McCarthy v. Middle Tennessee Electric Membership Corp.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0378p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiffs-Appellants, -
JOHN MCCARTHY et al.,
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No. 05-6477
v.
,
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MIDDLE TENNESSEE ELECTRIC MEMBERSHIP -
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Defendants-Appellees. -
CORPORATION et al.,

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Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 04-00312—William J. Haynes, Jr., District Judge.
Argued: July 26, 2006
Decided and Filed: October 17, 2006
Before: MOORE, CLAY, and GRIFFIN, Circuit Judges.
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COUNSEL
ARGUED: Gerald E. Martin, BARRETT, JOHNSTON & PARSLEY, Nashville, Tennessee, for
Appellants. J. Richard Lodge, Jr., BASS, BERRY & SIMS, Nashville, Tennessee, Harriet A.
Cooper, TENNESSEE VALLEY AUTHORITY, Knoxville, Tennessee, for Appellees. ON BRIEF:
Gerald E. Martin, George E. Barrett, Edmund L. Carey, Jr., Timothy L. Miles, BARRETT,
JOHNSTON & PARSLEY, Nashville, Tennessee, for Appellants. J. Richard Lodge, Jr., Russell S.
Baldwin, BASS, BERRY & SIMS, Nashville, Tennessee, Harriet A. Cooper, Frank H. Lancaster,
Maria V. Gillen, TENNESSEE VALLEY AUTHORITY, Knoxville, Tennessee, for Appellees.
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OPINION
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KAREN NELSON MOORE, Circuit Judge. Plaintiffs-Appellants appeal from the district
court’s dismissal of claims brought against electric cooperatives and the Tennessee Valley Authority
(together, “defendants”). Members of the electric cooperatives (“plaintiffs”) brought an action
against the defendants, claiming that the cooperatives (“Cooperatives”) refused to distribute refunds
or to reduce electricity rates as required when electric cooperatives have excess revenue. The
Cooperatives were prohibited from distributing the refunds on the basis of their contracts with the
Tennessee Valley Authority (“TVA”), which supplies the Cooperatives with electricity. The
plaintiffs also asserted that the Cooperatives failed to keep adequate records. The district court

1
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 2

dismissed the plaintiffs’ state-law claims without prejudice because these claims should have been
filed as a derivative suit, and it dismissed the plaintiffs’ federal-law claims with prejudice. For the
reasons discussed below, we AFFIRM the judgment of the district court.
I. BACKGROUND
The Tennessee General Assembly has stated “that rural electric cooperatives . . . have proved
to be ideal business organizations in providing adequate and reliable electric services at reasonable
rates throughout the rural communities of Tennessee.” TENN. CODE ANN. § 65-25-201(b)(1). The
defendants include 22 electric cooperatives that supply electricity to over 700,000 cooperative
members in Tennessee. The Cooperatives are nonprofit corporations organized pursuant to
Tennessee’s Rural Electric and Community Services Cooperative Act (“RECSCA”). TENN. CODE
ANN. § 65-25-203.1 The Cooperatives purchase electricity from the Tennessee Valley Authority,
which is “the nation’s largest public power producer.”2 Joint Appendix (“J.A.”) at 83 (TVA 2002
Annual Report at 2).
If electric cooperatives accrue excess revenue beyond what is necessary to cover specified
expenses, these funds must be distributed in one of the following three ways: “(A) As patronage
refunds prorated in accordance with the patronage of the cooperative by the respective patrons paid
for during or with respect to such fiscal year;3 (B) By way of general reductions of rates or other
charges; or (C) By any combination of methods in (b)(1)-(3).” TENN. CODE ANN. § 65-25-212(a).
Section 65-25-212(b) provides as follows:
(b) With respect to the supplying or furnishing of services in pursuance of one
(1) or more secondary purposes, the revenues of a cooperative shall, as
separately accounted for and determined for each such service, be first applied
as provided in subdivisions (a)(1)-(6) and then distributed to the patrons of each
such service in the manner provided for in the bylaws, either:
(1) As patronage refunds prorated in accordance with the patronage of the
cooperative by the respective patrons paid for during or with respect to
such fiscal year;
(2) By way of general reductions of rates or other charges;
(3) By crediting patrons with having furnished the cooperative capital in
amounts equal to the amounts of their patronage not refunded pursuant to
subdivision (b)(1) and not used for general reduction of rates or other
changes pursuant to subdivision (b)(2), all or any portion of such capital to
be redeemable and be retired at such later time as the board in its sole
discretion determines that such will not impair the cooperative’s financial
condition and will be in the cooperative’s best interests; or
(4) By any combination of methods in subdivisions (b)(1)-(3).

