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Pizza Hut Takes on Dairy Farmers’ Co-op

INDEPENDENCE, Mo. (CN) - Pizza Hut and three franchisees demand punitive damages from the Dairy Farmers of America, which they say inflated the cost of cheese by buying up large quantities of block cheddar in the Chicago Mercantile Exchange's spot cheese market. The DFA, the largest dairy co-up in the nation, was fined $12 million for the cheesy scheme in 2008 by the Commodity Futures Trading Commission, Pizza Hut says.

Pizza Hut and three multiple-franchise owners sued the DFA and its former CEO Gary Hanman and former CFO Gerald Bos according to the complaint in Jackson County Court.

The DFA, formed in 1998, has nearly 18,000 dairy farmers as members in 48 states, and supplies one-third of the fluid milk in the United States, according to the complaint.

The three plaintiff franchisees own 3,000 Pizza Hut outlets. The plaintiffs say they buy "approximately 275 million pounds of cheese per year" through the (nonparty) United Foodservice Purchasing Co-op and (nonparty) supplier Leprino Foods Co. Through those entities, Pizza Hut seeks a "stable source" of "quality goods" at the lowest possible price, Pizza Hut says.

According to Pizza Hut, the cost of each cheese purchase is based on the sum of "the weekly average Spot Cheese Market price for block cheddar," and "a specific premium" outlined in its agreement with Leprino, which makes its cheese from milk bought from DFA.

To raise the value of milk futures contracts, DFA, Hanman and Bos had the co-op buy multiple loads of block cheddar cheese - knowing they would have to dispose of it "at a loss" - manipulating cheese prices and pushing the inflated cost on to Pizza Hut and the franchisees, according to the complaint.

A CFTC investigation revealed that in early 2004, DFA bought approximately 12.9 million pounds of cheese at $1.80 per pound, "in order to keep block cheddar prices from declining," the complaint states. It continues: "During this period, DFA was the sole purchaser of block cheddar cheese on the CME."

"On June 23, 2004, when DFA stepped back from its purchases on the CME, the price of block cheddar cheese moved immediately to $1.6050 per pound, and eventually settled at $1.3600 per pound by July 7, 2004," according to the complaint.

DFA also bought multiple loads block cheddar between Sept. 1, 2004 and Oct. 1, 2004, to hold cheese prices "at a particular level" - a scheme that it had run several times over previous years, Pizza Hut says.

Pizza Hut and the franchise owners say they have unfairly paid artificially high prices for "millions of pounds of cheese" under its agreement with Leprino, and that their profit margin was significantly reduced due to DFA's misconduct.

"In May and June 2004 alone, plaintiffs and UFPC's owner-members purchased approximately 47.6 million pounds of cheese under the Leprino Agreement at prices artificially inflated," they say.

The DFA agreed to pay the CFTC's $12 million fine without admitting or denying guilt, Bloomberg News Service reported in May.

Pizza Hut and its franchisees demand actual and punitive damages from Dairy Farmers of America, Hanman and Bos, alleging tortious interference and civil conspiracy. Their lead counsel is Todd Ruskamp with Shook, Hardy & Bacon.

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