How Sunkist Put the Squeeze on the FTC

When oranges were dumped by the truckload in California last spring, accusing fingers were pointed at Sunkist, monopolist of the western citrus market. How does Sunkist maintain its monopoly? Public records and personal interviews tell the story.

By the spring of 1981, the world of Sunkist had returned to normal:

• Nearly half of the year's record crop of western navel oranges was being withheld from the consumer market under an industry-run marketing control process dominated by Sunkist.

• Wholesale prices for navel oranges were 12 percent higher than the year before despite a bountiful 30 percent increase in the harvest that, in a free market, would have lowered prices.

• Litigation by the Federal Trade Commission (FTC), originally intended to reduce Sunkist's monopoly power over the western citrus fruit industry—power granted to it by another arm of the feds, the Department of Agriculture (USDA)—had ended with a minor wrist slap and a fully intact Sunkist-USDA monopoly.

The rosy orange glow in Sunkist's future is not an accident. It has more to do with the political climate in Washington than with growing conditions in southern California. The brief spate of adverse national publicity last April has faded from the public memory. People have largely forgotten the scenes of tens of millions of navel oranges dumped and rotting in the sun to keep prices artificially high.

Meanwhile, the political power of Sunkist in our nation's capital is as strong as ever. Just ask the FTC. It learned about "orange power" the hard way—and it barely survived the lesson.

Of course, it's hard to shed tears over the FTC's being taught a lesson by anyone. The good it does by accident is more than offset by the harm it does intentionally. But the story of why and how Sunkist cowed the FTC goes a long way toward explaining the impunity with which the giant orange cooperative last spring caused the destruction of tons of oranges while the USDA smiled in satisfaction and the Justice Department stood by, ready to levy $10,000 fines against "criminal" growers who tried to offer more than the allotted share of their crops to willing buyers.

SLEEPING GIANT

The Federal Trade Commission is an unlikely enemy for a large, government-protected business entity like Sunkist. It is a child of the Progressive Era, that age in which Teddy Roosevelt, William Taft, and Woodrow Wilson served as presidents; trusts were being busted; and big-business leaders like Andrew Carnegie and Judge Elbert Gary of US Steel were openly praising the benefits of government price-fixing and federal regulation of the economy. The Federal Trade Commission Act, passed during President Wilson's administration, was designed at the behest of business leaders like Carnegie and Gary, to eliminate the "uncertainty" engendered by the courts in interpreting existing antitrust legislation (the Sherman and Clayton acts).

Wilson obliged the big-business desire for stability. By the end of his eight years, he had brought far fewer antitrust cases than his Republican successors, Harding and Coolidge, would. But he also appointed Edward Hurley as the FTC's first vice-chairman and later its chairman. As Gabriel Kolko records in The Triumph of Conservatism, upon his promotion to chairman, Hurley told the National Industrial Conference Board:

I do not know anything about the law, and that applies to the Clayton Act and to the Federal Trade Commission Act. In my position on the Federal Trade Commission I am there as a business man. I do not mind telling you that when I was offered the place I told the President that all I knew was business…and that I would apply the force that I might have in the interest of business…and I think that the business men of the country will bear me out when I say that I try to work wholly in the interest of business.

The interest of big business is what Edward Hurley meant. That was the way the FTC was intended to work and, with few exceptions, that was the way it did work until the 1970s. As one government observer summed up the FTC's record in testimony before a congressional hearing in 1974:

The people who head the agency carefully avoid…controversial areas and…concentrate their attention instead on targets that don't—and can't—shoot back at them. They carefully search out instances of petty fraud to get in their quota on the "deceptive practices" side of their docket. On the "antitrust" side of the ledger, the filler is an endless series of cases involving equally petty instances of so-called "unfair" business practices used most frequently in the competitive rather than the concentrated sector of the economy.…

Even as this indictment was uttered, however, the FTC was in the process of changing. Ignoring its origins, in the 1970s the agency started picking fights with some of the biggest vested business interests in Washington. Antitrust actions or investigations were commenced against the heavily regulated insurance and drug industries, the American Medical Association, the organized bar, and, ominously for Sunkist, large agricultural cooperatives.

BEEFING UP THE FTC

At first, this new-found activism did not manage to offend Congress. Indeed, Congress appeared to be pleased, for in 1974, via the Magnuson-Moss Act, it obligingly gave the FTC increased authority—to promulgate industry-wide regulations of competitive conduct.

Up till then, the FTC's modus operandi had been to deal with individual companies case-by-case if there was reason to believe that their activities were unfair or anticompetitive (the scope of the FTC's judgment). The half-baked theory behind granting increased rule-making power was that such case-by-case adjudication was too time-consuming and unpredictable. Congress believed at the time—and the FTC eagerly agreed—that what was really needed was agency power to make preemptive regulations governing entire industries.