1
Section 65-25-203 states:
Electric cooperatives heretofore incorporated under the former “Electric Cooperative Law” or
hereafter incorporated under this part shall be organized and operated on a nonprofit basis and without
pecuniary gain, and shall furnish their services on an area coverage basis at the lowest cost consistent
with sound business principles.
2
“Wholly owned by the U.S. government, TVA was established by Congress in 1933 primarily to provide
navigation, flood control and agricultural and industrial development and to promote the use of electric power in the
Tennessee Valley region.” Joint Appendix (“J.A.”) at 83 (TVA 2002 Annual Report at 2).
3
The plaintiffs explain that “patronage capital is the amount of a Cooperative member’s payment for electricity
above and beyond the cost of providing that electricity.” Appellants Br. at 5.
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 3

However, “[n]othing contained in subsection (a) or (b) shall be construed to prohibit the payment
by a cooperative of all or any part of its indebtedness prior to the date when the same shall become
due.” § 65-25-212(c). The Cooperatives’ contracts with the TVA prohibited the distribution of
patronage refunds.4 The plaintiffs claim that the Cooperatives wrongfully withheld patronage
capital and failed to maintain properly records of each member’s patronage capital.5
On April 12, 2004, the plaintiffs filed a complaint against the Cooperatives and the TVA in
federal district court. The plaintiffs’ complaint included the following claims: violation of the
Sherman Act, 15 U.S.C. § 1; violation of the Tennessee Trade Practices Act, TENN. CODE ANN.
§ 47-25-101; violation of the Tennessee Consumer Protection Act, TENN. CODE ANN. §§ 47-18-
104(b)(27) and 47-18-109; breach of fiduciary duty; and failure to refund patronage capital or to
reduce rates as required by Tennessee Code Annotated § 65-25-212(a). The TVA and the
Cooperatives each filed motions to dismiss the plaintiffs’ claims against them. The plaintiffs filed
an amended complaint in July 2004 that included a Fifth Amendment takings claim and a Fifth and
Fourteenth Amendment due process claim.
The district court issued an order on August 4, 2004, staying discovery and seeking a
response from the plaintiffs as to the following issues raised in the Cooperatives’ motion to dismiss:
“(1) Whether Plaintiffs’ claims are derivative claims; (2) if Plaintiffs’ claims are deemed derivative
claims, whether the Plaintiffs complied with State law to assert these claims; and (3) whether the
Plaintiffs have standing to sue cooperatives of which Plaintiffs are not members.” J.A. at 322 (Dist.
Ct. Order). The plaintiffs filed a response to this order on August 19, 2004, and they also filed a
motion for leave to file a second amended complaint expanding the plaintiff class to include
members of additional cooperatives. The district court never ruled on the plaintiffs’ motion for
leave to file a second amended complaint.
On December 3, 2004, the district court granted the defendants’ motions to dismiss;6 it
dismissed the plaintiffs’ state-law claims without prejudice, and it dismissed the plaintiffs’ federal-
law claims with prejudice. The plaintiffs filed a motion to alter or amend the district court’s
judgment, claiming that there was no basis for dismissing their constitutional claims or for finding
that their state-law claims were derivative in nature. The district court denied the plaintiffs’ motion
on July 29, 2005; in addressing the plaintiffs’ constitutional claims, the district court concluded that
there was no state action and that the plaintiffs had an adequate remedy under state law. The
plaintiffs timely appealed from the district court’s December 2, 2004 and July 29, 2005 orders.
II. ANALYSIS
A. Standard of Review
We review de novo the district court’s grant of the defendants’ motions to dismiss pursuant
to Federal Rule of Civil Procedure 12(b)(6). Downie v. City of Middleburg Heights, 301 F.3d 688,
693 (6th Cir. 2002). We “treat[] all well-pleaded allegations in the complaint as true, and . . . find[]

4
The defendants did not provide the plaintiffs with copies of the contracts between the Cooperatives and the
TVA. However, the Cooperatives agree that these contracts prohibit patronage refunds.
5
The Cooperatives are required to maintain records of their members’ patronage capital. TENN. CODE ANN.
§ 65-25-204(d)(1).
6
The TVA requested that the district court dismiss the plaintiffs’ claims on the basis of a lack of subject-matter
jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1), but the district court did not address the jurisdictional
argument in its ruling.
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 4

