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How Monsanto Outfoxed the Obama Administration

The inside story of how the government let one company squash biotech innovation, and dominate an entire industry.
 
 
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"MON 810", a variety of genetically modified maize (corn) developed by Monsanto Company is pictured January 23, 2012. The agricultural giant posted a large increase in quarterly earnings on strong results in corn seed sales in the US and Latin America and

 

 

Last November, the U.S. Department of Justice quietly closed a three-year antitrust investigation into Monsanto, the biotech giant whose genetic traits are embedded in over 90 percent of America’s soybean crop and more than 80 percent of corn. Despite a splash of press coverage when the investigation was initially announced, its termination went mostly unreported. The DOJ released no written public statement. Only a brief press release from Monsanto conveyed the news.

The lack of attention belies the significance of the decision, both for food consumers around the world and for U.S. businesses. Experts who have examined Monsanto’s conduct say the Justice Department’s decision not to act all but officially establishes the firm’s sovereignty over the U.S. seed industry. Many of them also say the decision ratifies aggressive practices Monsanto used to entrench its dominance and deter competition. This includes highly restrictive contractual agreements that excluded rivals, alongside a multibillion-dollar spree to buy up seed companies.

When the administration first launched its investigation, many antitrust and agriculture experts believed it was still possible to imagine an industry characterized by greater competition in the marketplace and greater diversity in seeds. That future may now be foreclosed.

The investigation into Monsanto’s business practices began at the state level in 2007, when attorneys general in Iowa, Texas and a handful of other states initiated an inquiry into the company’s confidential licensing agreements. These are the contracts that must be signed by any seed company wishing to insert Monsanto’s genes into its own strains of soybean and corn plants.

State officials uncovered agreements that, in one form or another, required seed breeders and retailers to favor Monsanto over its competitors. One provision, for example, prohibited seed companies from combining Monsanto’s genetic traits with the traits controlled by its rivals, unless given explicit written permission from Monsanto. Since the vast majority of U.S. corn and soybean crops contain Monsanto’s genes, the company could effectively lock out competitors.

In another arrangement Monsanto stipulated its product Roundup as the only herbicide farmers could apply to its Roundup Ready crops. Competitors say this tactic blocked a cheaper, generic herbicide from the market.

Monsanto also promised significant rebates to seed companies that agreed to ensure its products made up at least 70 percent of certain lines of inventory. Many seed dealers have said Monsanto’s policies dissuaded them from promoting competitors’ products.

Monsanto’s action were “very bad,” said one state lawyer who investigated the confidential agreements, and who asked not to be identified because he was not authorized to discuss them. “If a seed company didn’t play by Monsanto’s rules, it could wipe that company out.”

Soon after President Obama took office, two years into the state-level investigation, the Justice Department opened its own inquiry into Monsanto’s practices. At the time, the event was reported as major news. Of all the antitrust efforts undertaken by the new administration, the Washington Post wrote, the Monsanto investigation appeared to “have the highest stakes, dealing as it does with the food supply and one of the nation’s largest agricultural firms.”

Federal and state antitrust laws have been blunted in recent decades by pro-business administrations and courts. Still, antitrust law maintains a highly critical view of the kinds of contractual restrictions Monsanto habitually imposed on seed companies and farmers. Antitrust enforcers also traditionally take a tougher line against companies that expand through acquisition rather than organic growth, as Monsanto has.

It’s useful to remember that, until recently, Monsanto was not in the seed business. Originally a chemical company that produced plastics and pesticides, it turned to biotech in the 1980s by developing genetic traits and licensing them to companies, big and small, that conducted the actual breeding of seeds and handled sales to farmers. In the mid-1990s, Monsanto adopted a new strategy and began acquiring many of the independent seed businesses that had been the prime customers for its traits. Over the next decade Monsanto spent more than $12 billion to buy at least 30 such businesses.

Alarmed by the fact that they were losing access to many key seed gene pools and seed breeders, biotech competitors – including DuPont, Dow and Syngenta – scrambled to keep up, grabbing suites of seed companies to secure their own arsenals.

