and regularly attempted to support or defend the block cheese price. By contrast, premium process cheese producers have an interest in low cheese prices, because they purchase barrel cheese at prices tied to the CME price but sell finished products at a fixed price well above the CME price. The lower the CME barrel price, presumably the higher their profit margins.

According to Schreiber, because it purchases around 1.2 billion pounds of milk to turn into process cheese every year, a large spread decreases Schreiber's profit on milk turned into and sold as process cheese.[6] As Schreiber COO David Pozniak explained when deposed by the Commodity Futures Trading Commission ("CFTC"):

A. The - The one plant that I mention where we make our natural cheese in Arizona, we buy milk there from a cooperative, and it would be a problem for us to buy, in essence, high priced milk if - if the spread was real high, if the blocks were real high relative to barrels, and then we took that milk and converted it into a low valued thing, like barrels, which we're doing. So that hurts us. That hurts the profitability of that plant.
Q. Okay. And just to clarify that I understand what you're saying is[, ] is that if the spread between blocks and barrels becomes too great, then it affects the price of Class III milk that you purchase to produce cheese, correct?
A. Yes * * * by making the raw goods higher, the cost of the milk higher.

Similarly, Chris Herlache, a Risk Analyst and the Schreiber employee in charge of CME cheese trading during the relevant period, testified during the CFTC proceedings that it was to Schreiber's benefit to maintain a three cent spread and that it was a "general practice" at Schreiber. The testimony of record is that the spread between blocks and barrels therefore is a factor that Schreiber considers in making purchases of cheese. Obviously, other barrel and process cheese producers have a similar interest in the spread. Other factors that Schreiber considers include market conditions, current inventory and sales needs, the availability of cheese from other sources, and supply and demand projections. The record further reflects that Schreiber would purchase barrel cheese on the CME in a manner that would correct or maintain the spread.

2. Schreiber's CME activity in 2004

During 2004, Schreiber was one of the largest cheese distributors in the world. Higher CME cheese prices can (but do not always) benefit Schreiber's business. DFA was one of the largest sellers of milk in the United States and also benefits from higher CME cheese prices. In February, March, April, May, June, July, September, October, and December of 2004, Schreiber maintains that it purchased, attempted to purchase, or contemplated purchasing barrels on the CME in part[7] because of a desire to correct a spread larger than three cents or to maintain a spread of three cents.

On January 30, 2004, the spread was 7 cents. David Pozniak, Schreiber's President and COO of Global Sales and Development, oversaw the individuals who were in charge of making purchases in the cash and futures markets. On February 2, 2004, when the spread was 5.75 cents, Pozniak wrote to Chris Herlache, the Schreiber employee charged with conducting and supervising Schreiber's CME trading in 2004, "Chris, if there is any opportunity for us to help bid on barrels to close the gap then we should consider doing it especially since the markets are trending up and maybe its [sic] possible." On February 3, when the spread was 5 cents, Herlache responded, "If others are bidding I can try to get behind them. If there is a lot of selling interest, are we OK with buying a load or two? If not, I'll bid a little more cautiously." On February 5, when the spread was 4.25 cents, Pozniak responded, "[Y]es * * * okay with that plan." However, Schreiber ultimately did not purchase any cheese on the CME in February 2004.

On March 15, 2004, Pozniak sent an e-mail to Schreiber officers, stating:

They continue to go up. We helped today close the spread with barrels, otherwise the block market is moving up from others. Unless there are major objections by you, we will bid if necessary to get more cheese at least to the $2 ranger [sic] over the next few days. The thought would be to allow the markets to go high enough that Kraft would have to raise their prices on the shelf to create aain [sic] a store brand and brand price difference. We will employ this strategy beginning tomorrow unless we hear from you to the contrary, and why.