dismissal proper only if it appears beyond doubt that the plaintiff[s] can prove no set of facts in
support of the claims that would entitle [them] to relief.” Id. (internal quotation marks omitted).
B. Judicial Review
The TVA characterizes the case as “a judicial challenge to the level of rates set by the TVA
Board of Directors for the sale of TVA power at retail and to the terms and conditions for the sale
of that power.” TVA Br. at 22. As a result of this, the TVA argues that we should affirm the district
court’s dismissal of the plaintiffs’ claims because these claims are not subject to judicial review.
The plaintiffs expressly state in their reply brief that “this lawsuit is not about rate making.”
Appellants Reply Br. at 23. Instead, they argue that they are seeking an accounting of the patronage
accounts. Id. However, because the plaintiffs also argue that they were improperly denied
patronage capital, Appellants Br. at 14, we believe it is necessary to address the question of judicial
review.
“A long line of precedent exists establishing that TVA rates are not judicially reviewable.”
Matthews v. Town of Greeneville, No. 90-5772, 1991 WL 71414, at *2 (6th Cir. May 2, 1991)
(unpublished opinion), cert. denied, 502 U.S. 938 (1991); see also 4-County Elec. Power Ass’n v.
TVA, 930 F. Supp. 1132, 1137 (S.D. Miss. 1996) (“Plaintiff acknowledges that by virtue of TVA’s
having been granted by Congress full discretionary authority with respect to setting rates, TVA’s
rate-making decisions are beyond the scope of judicial review under the APA.”); Carborundum Co.
v. TVA, 521 F. Supp. 590, 593 (E.D. Tenn. 1981) (noting the “well established legal princip[le] that
the setting of power rates under the Tennessee Valley Authority Act is not subject to judicial
review”); Mobil Oil Corp. v. TVA, 387 F. Supp. 498, 506-07 (N.D. Ala. 1974) (“[T]he judgment or
expertise of the Authority in setting the electric power rates is a matter committed to its discretion
by law and is not subject to judicial review.”) (citation and footnote omitted); Ferguson v. Elec.
Power Bd. of Chattanooga, Tenn., 378 F. Supp. 787, 789 (E.D. Tenn. 1974) (“[T]he matter of rate
setting under the Tennessee Valley Authority Act is not subject to judicial review.”), aff’d, 511 F.2d
1403 (6th Cir. 1975).
The plaintiffs’ claims “against the TVA must be evaluated under the provisions of the
Administrative Procedure Act (APA).” Matthews, 1991 WL 71414, at *2. Parties may seek judicial
review of agency action7 unless the relevant statute precludes such review, 5 U.S.C. § 701(a)(1), or
the “agency action is committed to agency discretion by law,” 5 U.S.C. § 701(a)(2). “If it is
determined that either situation exists, then a court must decline to exercise jurisdiction over the

7
The Supreme Court has explained that “28 U.S.C. § 1331, generally granting federal question jurisdiction,
‘confer[s] jurisdiction on federal courts to review agency action.’” Reno v. Catholic Soc. Servs., Inc., 509 U.S. 43, 56
(1993) (alteration in original) (quoting Califano v. Sanders, 430 U.S. 99, 105 (1977)). Furthermore, “‘the Administrative
Procedure Act, . . . embodies the basic presumption of judicial review to one “suffering legal wrong because of agency
action, or adversely affected or aggrieved by agency action within the meaning of the relevant statute.”’” Id. at 56-57
(quoting Abbott Labs. v. Gardner, 387 U.S. 136, 140 (1967)).
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 5

matter.”8 Madison-Hughes v. Shalala, 80 F.3d 1121, 1124 (6th Cir. 1996).9 The TVA Act
authorizes the TVA to enter into contracts to sell its surplus power, and the Act provides that: “the
Board is authorized to include in any contract for the sale of power such terms and conditions,
including resale rate schedules, and to provide for such rules and regulations as in its judgment may
be necessary or desirable for carrying out the purpose of this chapter.” 16 U.S.C. § 831i. Courts
have acknowledged that “the TVA Act accords the TVA a great amount of discretion in its
contractual relations with municipalities.” Matthews, 1991 WL 71414, at *3. The TVA acted within
the scope of its authority under the TVA Act in entering into contracts with the Cooperatives. The
contractual provisions that prevent the Cooperatives from distributing patronage refunds were
created within the TVA’s authority to set “resale rate schedules” pursuant to § 831i, because
“determinations about the level of rates necessary to recover the various costs of operating TVA’s
power system, as well as the terms and conditions of TVA’s power contracts, . . . are part of TVA’s
unreviewable rate-making responsibilities.” 4-County, 930 F. Supp. at 1138; see also Carborundum
Co., 521 F. Supp. at 594 (holding that a contractual “minimum bill provision” was “simply an
integral portion of the rates which TVA has fixed, pursuant to express congressional authority”).
To the extent that Tennessee law imposes additional constraints on the TVA’s authority, it is
preempted by the TVA Act’s express grant of discretion and the APA’s prohibition on judicial
review. See Millsaps v. Thompson, 259 F.3d 535, 538 (6th Cir. 2001) (“[F]ederal law preempts state
law when the two actually conflict.”). We thus decline to review any of the plaintiffs’ challenges
to the contractual term prohibiting the distribution of patronage refunds.
Our decision not to review the TVA’s contract also extends to the Cooperatives’ enforcement
of that contract. See Allen v. Elec. Power Bd., 422 F. Supp. 4, 6 (M.D. Tenn. 1976) (“By parity of
reasoning, the imposition of the rate adjustment schedules by TVA’s distributors pursuant to their
contracts with TVA are likewise not reviewable.”). Federal law preempts Tennessee law on this
point as well. See Millsaps, 259 F.3d at 538 (stating that federal law preempts state law “when a
state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and
objectives of Congress’” (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941))). If we were to
review the Cooperatives’ actions in enforcing the contract, we would still be reviewing the TVA’s
actions and thus ignoring the APA’s prohibition on judicial review.
This does not end our inquiry. The plaintiffs’ claims under the Tennessee Consumer
Protection Act, Tennessee Code Annotated § 65-25-212, and for breach of fiduciary duty are based
in part on the Cooperatives’ failure to issue patronage refunds; the Cooperatives failed to issue the
refunds as a result of their contracts with the TVA, which are not subject to review. However, we
will still proceed to review these claims to the extent that they are also based upon the Cooperatives’
failure to reduce rates and to maintain records properly. We will also proceed to review plaintiffs’

