Monday, June 16, 2008

Chocolate Antitrust Update: Study Shows That Commodity Price Rises Don’t Justify Chocolate Price Increases

Chocolate Antitrust Litigation - I've posted previously (here, here, here, and here) about In re Chocolate Confectionary Antitrust Litigation, MDL 1935 (M.D. Penn.), in which chocolate makers are accused of conspiring to fix prices. A recent study lends some support these accusations.

Rise in Commodity Prices - Hershey's and other chocolate makers have previously blamed the rise in chocolate prices on the rise in the price of commodities such as sugar, milk, and cocoa. They made a similar argument in a recent court filing (.pdf).

Study Contradicts Chocolate Makers' Justification – The chocolate makers' assertion was analyzed in a recent study by Stine Skov and Casper J. Kaufmann at the Copenhagen Business School, who examined whether the rise in commodity prices justified the price increases.

Skov and Kaufmann found that, from 2004 to 2008, sugar prices increased 0.69%, cocoa 60.65%, and milk 11.73%. Weighing the value of the ingredients in proportion to their percentage in a chocolate bar (Snickers, for example) yields an increase in the total cost of production of 15.75%. The cost of production is only one component of the total cost of selling a chocolate bar, and the total cost of a chocolate bar should rise less than the increase in the cost of production.

But the study found that manufacturers increased the total price of chocolate bars by 38.32% between 2004 and 2008 – more than the double the 15.75% increase in the cost of production. Thus, Skov and Kaufmann concluded that the rise in input prices could not explain the rise in the price of chocolate bars.

While the study is not admissible evidence of the conspiracy, it may bode poorly for the defendants, at least insofar as they hope to defend on similar grounds. (The study's executive summary is available here; the full text here).

Alternative Justifications - In their recent court filing, however, the defendants argued that their conduct would not be unlawful if they had simply followed each others' leads in raising prices without conspiring, as "parallel pricing behavior is both common and expected in the ordinary course of business." Such parallel price increases are most frequent in highly-concentrated industries with only a few players, such as fare increases or sales by the airlines.

Defendants contend that the Plaintiffs' allegations are conclusory and fail to plausibly suggest a price-fixing conspiracy, as required under the Twombly pleading standard. Absent additional evidence, the chocolate makers may have a reasonable argument that the plaintiffs' allegations are inadequate. Presumably, however, the government investigations will reveal evidence of price fixing.

Procedural Developments – An initial case management conference was held on May 29. Defendants requested that the court address a motion to dismiss before granting discovery, and that merits discovery not be permitted until after class certification. The chocolate makers also argued that the products at issue in the complaint are not adequately defined.

By contrast, Plaintiffs requested that they be initially provided with copies of documents that have been provided to government investigators, and that discovery not be bifurcated.

The numerous counsel for the Plaintiffs are fighting for control of the litigation as interim liaison counsel. Briefs in support of motions for appointment as interim liaison counsel were filed June 10.

The proceedings are likely to take time to unfold, though numerous chocolate lovers appear to be following the case with interest.

UPDATE: On July 14, 2008, the court issued this order appointing interim lead and local counsel.

Related Posts: Chocolate Price Fixing Cases Consolidated; Retail Grocery Chains File Suit Against Chocolate Makers; Investigation of Chocolate Makers Goes Global; Chocolate Makers Allegedly Fixed Prices


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