On March 16, 2004, Ron Dunford responded to Mr. Pozniak's e-mail stating: "Just one watch out' * * * our customers are not pleased with the current high pricing and will be even less pleased if they somehow find out that we are involve [sic] in helping drive the market up. Let's hope that the confidential trading' at the CME remains that way." Deborah Van Dyk, Schreiber's Vice President of Industry & Regulatory Affairs responded stating:

FYI - the industry is already talking about who is trading at the CME ("not the usual suspects"). I've had two inquiries (yesterday) asking about our trading and rationale. Within the industry it is well known who is trading at the CME. Therefore, if a customer wants to know who is actively trading it is very easy to find out. To Ron [Dunford's] point, if we need to have a Q&A prepared for sales to use for customer inquiries, the time is upon us.

On April 2, 2004, Chris Herlache e-mailed "Officers" stating:

As an update on the current tightness in cheese markets, I have attached a file detailing the CME cheese markets, and number of trades since the beginning of the year. Important points to take from this are:
1) Since the markets started taking off in March, there have been no trades, despite the high price.
2) This means the overall market supply of cheese is so tight that no one is willing to part with any cheese despite the very good profit they could make. If you have any questions on this, please let me know.

On April 21, 2004, the spread was 4.5 cents. Schreiber purchased 6 loads of barrels. On April 22, 2004, when the spread remained at 4.5 cents, Schreiber purchased 6 additional loads of barrels. On April 22, 2004, Schreiber employee Cheryl Glenzer provided Chris Herlache with a summary of the day's CME activity:

Blocks closed unchanged at $2.20 with 2 sales to DFA. Sellers were Dairy State and Dean Management on offers. There was 1 bid left on board for $2.20 from DFA.
Barrels closed unchanged at $2.1550 with 6 sales. [Schreiber] bought all 6 loads. All offers, no bids. RIC (Aaron thought this was Anderson) opened with $2.1600 offer. Offer lowered to $2.1550. Kraft, Bongards, and RIC then continued to put offers on board of $2.1550 or $2.1525 replacing an offer when [Schreiber] purchased one.
Aaron made comment that he thought if [Schreiber] bought another 10-15 loads, we could possibly bring market back to $2.17.

If barrels had risen to $2.17, the spread would have been 3 cents. Schreiber purchased 2 loads of barrels on April 23, 2004. On April 27, 2004, the spread was 5 cents. The next day, Schreiber purchased 4 loads of barrels.

Between May 4 and May 5, 2004, the spread grew from 3.5 cents to 11.5 cents. On May 5, 2004, Schreiber purchased 2 loads of barrels at a price $2.04. One other load of barrels traded at $2.05. On May 11, 2004, the spread increased from 11.5 cents to 22 cents.[8] Schreiber purchased 1 load of barrels at $1.95 on May 11, 2004. One other load of barrels traded at $1.9775. DFA bought all 5 loads of CME block cheese that traded. The spread fell to 7 cents on May 12, 2004, before rising to 17 cents on May 13. Seven loads of barrels were traded on May 13, 2004. Schreiber did not purchase any. The spread remained steady at 17 cents from May 13 through May 20, 2004. One load of barrels was purchased on May 18, 2004, but not by Schreiber.

On May 20, 2004, when the spread remained at 17 cents, 6 loads of barrels were traded; Schreiber purchased 4 of these loads at $1.8275, $1.8300, $1.8300, and $1.8275. The market closed at $1.8300. On May 21, 2004, the price of blocks fell to $1.80, and the barrel price fell to $1.61. Schreiber purchased 1 load of barrels at the closing price, and the spread grew to 19 cents. Also on May 21, 2004, Herlache sent an e-mail to the President's Staff at Schreiber, detailing the day's activity on the CME:

-Blocks and barrels were offered down aggressively right from the opening of the markets.
-DFA had clearly stepped back and was allowing the market to move down.
-Once blocks hit 1.80, DFA supported that level. It was in support of the 1.80 market that DFA made almost all of their purchases.
-Barrels were basically moved along with the block market, although spread varied throughout the trading session * * * It appears this is in response to the April cold storage report that came out yesterday. The report did show inventories * * * * between.6% and 1% lower than last year, however, this decrease was smaller than expected. This may be why DFA decided to give some ground.