8
The Supreme Court analyzed § 701(a)(1) and (a)(2) in Heckler v. Chaney, 470 U.S. 821, 830 (1985),
explaining that:
The former applies when Congress has expressed an intent to preclude judicial review. The latter
applies in different circumstances; even where Congress has not affirmatively precluded review,
review is not to be had if the statute is drawn so that a court would have no meaningful standard
against which to judge the agency’s exercise of discretion. In such a case, the statute (“law”) can be
taken to have “committed” the decisionmaking to the agency’s judgment absolutely.
9
We note that the Supreme Court has recently “instruct[ed] [the] courts of appeals to properly distinguish
between subject-matter jurisdiction and other limits on a court’s authority.” Cobb v. Contract Transport, Inc., 452 F.3d
543, 550 (6th Cir. 2006); see also Arbaugh v. Y & H Corp., 126 S. Ct. 1235, 1242 (2006); Eberhart v. United States, 126
S. Ct. 403, 405 (2005); Kontrick v. Ryan, 540 U.S. 443, 455 (2004). In Madison-Hughes, we stated that “courts do not
have subject matter jurisdiction to review agency actions that are ‘committed to agency discretion by law.’” Madison-
Hughes, 80 F.3d at 1127 (quoting 5 U.S.C. § 701(a)(2)). It is not at all clear today that this is actually a matter of
subject-matter jurisdiction in light of Arbaugh, Eberhart, and Kontrick; however, because we decline to review any
claims based on the TVA’s rate-making decisions, we do not need to make that determination at this time.
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 6

constitutional claims, which are not limited by the TVA Act or the APA. Finally, we will review
those aspects of plaintiffs’ antitrust claim that are not based on the terms of the contracts between
the TVA and the Cooperatives.
C. Derivative Nature of Plaintiffs’ State-Law Claims
“A derivative action is an extraordinary, equitable remedy available to shareholders when
a corporate cause of action is, for some reason, not pursued by the corporation itself.” Lewis v.
Boyd, 838 S.W.2d 215, 221 (Tenn. Ct. App. 1992). Tennessee “requires the shareholder to first
make a written demand on the corporation’s directors requesting them to prosecute the suit or to take
other suitable corrective action. This precondition is commonly known as the demand requirement.”
Id. (internal quotation marks omitted). The demand requirement serves several purposes: “to allow
the directors to occupy their normal status as the conductors of the corporation’s affairs, to
encourage informal resolution of intracorporate disputes, and to guard against misuse of the
derivative remedy.” Id.
The district court held that the plaintiffs’ state-law claims10 were derivative rather than
11
direct and that the plaintiffs’12failure to make a pre-suit demand to the Cooperatives could not be
excused on the basis of futility. The plaintiffs challenge both the precedent upon which the district
court relied as well as the district court’s application of that precedent to the facts of this case.13
1. Tennessee standards for determining whether a suit is derivative or direct
The district court cited the following rule from Cato v. Mid-America Distribution Centers,
Inc., No. 02A01-9406-CH-00149, 1996 WL 502500, at *5 (Tenn. Ct. App. Sept. 6, 1996)
(unpublished opinion): “Stockholders may bring an individual action to recover for an injury done
directly to them that is separate and distinct from any injury incurred by the corporation or other
shareholders.” Cato, 1996 WL 502500, at *5, cited Hadden v. City of Gatlinburg, 746 S.W.2d 687,
689 (Tenn. 1988), which in turn stated that “[s]tockholders may bring an action individually to
recover for an injury done directly to them distinct from that incurred by the corporation and arising
out of a special duty owed to the shareholders by the wrongdoer.” The district court also discussed
Davis v. Appalachian Electric Co-Operative, Inc., 373 S.W.2d 450 (Tenn. 1963), a 1963 case

