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Logic Melts in Dismissal of Chocolate Price-Fixing Lawsuit

By Rich Duprey - Mar 3, 2014 at 7:00PM

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Industry players absolved of guilt despite some of them admitting to as much elsewhere.

Funny how a judge in one country can ignore admissions of guilt by participants in a crime in another country, and dismiss all charges against the perpetrators for a lack of evidence here at home.

Last year after Mondelez International's ( MDLZ 1.34% ) Cadbury unit confessed to Canadian authorities it had participated in a price fixing scheme, co-conspirators Hershey ( HSY 1.65% ), Nestle ( NSRGY 1.59% ), and Mars ended up paying a total of $23.2 million in fines for their roles. Cadbury got off scot-free because it dimed out the others first -- Canadian law allows the first participant to step forward and admit guilt to gain immunity -- and Hershey had to pay just $4 million because it cooperated with authorities. 

Nestle and Mars, however, which both denied any collusion to fix prices, bore the brunt of the balance of the total, as did distributor Itwal. 

Yet here in the U.S., a federal judge this week dismissed all claims against the chocolatiers (all except Cadbury, that is, as it settled the claims against it in 2012) that were brought by some 91 grocery stores, drugstores, and other businesses that purchased chocolate products. Middle District Chief Judge Christopher Conner ruled that even though the defendants all hiked their prices by identical or nearly identical amounts over that time, and often did so at the very same time, cocoa prices also rose 53% between 2002 and 2009, so the price hikes don't necessarily mean anything.

Even though Hershey, Nestle, and Mars control 75% of the U.S. chocolate market, and the small number of players could have opened the door for collusion, does not mean it actually occurred, the judge said. He did go on to note in his ruling that "the record reveals that [the companies] were frequently surprised by both the timing and amounts of their competitors' increases," but to Conner the hikes that occurred in 2002, 2004, and 2007 were just a normal business response to rising industry costs.

The admission by Cadbury to fixing prices in Canada is irrelevant to what occurred in the U.S., as the judge noted, "Nothing scandalous or improper has been discovered within our borders." That's an interesting assertion, particularly since Cadbury paid $1.3 million to settle price-fixing claims here and was required to help the plaintiffs in their case against the other three chocolate companies that refused to settle. And the same judge approved the agreement.

Cadbury itself was the victim of a price-fixing scheme in Australia between 2000 and 2004 when its corrugated fiberboard supplier Amcor colluded with industry partners to raise prices on its packaging. As in Canada, Australia has an immunity law that allowed Amcor to blow the whistle on its co-conspirators and escape prosecution, though Cadbury still filed a lawsuit against the company that was settled out of court.

Sure, many companies believe it's cheaper to settle a case than fight for their innocence, though it seems oftentimes that course of action just invites more lawsuits. However, when participants to a scheme have admitted crimes occurred elsewhere, it's hard to believe they didn't occur everywhere, and that could be the basis for an appeal by the plaintiffs.

This lawsuit is not likely to melt away for the chocolate makers anytime soon, but even if they are ultimately found to have fixed prices, the impact of any fines imposed would likely not be material to their operations -- suggesting that if you're still sweet on its chances, Hershey's stock at least would satisfy your portfolio's chocolate cravings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Mondelez International, Inc. Stock Quote
Mondelez International, Inc.
MDLZ
$60.26 (1.34%) $0.80
Nestle S.A. Stock Quote
Nestle S.A.
NSRGY
$129.64 (1.59%) $2.03
The Hershey Company Stock Quote
The Hershey Company
HSY
$179.61 (1.65%) $2.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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