On May 24, 2004, the CME barrel cheese price increased 16 cents from $1.61 to $1.77 per pound. Schreiber was the sole bidder in the CME barrel cheese market and was the sole purchaser. The 16-cent increase in the CME barrel cheese price on May 24 caused the "spread" between CME block cheese and CME barrel to decrease from 19 cents to 3 cents. The 16 cent decrease in the CME block-barrel spread price on May 24, 2004 was the largest decrease in the CME block-barrel spread price up to that time and is the third largest decrease observed on the CME. On May 24, 2004, Schreiber placed several bids for barrels on the CME. Its bids went unfulfilled until the barrel price rose to about three cents less than the block price, at which point Schreiber's bids were met for sales of two loads at $1.7700 and 1 load at $1.7650. The spread reduced to 3 cents, where it remained through June 23, 2004.[9]

On May 25, 2004, 13 loads of barrels traded on the CME: 7 at $1.7675, 4 at $1.7700, 1 at $1.7650, and 1 at $1.7600. Schreiber purchased all 13. No blocks were traded. The next day, Schreiber purchased 10 loads of barrels at $1.7700, 8 loads at $1.7675, 1 at $1.7600, and 1 at $1.7650. On May 27, Schreiber purchased 2 loads of barrels at $1.7700, 1 at $1.7675, and 1 at $1.7600, and on May 28, Schreiber purchased 2 loads of barrels at $1.7625 and 1 at $1.7700. On June 1, 2004, no barrels were traded, but DFA purchased 14 loads of blocks.

On June 1, 2004, Larry Ferguson, Schreiber's CEO, sent a letter to Craig Donohue at the CME, alerting Donohue to recent activity in the block and barrel markets and expressing concern about the spread and the lack of anonymity in trading:

I am writing in reference to trades that were made on the cheese exchange on Friday, May 21 and Monday, May 24. The barrel market fell $.20 and the block market fell over $.20. There was a spread between blocks and barrels on Friday of $.19. The cost of raw materials for these two products is exactly the same. I think is a clear indication to everyone in the dairy industry that the CME is not a decisive price discovery mechanism because of the small number of trades. Even more disturbing is that it seems all the brokers on the market are exchanging data of who is trading and why they are trading. I think this is very damaging to the price discovery process.

After Ferguson sent the letter, the trading on the CME in June 2004 proceeded with DFA and Schreiber purchasing 100% of the barrel and block cheese that was traded over the next few weeks. On June 2, 2004, Schreiber purchased 1 load of barrels at $1.7600 and 2 at $1.7700. The following day, no barrels were traded, however, DFA purchased 22 loads of blocks. On June 4, Schreiber purchased 1 load of barrels at $1.7700 and 1 load at $1.7675, and on June 7, Schreiber purchased 2 additional loads of barrels at $1.7650 and $1.7700, respectively. On June 8, Schreiber purchased 2 loads of barrels at $1.7600. On June 9, no barrels were traded, but DFA purchased 11 loads of blocks. On June 10, Schreiber purchased 1 load of barrels at $1.7700 and 1 at $1.7675. On June 14, Schreiber purchased 2 loads of barrels at $1.7575, 1 at $1.7525, 2 at $1.7600, 1 at $1.7500, 2 at $1.7700, and 1 at $1.7650. On June 15, Schreiber purchased 3 loads of barrels at $1.7700, 2 at $1.7675, and 1 at $1.7650. On June 16, no barrels were traded, however, DFA purchased 17 loads of blocks; the following day, no barrels were traded but DFA purchased 9 loads of blocks. On June 18, Schreiber purchased 1 load of barrels at $1.7700 and 1 at $1.7675. On June 21, no barrels were traded, however, DFA purchased 13 loads of blocks. On June 22, Schreiber purchased 4 loads of barrels at $1.7700, 1 at $1.7600, 1 at $1.7650, and 2 at $1.7675. On June 23, DFA did not make any bids for CME block cheese and did not accept the offers by another market participant (Glanbia) to sell CME block cheese at $1.80 or $1.780 per pound. Schreiber did not make any bids for CME barrel cheese and did not accept the offers by another market participant (Kraft) to sell CME barrel cheese at $1.77 or $1.575 per pound. DFA did accept two offers from Dairystates to sell CME block cheese at $1.700 and $1.605.