10
As noted above, the Cooperatives are organized on a nonprofit basis pursuant to Tennessee Code Annotated
§ 65-25-203. The district court correctly considered the plaintiffs to be shareholders of the Cooperatives. See Davis v.
Appalachian Elec. Coop., Inc., 373 S.W.2d 450, 452 (Tenn. 1963) (discussing members of an electric cooperative as
the equivalent of shareholders of a corporation); accord Alston v. Black River Elec. Coop., 548 S.E.2d 858, 860 & 861
n.3 (S.C. 2001) (stating that electric cooperative members are similar to shareholders and listing other state-court
decisions that concluded similarly).
11
Several Tennessee Court of Appeals cases have “recognized the right of members of a nonprofit corporation
to bring the equivalent of a shareholder derivative action against the directors and officers for wasting corporate assets
and using corporate assets for personal gain.” Summers v. Cherokee Children & Family Servs., Inc., 112 S.W.3d 486,
506 (Tenn. Ct. App. 2002); see also Hannewald v. Fairfield Cmtys., Inc., 651 S.W.2d 222, 225-26 (Tenn. Ct. App.
1983); Bourne v. Williams, 633 S.W.2d 469, 471-73 (Tenn. Ct. App. 1981).
12
The district court properly applied Tennessee law. See also Hicks ex rel. Union Pac. Corp. v. Lewis, 148
S.W.3d 80, 84 (Tenn. Ct. App. 2003) (“Tennessee has long adhered to the internal affairs doctrine, under which matters
involving the internal affairs of a foreign corporation are deemed substantive in nature and should be resolved in
accordance with the law of the state of incorporation.”) (internal quotation marks omitted).
13
In its brief, the TVA addressed the question of whether the “district court improperly dismissed [the
plaintiffs’] claims because no motion to dismiss the constitutional claims had been filed.” TVA Br. at 20. However,
the plaintiffs noted this fact in their recitation of the procedural history but did not actually raise it as an issue for our
review.
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 7

involving an analogous effort by plaintiffs to obtain patronage refunds from an electric cooperative.
In Davis, the Tennessee Supreme Court held that the plaintiffs were required to “show that [their]
remedies permitted within the corporate structure have been exhausted, or that such an attempt to
exhaust said remedies would be a useless gesture.” Davis, 373 S.W.2d at 452.
The plaintiffs argue that the Tennessee courts no longer apply the test set forth in Cato for
determining whether an action is direct or derivative; rather,14they argue, Tennessee precedent
reflects recent changes in Delaware’s approach to this issue. The Delaware Supreme Court
explained:
The trial court’s premise was as follows:
In order to bring a direct claim, a plaintiff must have experienced
some “special injury.” A special injury is a wrong that “is separate
and distinct from that suffered by other shareholders, . . . or a wrong
involving a contractual right of a shareholder, such as the right to
vote, or to assert majority control, which exists independently of any
right of the corporation.
In our view, the concept of “special injury” that appears in some . . . cases is
not helpful to a proper analytical distinction between direct and derivative actions.
We now disapprove the use of the concept of “special injury” as a tool in that
analysis.
Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004) (citations and
footnote omitted). Tooley held that “[t]he analysis must be based solely on the following questions:
Who suffered the alleged harm - the corporation or the suing stockholder individually - and who
would receive the benefit of the recovery or other remedy?” Id. The plaintiffs argue that “[c]ourts
in Tennessee follow Delaware law in determining whether an action is derivative or direct,” citing
Denver Area Meat Cutters & Employers Pension Plan v. Clayton, 120 S.W.3d 841, 859-60 (Tenn.
Ct. App. 2003). Appellants Br. at 19. However, the defendants respond that Clayton involved two
Delaware corporations and any citation to Delaware law is indicative only of the rule that Tennessee
courts apply the law of the state of incorporation to internal corporate disputes. Clayton, 120
S.W.3d at 849.
We agree with the plaintiffs that if presented with this issue, the Tennessee Supreme Court
would likely adopt the rule articulated in Tooley, rather than adhering to its 1988 decision in
Hadden. The Tennessee Court of Appeals explained that “Delaware has become the most popular
state in which to incorporate businesses, and Delaware’s judiciary are recognized as specialists in
the field of corporate law. Courts of other states consider the decisions of Delaware courts on
corporate matters to be instructive.” Bayberry Assocs. v. Jones, No. 87-261-II, 1988 WL 137181,
at *5 n.8 (Tenn. Ct. App. Nov. 9, 1988) (unpublished opinion). The appellate court decision in
Bayberry was vacated, but the Tennessee Supreme Court did not dispute the lower court’s use of
Delaware law. Bayberry Assocs. v. Jones, 783 S.W.2d 553, 560 (Tenn. 1990). Rather, the supreme
court merely provided its own analysis of the applicability of Delaware precedent. Id. We believe

