Antitrust Lawsuit Against Pacific Seafood Settled – Fishermen, processors reach mediated agreement

By Terry Dillman

Under a freshly-forged settlement agreement, almost two years of parry-and-thrust antitrust litigation filed against Pacific Seafood Group and Ocean Gold Seafoods would likely end with the processors paying attorney fees, but not one penny in damages. The companies would also remain intact, avoiding the breakup requested in the complaint.

The companies must, however, chart a course toward making prices and markets more equitable and competitive.

If US District Court Judge Owen Panner approves the agreement during a hearing scheduled for May 21 in Eugene, Oregon, company officials would face the task of enacting several “pro-competitive” practices outlined in the settlement.

Fishermen who filed the complaint said those practices – if followed – would go a long way toward alleviating the circumstances that led to the legal action.

The initial complaint – filed in June 2010 by Portland-based attorney Mike Haglund for Brookings-based fishermen Lloyd Whaley and Todd Whaley and other “similarly situated fishermen and fishing vessel owners” – alleged monopolization of the Dungeness crab, Oregon coldwater (pink) shrimp, groundfish and whiting seafood markets along the West Coast by Pacific and its owner Frank Dulcich.

Prices paid to fishermen are the central issue. The complaint alleged that Pacific uses its market share of 50 to 70 percent in each of those four critical fisheries and coordinates with other processors to drive down those prices, thus violating federal antitrust laws. It alleges that PSG uses vertically integrated acquisitions, multiple tactics to set and enforce ex-vessel prices, exclusive dealing and tying arrangements, restrictions on output, “theft of seafood commodities” from fishermen, “fraudulent representations” to public agencies, and “miscellaneous dirty tricks.”

During the discovery process, Pacific affiliate Ocean Gold was named as a co-defendant.

The lawsuit requested a trial by jury, and asked the court, among other things, to declare Pacific’s conduct illegal and award the fishermen and fishing vessel owners a class judgment for damages. Judge Panner granted the class action motion in February.

The complaint went through four iterations, including a July 2011 re-filing that added Newport-based pink shrimp fisherman Jeff Boardman, Brookings-based fisherman Brian Nolte and Dynamik Fisheries, Inc. and Miss Sarah LLC as plaintiffs. It also narrowed the scope of the proposed class by dropping the Dungeness crab market, coastal areas south of Fort Bragg, Calif., and crew members who receive salaries rather than a percentage of proceeds.

Both sides appeared ready to go full speed ahead into a July courtroom showdown, but after intense negotiations mediated by US District Court Judge Michael R. Hogan, the fishermen agreed to drop their damages claims in exchange for a package of measures they say are designed to strengthen the West Coast fishing industry, make processing and marketing more transparent and competitive, and to hold Pacific and Ocean Gold accountable.

Fair Prices and Following Markets
Haglund said the five-year agreement was a trade-off between trying to recover damages for past actions and focusing on actions to improve the situation now. Sailing into the stormy seas of a trial would prolong the matter by as much as three years or longer, followed by appeals. Haglund said the number of unsettled questions concerning antitrust law that the complaint dredged up could eventually have carried the legal action into the US Supreme Court.

While Newport-based Oregon pink shrimp fisherman Jeff Boardman – who signed onto the complaint in July 2011 and participated in the settlement negotiation process – has “mixed emotions” about the agreement, he said it “should benefit the fleet in the long run.”

“It was never really about the money, anyway,” Boardman added. “It was about making the situation better for the fleet.”

Specifically, they focused on boosting to-the-boat prices for fishermen by breaking the processors’ stranglehold on the markets and what fishermen say is the companies’ ability to unfairly suppress those prices.

Company attorneys led by Portland-based Michael Esler never contested the notion that the companies have large market shares in the whiting, groundfish, Dungeness crab and pink shrimp fisheries. But they did note that prices in a number of fisheries have actually gone up due to their market clout, based on their ability to “reliably deliver” huge quantities of fresh fish and open up new markets throughout the world. They say the complaint lacked sufficient evidence to prove antitrust violations, which required the fishermen to show that the companies used their powerful market positions to unfairly hold down prices or otherwise harm fishermen and competing processors.

Boardman fished for Newport Shrimp and Clearwater before PSG took over the processing facility on Newport’s Bayfront, remaining for a time afterward until he decided things weren’t going in the best direction for the fishermen.

“I tend to be loyal, but I felt they weren’t loyal to me,” he noted.

Boardman and others say wholesale and retail prices have risen, but to-the-boat prices have fluctuated considerably and most often unfavorably for the fishermen. Other fishermen say nothing is wrong, that ex-vessel prices reflect market fluctuations and they are satisfied with the status quo.

Coming to Terms
While Pacific and Ocean Gold escaped a potential $70 million-plus judgment had they eventually lost the case, they will reportedly pay as much $2.6 million in attorney fees, and must adhere to multiple terms written into the agreement.

Under the agreement, a 10-year contract between Pacific and Ocean Gold will not renew in 2016, and within 10 days of the settlement’s approval, sections of the contract dealing with setting fish prices will become void. The fishermen alleged that the contract allowed the companies to use collective buying power to fix and hold down prices paid to fishermen. Nothing prevents the companies from inking a new contract, but if it requires Pacific to “act as the exclusive marketer” of any OGS seafood product, Judge Hogan would have to approve it.

Haglund called this “one of the most significant features” of the agreement, noting that if a new contract between Pacific and Ocean Gold were considered anti-competitive, Hogan couldn’t and wouldn’t approve it.