Once mimicked by its rivals, Monsanto’s strategy redrew the industry. Competition and variety have dwindled as a result. Since the mid-1990s, the number of independent seed companies has shrunk from some 300 firms to fewer than 100.  Many businesses not bought out directly were pushed out by bankruptcy. And even these figures underestimate Monsanto’s power, as many of the independent companies that remain now must compete with the same company on which they also depend for their supply of genetic traits, a fact that constricts how freely they can select or market others’ products.

“My big concern is that Monsanto can go out and undercut us in the marketplace through one of its own seed brands,” said the owner of a family seed business in the Midwest who asked not to be identified because he relies on Monsanto for genetic traits. “It puts us in a very vulnerable position. It could squeeze us any time.”

Documents obtained from the Texas attorney general’s office through a public information request show the states examined Monsanto’s conduct broadly. Their materials included academic research on Monsanto’s bundled pricing and law journal articles on how to police dominant firms with intellectual property rights for anticompetitive conduct. The documents suggest that the states were trying to gauge not just whether Monsanto’s contracts were unlawful, but – more expansively – whether the company had used its dominance illegally to maintain a monopoly.

The Midwest seed business owner said that DOJ officials, by contrast, appeared to be most focused on the mechanics of Monsanto’s licensing agreements, phoning him several times in 2010 to discuss the issue. “They asked very specific questions about [Monsanto’s] contracts, the conversation was very focused on this one point,” he said. “They did not try to understand the layout of the seed industry, or any larger issues.”

When contacted, a spokeswoman for the DOJ acknowledged only that the antitrust division had shut its investigation into “possible anticompetitive activity” in the seed industry, due to “marketplace developments that occurred during the pendency of the investigation.” The spokeswoman would not detail these developments. “We believe it would not be appropriate to comment further,” she said. The state attorneys general who initiated the probe five years ago also closed their inquiry and have chosen not to comment.

Academics and private attorneys who consulted with the government during its investigation concede that an antitrust lawsuit against a company as strategic and politically connected as Monsanto would not have been a guaranteed win. Few firms have as methodically mastered the revolving door between Washington and industry as Monsanto – whose former employees and lobbyists frequently enjoy top posts at agencies like the Food and Drug Administration and on legislative committees – or groomed as deep ties with both Republican and Democrat administrations. The company spent close to $6 million on lobbying in 2012, more than any other agribusiness organization, and three times the sum dished out by the second-highest paying firm, Archer Daniels Midland.

Those close to the investigation also note that it became easier for officials to justify inaction because Monsanto cleaned up its act as soon as authorities came knocking. Seed companies say Monsanto began loosening its licensing agreements in 2008, less than a year after the state attorneys general opened their inquiry. Months after the Justice Department followed suit in 2009, Monsanto announced it would allow farmers to continue using its leading soybeans, Roundup Ready 1, even after its patent expired in 2014. This gesture — at least in theory — opens the market to generic competition.

“Monsanto had reached a place of sufficient dominance that it no longer needed its restrictive agreements, and they were just attracting trouble,” said the lawyer in the state attorney’s office. “So it loosened its practices, giving seed companies more freedom to make their own choices. But it didn’t change the direction of the market — Monsanto had already locked that in.”

The seed business owner from the Midwest confirmed that Monsanto adopted a more benevolent face after the states began investigating in 2007. When asked whether its new agreements were fair, he paused. “There are a lot of ways Monsanto can use its power to influence you,” he said. “You don’t need a written contract.”

When contacted by Salon, Monsanto declined to comment beyond its initial public statement announcing the DOJ’s decision.

Several experts agree that the strongest case the DOJ could have brought against Monsanto would focus on how it has used its monopoly in one market — the provision of genetic traits — both to exclude rivals and to gain advantage in another market: the breeding and retail of seeds.

