Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Ill.: Monopoly claims over wheat futures manipulation proceed against Kraft, (Jun 28, 2016)

By Jeffrey May, J.D.

Kraft Foods Group and Mondelez Global LLC were unable to convince the federal district court in Chicago to dismiss monopolization claims based on a purported "long wheat futures scheme." A putative class action brought by plaintiffs who transacted in wheat futures and allegedly lost money because of the artificial prices caused by Kraft’s allegedly manipulative actions will proceed (Ploss v. Kraft Foods Group, Inc., June 27, 2016, Chang, E.).

The complaint alleged that in the summer and fall of 2011, Kraft changed its wheat sourcing strategy when the cash price of No. 2 soft red winter wheat in the Toledo market rose. During that same time, the price of December 2011 wheat futures contracts increased.

Even though there was enough wheat in the Toledo market to satisfy Kraft’s needs, senior management allegedly devised a strategy to use its status as a commercial hedger to acquire an enormous long position in December 2011 wheat futures contracts, purchasing $90 million worth of December 2011 contracts. The complaint alleged that the purpose of obtaining this long position was to induce sellers to believe that Kraft would in fact take delivery, and use that wheat in its mill in Toledo. Kraft caused the wheat price in the Toledo cash market to drop, because that cash market believed that there was a greater supply than demand, according to the complaint. As a result, Kraft was allegedly able to obtain wheat in the cash market at more favorable prices. The plaintiffs contended that Kraft took a long position in December 2011 wheat contracts in order to affect the market price of wheat in ways that would benefit Kraft.

Relevant market. The plaintiffs adequately alleged that Kraft violated Section 2 of the Sherman Act by gaining control of a large interest in wheat futures at the end of 2012 in order to create anticompetitive prices. The court rejected Kraft’s challenge to the plaintiffs’ relevant market comprised of December 2011 soft red winter wheat futures contracts.

Kraft contended that this was not a relevant market because it did not include the cash market. Cash wheat and futures market wheat were not necessarily interchangeable, in the court’s view. Cash-bought commodities and futures-bought commodities had distinct features and were not necessarily substitutes. Cash-bought commodities were used for immediate consumption, and the futures-bought commodities were used for hedging against risks. Moreover, each contract month satisfied a different hedging need. The court also noted that dismissal was inappropriate because market definition was a "deeply fact-intensive inquiry."

Monopoly power. The court noted that the allegations regarding Kraft’s monopoly power in the relevant market raised the "closest question" for the antitrust claim. However, it refused to dismiss for failure to allege monopoly power.

Kraft was alleged to have monopoly power in the December 2011 futures market, based on direct evidence of anticompetitive effects. The plaintiffs alleged that Kraft held 3,150 long December 2011 wheat futures contracts and 87 percent of the December 2011 open interest in wheat, causing these futures prices to be artificially high. They contended that monopoly power was evidenced by Kraft’s ability to control prices and the resulting anticompetitive prices. Despite Kraft’s argument that there could not be market power where there were no barriers to entry, the plaintiffs adequately alleged that Kraft’s monopoly power was demonstrated by its success in excluding competitors from taking a meaningful position in the December 2011 wheat futures market.

Willful acquisition, maintenance of monopoly power. Noting that Kraft’s alleged behavior was uneconomic and financially irrational, the court concluded that the plaintiffs adequately alleged the second element of a monopolization claim under § 2 of the Sherman Act—"the willful acquisition or maintenance" of monopoly power. The allegations suggested that price changes of December 2011 wheat futures were driven by willful anticompetitive conduct, and not by chance or other legitimate economic reason. Kraft unsuccessfully contended that the plaintiffs failed to allege predatory bidding to satisfy the exclusionary conduct element of their Section 2 claim. The alleged anticompetitive conduct did not involve predatory bidding, the court explained. Rather, the conduct involved obtaining a large market share of a futures market to prevent the competition, at least temporarily, from being able to seize control of a meaningful portion of the market.

The case is No. 15-cv-2937.

Attorneys: Christopher M. McGrath (Lovell Stewart Halebian Jacobson LLP) for Harry Ploss. Dean Nicholas Panos (Jenner & Block LLP) for Kraft Foods Group, Inc. and Mondelez Global LLC.

Companies: Kraft Foods Group, Inc.; Mondelez Global LLC

Cases: Antitrust IllinoisNews