For organized business interests, the predictability of uniform government regulation was appealing. With no regulation, a business's competitors might gain the upper hand by engaging in practices that this business owner would never consider; but with regulation, every business would have to toe the same line. Regulation would banish some of the uncertainties of competition. So business lobbyists didn't object too vigorously to the Magnuson-Moss Act.

Armed with this new ammunition, the FTC promptly proceeded to shoot itself in both feet. Now, in addition to its actions against long-protected big business, it began to initiate wide-ranging proceedings against a host of decentralized industries made up largely of small businessmen. No doubt it viewed its activities as protection of the otherwise defenseless American consumer from such evil examples of capitalism as home insulators, vocational trade schools, advertising for antacids, advertising for ophthalmic goods and services, funeral homes, health spas, hearing aid dispensers, mobile home and used car dealers, and television advertising for children's products.

What the FTC failed to appreciate was that the case method only offended one company at a time, while competitors sat by and chuckled at the poor fellow's bad luck to have been singled out by the feds. Promulgating a rule for an entire industry, on the other hand, meant that all the businesses in that industry would be united against the FTC.

CO-OPS UP IN ARMS

Sunkist was not initially upset with the FTC's new activism, but that soon changed. Because of the illegal excesses of the dairy lobby that came to light in the Watergate investigations, it became fashionable during the Ford administration to take on the dairy lobby, and agricultural co-ops generally.

In 1976 the Ford Justice Department issued a massive 600-page report recommending the abolition of USDA milk marketing orders, whereby milk producers can jointly decide how much milk will be sent to which markets, thus controlling the prices of milk and milk products. The report also recommended that antitrust laws be more vigilantly enforced against the predatory practices of the giant milk co-ops. For a time in late 1975 and early 1976, Edward Kennedy appeared to have singled out dairy co-ops as his next deregulation target after the airlines.

The FTC staff did Justice and Kennedy one better. It investigated all USDA agricultural marketing orders—from milk to citrus fruit to nuts. Farmers and the USDA are of one voice in explaining the benefits of these orders: to assure a stable supply of good-quality farm products. Of course, achieving a stable supply means that goods must be withheld from the market in bountiful years or seasons, which means that the marketing orders directly result in higher-than-otherwise prices. In a comprehensive report issued in 1976, the FTC documented in meticulous detail the absence of any economic benefits from agricultural marketing orders except their usefulness as a device for transferring income from consumers to farmers.

Needless to say, Sunkist and other agricultural co-ops were not happy. As not-for-profit organizations, they have tax breaks from the government that other corporations only dream about. They are allowed to conspire together and fix prices with impunity. For such acts, their counterparts in nonagricultural businesses would have long since landed in federal penitentiaries.

It should come as no surprise, therefore, that agricultural co-operatives were quite concerned about protecting their privileged position at the public trough. Much to their dismay during the Carter years, the FTC continued its inquiries into co-op behavior, "unfairly" picking on Sunkist and such other giant cooperatives as Ocean Spray, the cranberry monopoly, and Dairymen's Inc., a key member of the dairy lobby.

But Sunkist was one of the most disturbed. An agricultural co-op of Western citrus growers that has annual sales of over a half billion dollars, it is a member of the Fortune 500 and controls 75 percent of the production of lemons and oranges in the western United States. In June 1977 the FTC issued a complaint alleging that Sunkist had achieved and maintained a monopoly in the western citrus fruit industry.

Among other things, the FTC charged Sunkist with (1) maintaining illegal "exclusive dealing" contracts with some 51 commercial citrus packing houses under which they were not permitted to pack fruit for non-Sunkist members or otherwise do business with competitors of Sunkist; (2) withholding large supplies of lemon products from the market in order to keep prices artificially high; and (3) refusing to sell its products to competing processors and marketers. All of this was naturally accomplished by Sunkist with the active approval and connivance of the USDA.

In its answer to the FTC's complaint, Sunkist claimed that the FTC didn't have jurisdiction and that only the secretary of Agriculture can hear antitrust claims against a co-op. The argument was unsupportable. Apart from the fact that the law is clearly to the contrary, no secretary of Agriculture in this century has ever had an antitrust lawyer working for him let alone utilized his limited statutory authority to restrict monopolization of co-ops and other antitrust violations.

The full commission rejected the argument in June 1978. Sunkist sought an injunction against the FTC in federal court in California and lost there in January 1979.