They note that Monsanto’s practices resemble conduct by Microsoft and Dentsply, two dominant firms that the Justice Department sued for antitrust violations in the late 1990s. Both companies had used contracts to restrict competitors’ access to the platforms they needed to distribute their technologies. In at least one way Monsanto enjoys still greater power than even Microsoft: because it now owns many of these intermediaries – the seed breeders and retailers – it no longer needs written agreements to favor some companies over others. It can effectively accomplish the same outcome without the paper trail.

Lawyers say winning such a case would have been tough but not impossible. “A successful case against Monsanto would have required very smart litigating,” said Peter Carstensen, a professor at the University of Wisconsin Law School and antitrust specialist who has studied the seed industry. “(The) Microsoft (case) required an extraordinarily able set of lawyers.”

Some experts also say the Justice Department was unduly cautious and ultimately outmaneuvered by the company. John Hinderaker, a lawyer who litigated against Monsanto 10 years ago in a private antitrust case, says that the company, by contrast, has been especially daring.  “Most companies would draw the line at certain practices, but Monsanto had a different attitude towards risk,” he said. “They’d look at a legal gray area and decide to test it. They were aggressive and strategic.”

Hinderaker notes that early legal wins against poorly resourced farmers fortified Monsanto in later battles, adding, “Monsanto has been very lucky in its opponents.”

Carstensen, a former DOJ attorney, believes antitrust officials may have been reluctant to wage a close fight given Monsanto’s political connections. “There was a good case to be made, but at the end of the day nobody was prepared to bite the bullet and move forward,” he said.

The public will suffer the costs of Monsanto’s capture of almost total control over much of the U.S. seed business. Since 2001 the company has more than doubled the price of soybean and corn seeds, whose crops are used in foods ranging from cereal and pizza to chocolate and soda. In 2008 Monsanto officials said farmers should expect seed prices to keep rising.

“Monsanto has used its power to raise prices and retain control over genetics at the public’s expense,” says Neil Harl, agricultural economist at Iowa State University who has studied the seed industry and antitrust law for decades and consulted with the Iowa attorney general’s office during the state investigation.

It is not just a matter of higher prices. The resulting loss of diversity from Monsanto’s dominance may restrict our ability to adapt plant stocks to an increasingly volatile climate. Many of the seed breeders and retailers Monsanto purchased were regional experts, familiar with the soil and adept at breeding crops suited to the vagaries of local pests and climate. That sprawling network of local knowledge and experimentation has been severely thinned.

Kyle Stiegert, professor of agriculture and applied economics at the University of Wisconsin-Madison, says Monsanto’s degree of control forecloses important opportunities for innovation. “There are suites of traits and seed combinations that are no longer being experimented with,” he says. “We have no idea if yields could be higher if farmers had flexibility to experiment.”

Experts echoed concerns about how Monsanto’s monopoly threatens future biotech advances to DOJ officials at a public workshop in Iowa in March 2010, as well as in reports submitted during the investigation. They say DOJ’s inaction cements Monsanto dominance for the foreseeable future.

In at least one recent instance, the Obama administration has supported that dominance. In Bowman v. Monsanto – the highly publicized case heard by the Supreme Court last month that pits the company against a 75-year-old farmer – the administration argued in favor of Monsanto’s position. The case asks whether Monsanto can employ patents to control how farmers use not just its seeds but also their progeny. In his brief the solicitor general argued that if patent rights for Monsanto’s crops were reduced, “[t]he incentive to invest in innovation and research might well be diminished.”

“It’s a great frustration,” Carstensen says. “If the Obama administration really cared about technological innovation, they would have come in and tried to free technology from being captured by a single company.” Instead, he says, they have “protected Monsanto’s interest.”

The Obama administration opened the Monsanto investigation as part of a signature effort to reinvigorate antitrust enforcement. In the end the administration appears mainly to have fortified the immense power of a chief target.

It has also ensured that future developments in our seeds – the basis of our food supply – will be driven not by tinkering farmers or scientists competing to discover the next breakthrough, but by the private interests of a single giant.

 

 
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