Also on June 23, 2004, Herlache sent an e-mail to Schreiber personnel regarding the drop in prices of block and barrel cheese on the CME:

The decrease in cheese was a result of DFA no longer supporting the 1.80 block market. It is currently unknown why they chose today to pull their support, but I will pass on any information I do get. Block sellers were leading the decrease with barrels following to maintain a.03 spread.

By June 28, 2004, the price of CME barrel cheese had dropped thirty-seven cents to $1.40 per pound. No CME barrels traded from June 23 through June 28, 2004. By June 28, 2004, the price of CME block cheese had dropped forty-two cents to $1.38 per pound. Fewer than 10 CME blocks traded from June 23 through June 28, 2004.

On July 28, 2004, Schreiber purchased 2 loads of barrels. Herlache provided Pozniak and Nancy Schwenke, Schreiber's Vice President of Procurement, [10] with the following summary of that day's CME trading activity:

Blocks were bid up again today by West Farm Foods. On the way up, West Farm had to purchase 2 blocks. As Blocks went up, we move the barrels to maintain the spread, but had to buy 2 barrels in the process. They were purchased at 1.47 and 1.48 (the market closed at 1.49). Both barrels were purchased from Bongards. Please let me know if there is any change in our plan to maintain the block/barrel spread.

On September 8, 2004, the spread was 5.75 cents. Schreiber purchased 2 of the 5 barrels traded that day. The spread fell to 4 cents on September 9 and 3.75 cents on September 10, then on September 14, it grew from 3.75 cents to 7.5 cents. That same day, Schreiber purchased 4 loads of barrels.[11] On September 15, the spread was 7.75 cents, and Schreiber purchased 2 of the 12 barrels traded that day. On September 16, 2004, Schreiber purchased 1 load of barrels, and the spread closed at 3.75 cents. Schreiber did not buy any cheese on the CME on September 17.

On September 17, 2004, Herlache sent an e-mail to Nancy Schwenke and Chip Smoot regarding Schreiber's CME activity:

We purchased one more yesterday, but that should be it. With DFA supporting the 1.5675 level, the spread grew to around.10 on Tuesday before it was brought back to.0750. Throughout this past week, there has been a number of other companies also trying to correct the spread with us. On Wednesday, there were a total of 5 buyers for barrel. We're not sure what Davisco was trying to do here. One rumor what that they had some bad futures positions, and that they were trying to bring the market down so they could get out of them. If that was the case it didn't work, because the fact that there were so many buyers on Wednesday, the futures market actually rallied even though the barrels settled down a quarter cent. I've been working with David on this, and after Tuesday, we set the limit for Wednesday at 2 loads. Also, I have sold futures against these purchases to protect ourselves if the market would fall. On the block side, DFA bought all 21 loads that were traded today.

The spread grew to 4.75 cents on September 20, 2004 and to 6.5 cents on September 22, and Schreiber purchased 1 of the 7 loads of barrels traded on September 22, 2004. Herlache provided the following summary of Schreiber's September 22 CME activity to a number of Schreiber personnel:

We bought 1 barrel today @ $1.5100. We are not sure who sold the load, but think it is through a trading company like Killer Whale. Barrels were offered down aggressively today, (to a low of 1.4625) and we did not step in until after Hilmar and AMPI bought a few loads and looked like they were going to move the market back up. I then placed a bid behind 2 other bidders, and all 3 were sold.