14
The plaintiffs also contend that Davis “does not represent the current state of the law,” because it “was issued
at a time before Tennessee courts had even recognized direct actions, much less the distinction between direct and
derivative actions.” Appellants Br. at 22. It is true that the holding in Davis is phrased in terms of exhausting corporate
remedies as opposed to making a distinction between direct and derivative suits. Davis, 373 S.W.2d at 452; see also
Daugherty v. Tri-County Elec. Membership Corp., No. 01A01-9607-CV-00334, 1997 WL 13757, at *3 (Tenn. Ct. App.
Jan. 16, 1997) (unpublished opinion) (“Davis held that before seeking judicial relief, the plaintiffs must have first
exhausted their remedies within the corporation.”). However, Davis supports the defendants’ position to the extent that
both the requirement of exhaustion of the corporate remedies and the demand requirement are structured to encourage
internal resolution of corporate disputes. See Davis, 373 S.W.2d at 454 (discussing the policy rationale for the
exhaustion rule); Lewis, 838 S.W.2d at 221 (discussing the policies for the demand requirement).
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 8

that the supreme court would agree with the well-reasoned analysis in Tooley. However, we note
that the resolution of this issue is not dispositive of the claims before us, because we believe that the
plaintiffs’ state-law claims are properly characterized as derivative under either the Hadden, Cato,
or Tooley tests.
2. Application of the rules
In their brief, the plaintiffs argue that the Cooperatives have failed to account for each
member’s patronage capital and “have improperly spent their surplus revenue on items unrelated
to their statutory purpose such as beauty pageants, all expense trips for board members around the
country, and unnecessary capital improvements.” Appellants Br. at 8-9. We believe that the
plaintiffs’ claims are essentially claims of “mismanagement, self-dealing, and breach of fiduciary
duty.” Cato, 1996 WL 502500, at *6. If the Cooperatives failed to maintain records and spent their
money on non-necessary expenses, it is clear that they were not acting in accordance with their
statutory purpose of providing their members with electricity “at the lowest cost consistent with
sound business principles.” TENN. CODE ANN. § 65-25-203; see also Bourne v. Williams, 633
S.W.2d 469, 470-73 (Tenn. Ct. App. 1981) (discussing a derivative claim brought by shareholders
of a nonprofit corporation alleging that the corporation “[took] actions contrary to the best interests
of the Corporation, and in violation of the purposes for which the Corporation was formed”). Such
claims “must generally be brought as 15 derivative actions because breaches of fiduciary duty are
deemed to injure only the corporation.” Cato, 1996 WL 502500, at *6. We agree with the district
court’s conclusion that the plaintiffs’ state-law claims are derivative rather than direct.
3. Demand requirement
Finally, the plaintiffs contend that even if their state-law claims are derivative, a pre-suit
demand would have been futile. Tennessee law recognizes “demand excused cases” on the basis
of futility if the shareholders demonstrate “(1) that the board is interested and not independent and
(2) that the challenged transaction is not protected by the business judgment rule.” Lewis, 838
S.W.2d at 222. The plaintiffs contend that demand would have been futile in this case due to the
contractual prohibition against distributing patronage refunds as well as the asserted fact that “the
Cooperatives have not kept adequate records for the determination of each member’s patronage
capital.”16 Appellants Br. at 23.
The district court correctly concluded that “the Plaintiffs have failed to plead adequately that
a pre-suit demand should be excused.” J.A. at 424 (Dist. Ct. Mem. at 14). As an initial matter, the
fact that the contract between the TVA and the Cooperatives prohibits patronage refunds is not
dispositive, because the “Plaintiffs sought distribution of excessive revenue in the form of either
patronage refunds or rate reduction under Tenn. Code Ann. § 65-25-212.” Id. There is no assertion
that the contract prevents the Cooperatives from reducing rates in accordance with § 65-25-212.

15
The plaintiffs also assert that their claims cannot be classified as derivative because their “definition of the
class includes individuals who are former members of the Cooperatives” who would not have any remedy as a result of
a derivative action. Appellants Br. at 21. However, this will have no effect on the case because the plaintiffs have
explained that they primarily are seeking an accounting by the Cooperatives. They have characterized their claim in this
manner because the Cooperatives do not necessarily need to provide patronage refunds and can instead use excess funds
(if any) to reduce rates or to pay off debt. TENN. CODE ANN. § 65-25-212. The result of the derivative suit would thus
provide the desired remedy for all of the individuals in question.
16
This assertion is based upon an article entitled “Co-ops: Members rarely involved; co-ops don’t tell them
exactly how much they own”; the article was published in The Tennessean on April 11, 2004. J.A. at 344. The article
explains that many electric cooperatives in Tennessee do not maintain records of their owners’ interests. For example,
the Middle Tennessee Electric Membership Corporation is asserted to have stated that it has no records prior to the 1980s
for its members.
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 9

