The nation's fifth largest poultry processor has agreed to stop penalizing chicken farmers who exit their contracts to work for other companies, in a proposed consent decree with the Justice Department.
Koch Foods has agreed not to impose the penalties for seven years, DOJ announced Thursday. In addition, it will not attempt to fine current growers and reimburse those that previously paid the fees or accrued legal costs fighting them.
The agreement was filed a day after the USDA unveiled a final rule aimed at improving transparency in the poultry industry by forcing integrators to disclose additional financial information to producers before signing contracts with them.
“The Packers and Stockyards Act stands for fairness, and that’s what this enforcement action today delivers,” USDA Senior Advisor for Fair and Competitive Markets Andy Green said in a release. “This action to protect growers’ right to compete signals the joint commitment of the USDA and Justice Department to open competitive markets.”
The agreement was filed in the Northern District of Illinois, where Koch is located, along with a complaint alleging the company violated the Sherman Act and the Packers and Stockyards Acts for assessing "exit penalties," ranging from between $24,000 to $56,000 to producers who switched to different processors within 10 years of contracting with Koch. Koch later extended the length of time to 15 years.
The lawsuit said the fees amounted to between 50% to 100% of several farmers' incomes after deducting operating expenses.
The fees, which began in 2014, are an "unfair practice" that suppress competition in the poultry industry, the lawsuit argued. Switching processors is often the only way chicken farmers are able to obtain better working conditions or pay, but it can be costly, risky and difficult — even without the additional penalties, DOJ said.
"The goal of Koch's exit penalty is clear: Koch wants to make it more difficult for its growers to switch to another processor," the lawsuit said.
Koch, according to the lawsuit, adopted the penalties under a "new house incentive" program aimed at young and beginning farmers that are "financially insecure, less familiar with the growing business, and short on collateral — making them more inclined to accept 90 or 100 percent financing from lenders." The company would show potential growers a "payback analysis" based on raising 6.5 flocks a year, though the company — which chooses how many birds to deliver to growers — is not obligated to provide that many.
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The company waited to inform some farmers of the exit penalty until after they "signed a loan for poultry facilities with the bank, drawn down the loan, and completed construction of new broiler houses," the complaint said. When farmers finally do sign the contract, the penalty is "non-negotiable."
Koch, the lawsuit added, has sued or threatened to sue at least 14 farmers looking to switch to other processors. Some of those farmers have "declined better opportunities with other processors" to return to Koch when faced with the exit penalty.
"Koch's highly visible efforts to collect its exit penalties have deterred farmers who might otherwise avail themselves of competition between Koch and other processors to obtain better compensation for themselves and their families," the lawsuit said.
Koch Foods operates eight U.S. poultry processing complexes and holds contracts with more than 800 farmers, according to the lawsuit. It is not affiliated with the larger and better-known Koch Industries.
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