Been v. O.K. Industries, Inc.

495 F.3d 1217

Charles BEEN, individually and d/b/a Creekside Farm, Inc.; Donald Frost; Edwin Johnston; Bob Fields, individually and dba Okie Blue Sky Farm, Inc.; Gene Blackwell, Class Representatives, Plaintiffs-Appellants, v. O.K. INDUSTRIES, INC.; O.K. Foods, Inc.; O.K. Farms, Inc., all Arkansas corporations, individually and as administrators of health and benefit plans; O.K. Broiler Farms Limited Partnership, an Arkansas limited partnership, individually and as administrator of health and benefit plans; Collier Wenderoth, Jr.; Randall Goins; Tom Webb, individually and as trustees of health and benefit plans; OK Industries, Inc. Employee Benefit Plan; OK Industries, Inc. Employee Funded Group Health Care Plan; OK Industries, Inc. and its Subsidiaries Employee Funded Health Care Plan; OK Industries, Inc. and Affiliates Flexible Benefits/Health Care Plan; OK Industries, Inc. and Affiliates Flexible Benefits Plan; Retirement Savings Plan of OK Industries, Inc. and Subsidiaries; Retirement Savings Plan of OK Industries, Inc.; Group Long Term Disability Plan; Group Life Health Insurance Plan; Group Voluntary Term Life Insurance Plan; Ken Primm, Defendants-Appellees.

No. 05-7079.

United States Court of Appeals, Tenth Circuit.

July 31, 2007.

Charles B. Goodwin and Harry A. Woods, Jr. (Mack J. Morgan, III, Christopher

B. Woods, and Amanda L. Maxfield, with them on the briefs), Crowe & Dunlevy, P.C., Oklahoma City, OK, appearing for the Appellants.

Matthew Horan, Smith, Maurras, Cohen, Redd & Horan, PLC, Fort Smith, AR, (James M. Sturdivan and Ronald N. Ricketts, Gable & Gotwals, P.C., Tulsa, OK, and Don A. Smith, Smith, Maurras, Cohen, Redd & Horan, PLC, Fort Smith, AR, with him on the briefs), appearing for the Appellees.

Before TACHA, Chief Circuit Judge, BRISCOE, and HARTZ, Circuit Judges.

TACHA, Chief Circuit Judge.

This appeal presents a matter of first impression for this Circuit, namely whether § 202(a) of the Packers and Stockyards Act ("PSA"), 7 U.S.C. § 181 et seq., requires a plaintiff to prove that an allegedly "unfair practice" injures or is likely to injure competition. The District Court held that such proof is required and, finding that the Plaintiffs had failed to present any evidence of a competitive injury, granted summary judgment in favor of the Defendants. The court also granted the Defendants' motion for summary judgment on the Plaintiffs' state law claim of unconscionability. We take jurisdiction under 28 U.S.C. § 1291, and for the reasons that follow, we affirm in part and reverse in part, remanding to the District Court for further proceedings consistent with this opinion.

I. BACKGROUND

Defendants-Appellants OK Industries, OK Farms, Inc., and OK Foods, Inc. (collectively "OK") constitute a vertically integrated poultry producer operating in Arkansas and Oklahoma. OK is involved in almost every stage of the production and wholesale of poultry and poultry products: it breeds, hatches, provides feed for, transports, slaughters, and processes poultry. One aspect of poultry production OK does not handle is the raising of broiler chickens to slaughtering age. OK enters into contracts with various "growers" who handle that part of the production process.

The Plaintiffs-Appellants ("Growers") are a class of growers operating in Oklahoma under contract with OK. In addition to alleging that the process by which OK and its growers enter into contracts is unconscionable under Arkansas law, the Growers argue that the terms of the contracts, as well as OK's performance under the contracts, violate the Packers and Stockyards Act, 7 U.S.C. § 181 et seq. Their claims hinge on the following undisputed facts.

OK is the largest poultry integrator in Oklahoma. With limited exceptions, no other integrators operate in the geographic markets in which OK operates. At the time of this lawsuit, OK had a waiting list of over 130 persons desiring to become growers for OK or to expand their existing operations. When OK needs to expand its production, it contacts persons on the waiting list to determine whether they are still interested, and if so, whether they will be suitable growers. Prior to entering into a contract with a grower, OK requires the grower to first obtain financing and build chicken houses to specifications set by OK. In exchange for a grower's expenditure of money to build the requisite chicken houses, OK signs a letter of intent, agreeing to enter into a broiler contract with the grower upon satisfactory completion of the chicken houses. One chicken house can cost a grower nearly $160,000, not including the cost of land and equipment.