With regard to the Cooperatives’ alleged failure to maintain adequate records, we will not assume
that if presented with a pre-suit demand, the defendants would not have found some method for
complying with the statutory provisions. More importantly, this factor is irrelevant to the recognized
bases upon which Tennessee courts will excuse a failure to file a pre-suit demand, Lewis, 838
S.W.2d at 222: the failure to keep adequate records does not indicate that the board is interested or
that the business-judgment rule does not apply.
D. Federal Constitutional Claims
1. State action
The plaintiffs filed their constitutional claims pursuant to 42 U.S.C. § 1983,17 which “has
two basic requirements: (1) state action that (2) deprived an individual of federal statutory or
constitutional rights.” Harajli v. Huron Twp., 365 F.3d 501, 505 (6th Cir. 2004) (internal quotation
marks omitted). “A private actor acts under color of state law when its conduct is ‘fairly attributable
to the state.’” Romanski v. Detroit Entm’t, L.L.C., 428 F.3d 629, 636 (6th Cir. 2005) (quoting Lugar
v. Edmondson Oil Co., 457 U.S. 922, 947 (1982)). The Cooperatives state that the district court
properly dismissed the plaintiffs’ constitutional claims because the plaintiffs were unable to prove
that the Cooperatives acted under color of state law.18
The plaintiffs first respond that the Cooperatives operate according to state legislative
mandate and in conjunction with the state government. It is true that the Cooperatives are subject
to a number of state regulations and are instructed to act to fulfill state objectives; however, “[t]he
mere fact that a business is subject to state regulation does not by itself convert its action into that
of the State for purposes of the Fourteenth Amendment.” Jackson v. Metro. Edison Co., 419 U.S.
345, 350 (1974). The plaintiffs also argue that the Cooperatives are “thoroughly ‘entwined’ with
the operation of the TVA” by virtue of the contracts between these two entities. Appellants Reply
Br. at 16. However, the existence of a contract alone does not rise to the level of “pervasive
entwinement” recognized in Brentwood 19 Academy v. Tennessee Secondary School Athletic
Association, 531 U.S. 288, 298-302 (2001). See also Carter v. Buckeye Rural Elec. Coop., No.
C2-00-1204, 2001 WL 1681104, at *5 (S.D. Ohio Sept. 7, 2001) (unpublished opinion) (holding that
an electric cooperative was not a state actor). Because the plaintiffs offer no support for their
contention that the Cooperatives are state actors beyond the fact of the contractual relationship with
the TVA and the existence of extensive state regulation, we affirm the district court as to this issue.

17
Section 1983 states:
Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State
. . . subjects, or causes to be subjected, any citizen of the United States or other person within the
jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the
Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other
proper proceeding for redress . . . .
18
We need only analyze this issue with regard to the Cooperatives, because there is no question that “TVA
is an agency and instrumentality of the United States.” TVA Br. at 36 n.16. In its brief, the TVA explains that it is not
subject to suit pursuant to the Fourteenth Amendment or to § 1983: “[t]his is because of the basic precept that ‘[t]he
Fourteenth Amendment’s Due Process Clause restricts the activities of the states and their instrumentalities; whereas
the Fifth Amendment’s Due Process Clause circumscribes only the actions of the federal government.’” TVA Br. at 36
n.16 (second alteration in original) (quoting Scott v. Clay County, 205 F.3d 867, 873 n.8 (6th Cir. 2000)). The TVA
concedes, however, that it is “subject to the Fifth Amendment to the Constitution.” TVA Br. at 36 n.16. Thus, we still
must address the merits of the plaintiffs’ constitutional claims. See infra Section II.D.2.
19
The Brentwood Academy Court found that there was sufficient entwinement based on the fact that the
association was comprised primarily of public-school representatives and that members of the association were a part
of the state retirement system. Brentwood Academy, 531 U.S. at 298-302.
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 10

2. Property interest
The plaintiffs’ constitutional claims also fail on the merits, against both the TVA and the
Cooperatives. Both their due process and takings claims require that the plaintiffs first demonstrate
that they have a legally cognizable property interest. “To have a property interest in a benefit, a
person clearly must have more than an abstract need or desire for it. He must have more than a
unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it.” Hamby
v. Neel, 368 F.3d 549, 557 (6th Cir. 2004) (quoting Bd. of Regents v. Roth, 408 U.S. 564, 577
(1972)). We have explained that such interests “are created and their dimensions are defined by
existing rules or understandings that stem from an independent source such as state law - rules or
understandings that secure certain benefits and that support claims of entitlement to those benefits.”
Id. (quoting Roth, 408 U.S. at 576).
The plaintiffs argue that they have property interests in their patronage capital. However,
this claim fails because § 65-25-212(a)-(c) explicitly allows the Cooperatives to use excess funds
to reduce rates or to pay off debt. See also Shadow v. Volunteer Elec. Coop., 448 S.W.2d 416, 419
(Tenn. 1969) (holding that a cooperative was permitted to enter a contract with the TVA that
prevented the cooperative from distributing patronage refunds). The plaintiffs thus have no
legitimate claim of entitlement to patronage refunds. The plaintiffs also argue that the Cooperatives’
failure to maintain records of the patronage capital has made it impossible for the Cooperatives ever
to distribute patronage capital. Because the plaintiffs are not entitled to the patronage capital as an
initial matter, the failure of the Cooperatives to maintain records does not deprive them of a property
interest.
E. Antitrust Claim
The plaintiffs “challenge the contractual provision between TVA and the Cooperatives
prohibiting patronage refunds as an unreasonable restraint of trade and interstate and intrastate
commerce in violation of Section 1 of the Sherman Antitrust Act,20 15 U.S.C. § 1.”21 Appellants
Br. at 37. Section 1 states that “[e]very contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is
declared to be illegal.” The defendants respond that it “makes no sense” that the TVA and the
Cooperatives violated the Sherman Act by virtue of “contracts fully authorized by the United States
Congress and the Tennessee General Assembly.” TVA Br. at 34. The district court held that the
TVA and the Cooperatives cannot be liable under the Sherman Act for entering into contracts
pursuant to “express congressional authority.”22 J.A. at 425 (Dist. Ct. Mem. at 15).