The e-mail also noted that DFA bought all loads of blocks that were traded that day. On October 1, 2004, Herlache sent another summary of CME trading activity to Pozniak and Schwenke:

DFA continues to buy blocks. They bought all 55 last week, and all 29 this week. This has resulted in a steady to higher market close each session this week. On the other hand, barrels were offered lower Monday, bid higher Wednesday, and then offered aggressively lower Thursday and Friday. The combination of lower barrels and higher blocks caused the spread grew to.1525 by the end of the week.
I did not participate at all this week for a few reasons I want you to be aware of.
1) Based on conversations with our bulk cheese team, there seems to be some tightness in blocks, whereas barrel supply is more than sufficient for our current needs. So, by letting the spread grow, it encourages more block production, which is what we are in need of.
2) I do not want there to be the impression in the market place that we will be the only ones to come in and bring the spread back in line. In talking to our broker, I was getting the impression this was starting to take place.
3) Knowing that our inventories are long in barrel, and that the market should be poised to drop in the near future, I was weary of purchasing more barrels, only to have the market drop, and we are again sitting with high cost inventory.
4) There was no clear indication how many we were going to have to buy in order to maintain the spread. We could have ended up with a lot of cheese and still had the same end result.

On December 2, 2004, the spread had grown to 15.5 cents. On December 3, 2004, Pozniak wrote to Chip Smoot about the spread between blocks and barrels: "Because of the high spread, I think it's ok to go ahead and buy up to 3 loads today if it would help anybody in the market to close the spread. If the blocks begin to fall, ideally the market will fall with it and that will be the way it goes. Whatever works out fine." Smoot replied: "We didn't buy anything today. Barrels did go up by $.04 and blocks stayed the same so the gap closed somewhat."

Schreiber and DFA purchased, respectively, 100% of the CME barrel cheese and 100% of the CME block cheese traded on the CME during the time period May 24 through June 22, 2004. In total, Schreiber purchased 79 carloads of CME barrel cheese (between 3, 160, 000 and 3, 476, 000 pounds) while DFA purchased 304 carloads of CME block cheese (between 12, 160, 000 and 13, 376, 000 pounds). Between approximately April 14 through July 6, 2004, Schreiber increased its barrel inventory and purchases significantly as a proportion of overall inventory. From April 13, 2004 to August 3, 2004, Schreiber's CME barrel purchases increased from zero pounds to 4.4 million pounds. Despite having an average barrel inventory of 7.4 million pounds from October 1, 2003 through April 13, 2004, Schreiber did not purchase from the CME until April 2004. In fiscal year 2004 (October 2013 to September 2014), Schreiber purchased 120 loads of CME barrel cheese. Of those 120 barrels, 107 barrels (or approximately 89%) were purchased between April 20, 2004 and June 22, 2004.[12]

3. DFA's CME activity in 2004

In 2004, Gary Hanman, Chief Executive Officer ("CEO") of DFA, made the ultimate decisions for DFA's purchases on the CME. Mark Korsmeyer served as DFA's President of American Dairy Brands, which was one of three business units under DFA's Dairy Food Products umbrella. American Dairy Brands was DFA's branded retail business, which included Borden cheese and the "typical retail grocer trade, the Wal-Mart Super Centers, the local HyVee type customers of the world." Korsmeyer reported to Sam McCroskey, who was the President of DFA's Dairy Food Products. Korsmeyer also gave orders with respect to Class III milk futures trading. Korsmeyer had "full business responsibility for American Dairy Brands, " was responsible for its profits and losses of that division, and made all of the decisions with respect to American Dairy Brands. He also was responsible for the sales and marketing of finished products that the Dairy Foods Group produced.

Lavonne Dietrich, the Sales and Marketing Vice-President of DFA's Dairy Foods Group, reported to Korsmeyer. Dairy Foods Group also was one of three business units under DFA's Dairy Food Products umbrella and was DFA's food service and industrial cheese business, "which is the larger packaged products, services national chain accounts, the Taco Bells, the Outbacks, the TGI Friday's, Applebee's of the world, the restaurant trade." Tom Goddard, another DFA employee, participated in DFA CME cheese purchases on the phone and sometimes made the decisions whether or not to purchase cheese on the CME.[13] Elvin Hollon, Director of Fluid Marketing and Economic Analysis at DFA in 2004, "deal[t] with [DFA's] day to day transactions on the Chicago Mercantile Exchange and interact[ed] with [DFA's] broker each day on the market when the cash market is open."