This opens the hatch for Ocean Gold to become a major independent competing processor four years from now. Also, Haglund said market forces emerging from the rise of the middle class in Asia and China could foster additional competition by bringing new processors to the West Coast.

The agreement also eliminates potential conflicts of interest involving fishermen’s cooperatives in Oregon, Washington and California.

The lawsuit claimed a Pacific employee in Charleston also ran a fish co-op there, which the fishermen called a serious conflict of interest. The processors agreed their employees could no longer serve as co-op managers. Pacific and Ocean Gold vessels and their affiliates may still participate in fishermen’s cooperatives, associations, joint purchasing and/or harvest and risk pools “authorized or permitted by court order, statute, administrative rule, order, law or other regulatory action.” They may also enter purchase agreements with cooperatives, and regularly meet with cooperative members “to discuss industry concerns, including harvesting, bycatch reduction and scheduling.”

Pacific also agreed to sell a piece of fallow waterfront property in Crescent City, California at fair market value to anyone who would use the location as a seafood processing plant, unless Pacific has “reasonable business purpose” in keeping the property for current or future needs.

Pacific and Ocean Gold, which operate the largest processing plants that turn fish waste into fishmeal, must now accept “on commercially reasonable terms” weighbacks and scrap fish from new and existing processors if the companies’ plants have the capacity “to reasonably handle scrap from other processors.” Company attorneys said both companies were already purchasing from competitors, refuting the lawsuit allegation that, as the only buyers in certain ports, Pacific and Ocean Gold were eliminating competition by refusing to buy product from competitors.

Both companies agreed to pay ex-vessel prices “negotiated with fishermen” for all groundfish and whiting processed at their plants, except when “an individual fishing vessel enters into an agreement under which the fishing vessel is harvesting species allocated to quota owned by the processor or otherwise agreed between the parties.” They also agreed to continue the “open door” practice of allowing captains or vessel owners to observe weighing and grading of catches “whenever and wherever reasonable under the circumstances.”

For the 2013 fishing seasons, Pacific and Ocean gold agreed to “separately negotiate in good faith” with fishermen for “alternative pricing approaches” for onshore whiting, groundfish and pink shrimp.

Both companies also agreed to buy from the fishermen represented in the lawsuit, including those who sued, for at least the next 10 years. It did have two stipulations: the vessel owners or operators must provide 90 days notice, and the companies “will not have to deal directly” with Lloyd Whaley.

In the Pink
Pacific also agreed to not concentrate its large fleet of pink shrimp fishing vessels at any one of its processing plants, and agreed to not send out any processor-owned vessel before they reach an agreement with fishermen on ex-vessel prices or other vessels have started to fish. Pacific and Ocean Gold also agreed – if fellow processors Bornstein Seafoods and Hallmark Fisheries would do the same – to provide their average pink shrimp wholesale prices to commodity market news reporting service Urner Barry, allowing fishermen access to that information to use in price negotiations.

Both companies also agreed to purchase and pay for pink shrimp on a peel-count basis, and to standardize ice sampling procedures at all plants.

Oversight
Judge Hogan inserted a “czar rule” in the agreement, which gives the judge final say in such matters, including whether or not to grant a five-year extension when the initial five-year time frame expires. Boardman, who now delivers his catches to Charleston-based processor Hallmark Fisheries, called the czar rule “one of the best things we could get,” but Hogan’s refusal to include a cap on how many vessels Pacific could own disappointed him.

Overall, Boardman considered the agreement “the right thing to do.”

According to the agreement, the fishermen acknowledged that some of their concerns arose “out of mistrust and a lack of understanding” between them and the processors, who “have made substantial investments that contributed to the development of international markets for West Coast seafood products that benefit the industry.”

The processors, in turn, acknowledged that the measures outlined in the settlement would “reduce fleet-processor conflict over ex-vessel prices, increase transparency and improve competitiveness of the West Coast fishing industry.”

Those fishermen who were caught up in the class action net and have issues regarding the terms of the settlement had until May 7 to file any objections and prepare for the May 21 hearing before Judge Panner, who granted the class action motion in February. Haglund said they would mail out or publish court-ordered notices for the estimated 1,200 to 1,500 individuals encompassed by the class of commercial fishermen and fishing vessel owners who delivered trawl-caught groundfish, whiting or pink shrimp to seafood processors on the West Coast from Ft. Bragg, Calif., to the Washington-Canada border at any time between June 21, 2006 and Dec. 31, 2011.

Hogan commended both sides for their willingness to “make huge compromises” to reach an accord.

“This case could have gone on for years, including appeals,” he said. “The fishermen and the processors, especially Pacific Seafood Group, are to be commended for taking a statesmanlike approach to resolving a complicated case. These parties focused on how to ensure the West Coast fishing industry for the future. Competition in this industry benefits both fishermen and processors, but also consumers over the long run.”

Ironically, Boardman said fishermen were still mired in price negotiations well past the season’s April 1 opening, although some vessels had already ventured out. Shrimpers wanted what Boardman deemed as “a modest 10 percent increase over last year’s prices, which he said “would be fair on both ends,” especially when market indicators point to a 20 percent hike in ex-vessel prices as being a fair market price.

The 2011 season started late because shrimpers and processors were haggling over opening prices.

Boardman said he and other fishermen were looking into creating a committee of representatives from different fishing associations along the coast “to look at wholesale prices and market access.” Such a committee, he noted, could help negotiate prices and “put out a report card” on different fisheries and processors.

Terry Dillman can be reached at tdwordwright@gmail.com