All the broiler contracts are materially identical; they are standard contracts drafted by OK and are not subject to negotiation. Under the standard contract, a grower agrees to use only chicks, feed, and medicine supplied by OK. OK is not liable, however, for any loss a grower incurs as a result of OK's failure to provide feed and supplies; nor is OK liable for birds condemned due to certain diseases. The contract also provides that a grower may not sell its chickens to poultry integrators other than OK and may not transfer its broiler contract to other potential growers without OK's prior approval. Under the terms of the contract, OK agrees to provide the grower with only one flock of chicks, which typically takes a grower seven weeks to raise.¹ Thereafter, OK may provide the grower with replacement flocks "from time to time." In addition to deciding when to deliver replacement flocks, OK determines the breed of chicken, the number of chicks per flock, and the number of flocks. Furthermore, at the end of each growing cycle, OK may require that a grower update its houses to meet OK's most recent specifications before it will place another flock of chicks with the grower. These required changes result in significant costs to growers.

The contract also details the method OK uses to calculate a grower's pay. OK uses a "competitive ranking" system to reward growers who produce chickens at the least cost to OK. Under OK's system of payment, OK first calculates the production cost per pound² of each grower's flock and labels this production cost the grower's "flock prime cost." It then lists the flock prime cost of each grower in order from lowest to highest. The flock prime cost of the grower that is numerically in the middle of the list is designated as the "average prime cost." If any individual grower's flock prime cost is less than the average prime cost, then OK pays that grower a higher rate per pound than those whose flock prime cost is higher than the average prime cost. In other words, a grower's pay is based on how growers in a group rank against each other, not on the individual grower's production.

The Growers in this case filed suit in the United States District Court for the Eastern District of Oklahoma. They obtained class certification to challenge the following conduct: (1) OK deducts from the Growers' pay certain charges for medicine and supplies; (2) OK sometimes delivers dead chicks to the Growers and causes the Growers to pay for them because OK counts chicks to be delivered at the hatchery, rather than at the Growers' premises; and (3) OK has reduced the number of birds placed per year with the Growers, causing a substantial decrease in the Growers' income. The Growers also challenged OK's competitive ranking system, arguing it is unfair and unconscionable because (1) OK uses the median flock prime cost as the average prime cost, which alters the rankings in a way that benefits OK to the detriment of the Growers; (2) OK exercises control over factors affecting the Growers' performance; and (3) OK calculates the weight of condemned birds, for which OK will not pay Growers, based on the weight of healthy birds, even though condemned birds can weigh up to 50% less than healthy birds. The Growers alleged that OK's conduct constitutes a breach of contract and violates § 202(a) of the PSA, 7 U.S.C. § 192(a). They also alleged that the broiler contract is unconscionable and therefore unenforceable under state law.

OK moved for judgment on the pleadings, arguing, inter alia, that proof of an injury to competition is a required element of a claim brought under § 202(a) of the PSA. The district court judge denied OK's motion, holding that § 202(a) does not require proof of an injury to competition. Approximately eighteen months later, in a motion for summary judgment before a different district court judge, OK re-raised the issue. The Growers argued that the doctrine of the law of the case bound the District Court to its prior ruling and that § 202(a) did not require proof of an injury to competition. In the alternative, they argued that they had presented sufficient evidence of an injury to competition to withstand summary judgment. The court disagreed with all three arguments. After concluding that the law of the case did not bind the court to the prior ruling, the District Court held that § 202(a) requires proof that a practice injures or is likely to injure competition and that the Growers had failed to establish a genuine issue of material fact concerning competitive injury. Consequently, the court entered summary judgment in favor of OK on the Growers' PSA claim. The Growers then moved to reopen discovery for the purpose of determining whether OK's conduct injured or was likely to injure competition. The District Court denied the motion.

Subsequently, in response to a motion filed by the Growers for an interlocutory appeal, the District Court supplemented its summary judgment ruling disposing of the PSA claim. It held that, even if § 202(a) does not require a competitive injury, whether particular conduct is "unfair" within the meaning of § 202(a) is a question of law, and OK's conduct in this case was not "unfair" as a matter of law.

In yet another order, the District Court entered summary judgment in favor of OK on the Growers'...