On May 7, 2004, Hanman sent a memorandum to DFA personnel stating that DFA had, during the week beginning on May 3, 2004, "supported the [CME block cheese] market at $2.15." On May 21, 2004, Hanman sent another memorandum, stating that "It will be difficult to hold $1.80 for blocks if barrels stay at $1.61." That is, DFA had to "defend" the 19-cent CME block-barrel spread if it wanted to continue to "support" CME block cheese prices. Hanman further noted that defending a large spread was difficult with sellers like "Glanbia bringing blocks to the exchange to adjust the spread." The parties agree that Schreiber knew that DFA was supporting the CME block cheese market at $1.80.[14]

DFA employees, led by Hollon, attempted to track daily purchases and the identities of participants on the CME spot block cheese, barrel cheese, and butter markets. Typically they did so by matching the floor broker making a bid or offer with the trader that the broker usually represented. Hollon or other DFA employees who followed the open outcry on the CME regularly also sent out "Daily Cash Market" e-mails to "a wide range of people" from DFA that contained information purporting to identify the purchasers and sellers of block and barrel cheese and butter traded on the CME each day.

DFA also maintained a database in 2004 of all trades, bids, and offers in the spot cheese and butter markets and the purported identity of each trader, bidder, or offeror. Hanman also sent out fax transmissions containing charts summarizing activity on the CME ("Hanman Activity Charts") every week. The Hanman Activity Charts list the number of loads of block cheddar cheese, barrel cheddar cheese, and butter traded on the CME every week. The Hanman Activity Charts also identified or attempted to identify the seller and buyer of each load traded.

In his April 23, 2004 fax, Hanman wrote: "Twenty loads of barrels were traded this week. Schreiber was the primary buyer * * * * There were 44 loads [of butter] traded during the week. We were the buyer of 18 loads; Rich Dairies (22) and Dreyers (16) were this week's biggest butter sellers." The accompanying Hanman Activity Chart notes that Kroger purchased 5 of the 20 loads of barrel cheese traded.

The May 21, 2004 Hanman Activity Chart identifies Hilmar as the supposed seller of 23 loads of block cheese and Glanbia as the seller of 5 loads on the CME during the week. It also identifies Schreiber as the purported purchaser of 5 loads of barrel cheese on the CME during the week. The fax transmission further notes:

We opened the week with a 17¢ spread between blocks and barrels, and closed today with a 19¢ spread between barrels and blocks. It became obvious that we could not maintain the $2.00 block price - and defend a 17¢ spread between blocks and barrels with both Hilmar and Glanbia bringing blocks to the exchange to adjust the spread. It will be difficult to hold $1.80 for blocks if barrels stay at $1.61.

In his May 28, 2004 fax, Hanman wrote: "Today's barrel closing price of $1.77 was up 16¢ from last Friday's close. 43 loads of barrels were traded this week. Schreiber was the primary buyer." The May 28, 2004 Hanman Activity Chart identifies Schreiber as the purchaser of 36 loads of barrel cheese traded during the week, SAW as the purchaser of 7 loads, Bongards as the seller of 40 loads, and Misc. Brokers as the sellers of 3 loads.[15] DFA was mistaken as to the 7 loads attributed to SWA; Schreiber in fact purchased all 43 barrels for the week ending May 28, but purchased the 7 loads attributed to SWA through a broker other than the one whom Schreiber usually utilized.

The June 4, 2004 Hanman Activity Chart notes that 107 loads of block cheese were traded during the week and that 5 loads of barrels were traded during the same week. According to the Chart, Schreiber purchased 4 of the 5 loads of barrel cheese traded, and Glanbia purchased 1 load. The fax also notes that "all week Schreiber has been the defender of the barrel market - maintaining a 3[cent] spread between blocks and barrels. They again stepped up today and held the barrel market at $1.77." The June 4 chart also identifies the purchasers of butter during the week as ...

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