Unable to prevail in litigation, Sunkist turned to legislation. Now, its skillful lobbyists were let loose, led by its vice-president for governmental affairs, William Quarles. Sunkist's strongest allies were congressmen from California's central valley, like Tony Coelho (D-Calif.) and Charles Pashayan (R-Calif.). Their common purpose was clear and straightforward: get the FTC off the co-ops' backs, and kill its antitrust action against Sunkist. But they needed a broader coalition and a broader vehicle if they were to stand a chance of success. Fortunately for Sunkist, the legislative vehicle had already been prepared, and all it had to do was hop on board.

"REFORMING" THE FTC

By the late 1970s, the FTC's seemingly indiscriminate attacks on big and small business alike had for once forged a common bond among these two frequently divergent interests. They both wanted relief. Given the tenor of the times, the obvious political solution was deregulation—repeal of Magnuson-Moss and a compromise return to the time-consuming, albeit more steady and less offensive, method of case-by-case adjudication.

The relief that business wanted, however, was not quite like that. Why not seize the opportunity to ensure the best of both worlds: the comfort and security of regulation in place of the uncertainties of the free market plus the chance to lobby Congress for repeal of particular FTC regulations that weren't to their liking? Prime targets were regulations that would aid consumers by undoing government protection of businesses—for example, lifting state bans on advertising of certain products and services, bans that have been shown in study after study to account for higher consumer prices.

The US Chamber of Commerce and the National Association of Manufacturers combined with many small business interests to support such a "legislative veto," whereby Congress could override FTC rule-making. The House of Representatives had long been receptive. Since 1976 it had been routinely attaching to FTC funding-and-authorization legislation a provision for a one-house legislative veto of any offending FTC regulations. This, of course, was the institutional equivalent of hanging a large "votes for sale" sign on the front door of the House. In late 1979 it included a similar provision in its version of FTC reform legislation, the "FTC Improvements Act." The Senate had regularly rejected, by large margins, a similar demeaning of its chamber. In February 1980, in its version of the Improvements Act, the Senate again rejected the one-chamber veto—but by a much narrower margin of 53-44. The House saw its chance and decided to make an all-out push. Proponents in the House threatened to cut off the FTC's funds unless the House-Senate conference committee included a legislative veto in the final bill.

The Senate did not give in without a struggle. A compromise was finally reached in April 1980 on a somewhat more complicated, two-house, legislative veto. Before it was reached, the FTC actually had to close its doors for 24 hours because of a lack of funding, and Jimmy Carter had to intervene personally and meet with the conferees at the White House to help effect the compromise.

BEHIND ANDREWS, ORANGES

Sunkist did not care about a legislative veto over the FTC. It had its own priorities to protect, the chief one being to get the FTC out of agriculture in general and USDA marketing orders in particular. But the FTC Improvements Act with its legislative veto was an ideal vehicle. Late in 1979 Sunkist and its fellow cooperatives in the dairy lobby succeeded in rushing through, without hearings, a last-minute amendment to the House version of the bill that completely exempted agricultural co-operatives and USDA marketing orders from FTC scrutiny.

The legislation was introduced in the House by Rep. Mark Andrews (R-N.D.), now the junior senator from North Dakota. Known as the Andrews Amendment, it provided that the FTC could not spend any funds to study, investigate, or prosecute any agricultural co-operative or to study or investigate any agricultural marketing orders. Specifically:

• The FTC could not conduct economic analyses to determine the consumer price effects of USDA marketing orders—the control mechanism of government-sanctioned and organized cartels that govern the supplies and prices of citrus fruits, nuts, cranberries, milk, and other politically favored commodities.

• The FTC could not respond to congressional inquiries and requests for comments on legislation concerning co-ops, marketing orders, or competition in agricultural industries.

Also included in the amendment, but not ultimately passed by both houses, were provisions forcing the FTC to call a halt to enforcement of existing antitrust judgments against co-ops; to abandon its major antitrust suit against Sunkist for illegally monopolizing the western citrus fruit industry; and to drop major antitrust investigations of Dairymen's, Inc., the nation's second-largest dairy co-op, and Ocean Spray, the northeastern co-op that monopolizes the cranberry industry.

Supporters of the Andrews Amendment attempted to pass it off as "deregulation," capitalizing on the FTC's unpopularity at the moment on Capitol Hill. The truth is far different. The purpose of the Andrews Amendment was not deregulation—getting the government off the backs of businesses so that they can compete in the marketplace, vying for consumers' dollars by outdoing one another in prices and quality. Rather, the blatant purpose of the amendment was to get the FTC off the backs of co-operatives like Sunkist, so that they could continue to enjoy the insulation from competition provided by USDA marketing orders. It was to keep the FTC from publicizing the anticonsumer, inflationary nature of these cartels. And it was to kill the antitrust lawsuits and investigations of the monopoly positions that the co-ops had been able to create under the protective wing of another government agency, namely, the Department of Agriculture.

Mark Andrews was the front man for Sunkist. He was undoubtedly recruited to introduce the legislation because, as Andrews himself defensively observed in the House debate on his Amendment, "Coming from North Dakota, nobody can accuse me of being the Congressman from Sunkist, because somehow or another, 40 below zero does not produce oranges."

No hearings were ever held on his amendment. Andrews never once met to discuss its language or meaning with the consumer protection subcommittee of the Interstate Commerce Committee, even though it was that committee that had jurisdiction over the FTC Improvements Act.

Instead, Andrews took his amendment directly to the Rules Committee of the House, where he successfully sought permission for it to be offered on the floor when the House considered the FTC Improvements Act. To no avail, some of the members of the Rules Committee questioned the propriety and unusual precedent of allowing an amendment to be offered on the floor pursuant to what was essentially a closed rule, particularly when there had been no hearings on it.

Andrews's presentation to the Rules Committee seemed to many to have been drafted by Sunkist, there being a remarkable similarity between his prepared statement and a November 1979 letter sent by Sunkist lobbyist Quarles to Rep. Mo Udall (D-Ariz.) and others in support of the amendment. Additional evidence of Andrews's role as a Sunkist front man arose at a luncheon in November 1979 between Andrews, Representative Pashayan and another congressman, James Scheuer (D-N.Y.), an opponent of the amendment; and representatives from the FTC and the general counsel's office of USDA. Interviews with an FTC lawyer who was present at the meeting reveal that it was arranged by Scheuer to clear the air and explore possible compromises between the supporters and opponents of the Andrews amendment.

The luncheon accomplished nothing, however, other than to confirm that Andrews and Pashayan knew little about antitrust law and even less of the legislative history of the 1920s legislation known as the Capper-Volstead Act. Both insisted that Capper-Volstead had "removed" the FTC from any jurisdiction over agricultural co-operatives—a legal position better known for its frequent appearance in Sunkist's legal briefs than for its citation in any reported court decisions.

Sunkist and Andrews were not interested in a compromise. Apparently, he and his co-op patrons were counting on the House, in its justified fury over the FTC's indiscriminate use of its rule-making authority, voting for anything that would restrict the FTC, even if its purpose was to further enhance the government-granted monopoly position of agricultural co-operatives like Sunkist. Their gamble paid off. The House approved the Andrews Amendment by a vote of 245 to 139.

ORANGE POWER PREVAILS

On the other side of Capitol Hill, several senators, including Alan Cranston (D-Calif.), considered introducing a similar amendment to the Senate version of the FTC Improvements Act. They were persuaded not to do so by the Senate leadership in order to avoid putting individual senators in the politically compromising position of having to vote to kill a major antitrust case. By that time, though, Sunkist and Andrews no longer cared about the antitrust case. With its funds cut off, the FTC was desperate. Harassing businesses on a case-by-case basis was beginning to look positively rosy compared to tangling with a huge government-protected entity like Sunkist. So the FTC capitulated, agreeing not to have its Senate allies oppose that portion of the Andrews Amendment that prohibited the FTC from ever again studying or investigating USDA agricultural marketing orders.

Andrews, flush with success, was off to run for the US Senate. He promptly sent a newsletter to the homefolk claiming a great victory: "The FTC…removed their objection to many of the amendments restricting their actions, mine included.…Hopefully…the FTC will have learned a. lesson." Many believe it has. Just ask Sunkist, whose big, round, overpriced orange face is still sporting a wide smile.

Sunkist got most of what it wanted from Congress when its USDA marketing orders were made safe from FTC scrutiny. It got almost all the rest from the FTC itself when, in August 1980, the FTC quietly and without fanfare withdrew the Sunkist antitrust case from litigation, ostensibly to facilitate settlement discussions, in reality to arrange an honorable surrender by the FTC, a surrender finalized in February 1981. And the tons of rotting oranges dumped later in the spring were icing on the cake.

Meanwhile, the FTC has returned to its roots, harassing small businesses and ignoring those favored by the government like Sunkist and other large agricultural co-ops. But poor Sunkist and its confreres may be facing another battle: agricultural marketing orders have been placed on the Reagan administration's "hit list" of government regulations to be scrutinized for possible elimination. Consumers, for their part, must be worried that this attempt, like the FTC's, will be reduced to pulp by Sunkist.

Michael McMenamin is a Cleveland attorney and coauthor of Milking the Public: Political Scandals of the Dairy Lobby from LBJ to Jimmy Carter. Diane Connelly does freelance research and reporting for Business Week and Reader's Digest.