20
The plaintiffs’ state-law antitrust claims filed pursuant to Tennessee Code Annotated § 47-25-106 fail in light
of § 47-18-111(a)(1), which provides that “[t]he provisions of this part shall not apply to . . . [a]cts or transactions
required or specifically authorized under the laws administered by . . . officers acting under the authority of this state
or of the United States.” The TVA clearly was acting within its authority pursuant to the TVA Act when it entered into
the contracts with the Cooperatives. See 16 U.S.C. § 831i.
21
As discussed above, we may not review the terms of the contract between the TVA and the Cooperatives
because such terms are wholly within the TVA’s discretion to set rates. However, the plaintiffs’ complaint alleges that
the Cooperatives and the TVA engaged in a conspiracy to withhold the refunds as well as to fail to reduce rates. In their
brief, the plaintiffs also discuss the effect of patronage capital rates. We do not believe that the plaintiffs’ antitrust
allegations are limited to the terms of the contract (and thus to rate-setting by the TVA), and we accordingly review the
plaintiffs’ antitrust arguments.
22
The district court also cited Kreager v. General Electric Co., 497 F.2d 468, 472 (2d Cir.), cert. denied, 419
U.S. 861 (1974), for the proposition that “generally members of a business unit cannot sue the entity for a federal
antitrust violation.” J.A. at 425 (Dist. Ct. Mem. at 15). The Second Circuit stated, “Kreager lacked standing to bring
a private anti-trust action to recover damages for injuries allegedly sustained by his corporation.” Kreager, 497 F.2d
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 11

In analyzing the plaintiffs’ Sherman Act claim, we first consider whether the TVA is entitled
to immunity on the basis of its status as a federal corporation. “The Sherman Act imposes liability
on any ‘person.’” U.S. Postal Serv. v. Flamingo Indus. (USA) Ltd., 540 U.S. 736, 744 (2004). “The
word ‘person’ . . . shall be deemed to include corporations and associations existing under or
authorized by the laws of either the United States, the laws of any of the Territories, the laws of any
State, or the laws of any foreign country.” 15 U.S.C. § 7. However, “person” does not include the
federal government. Flamingo, 540 U.S. at 745. In Flamingo Industries, the Supreme Court
analyzed “whether for purposes of the antitrust laws the Postal Service is a person separate from the
United States itself.” Id. at 746. Although some prior cases have recognized that the TVA is
immune from antitrust liability,23 the Flamingo Industries analysis casts doubt on such a conclusion.
The Court noted that the Postal Service “remains part of the Government,” id. at 746, and that it has
“different goals, obligations, and powers from private corporations,” id. at 747. However, “had the
Congress chosen to create the Postal Service as a federal corporation, we would have to ask whether
the Sherman Act’s definition extends to the federal entity under this part of the definitional text.”
Id. at 746. The TVA also has certain public characteristics,24 but it is organized as a corporation.
16 U.S.C. § 831. While this is not an easy question, we believe that the key distinction presented
by Flamingo, that the TVA is a federal corporation unlike the Postal Service, supports the
conclusion that the TVA is not immune from antitrust liability on these grounds.
Both the TVA and the Cooperatives acted pursuant to federal and state law, which is also
relevant to our antitrust analysis. The district court relied on Gordon v. New York Stock Exchange,
Inc., 422 U.S. 659, 689 (1975), which held that exchange commission rates approved by the
Securities and Exchange Commission (“SEC”) pursuant to the Securities Exchange Act of 1934 are
entitled to antitrust immunity. The Gordon Court explained that “[r]epeal of the antitrust laws by
implication is not favored and not casually to be allowed. Only where there is a plain repugnancy
between the antitrust and regulatory provisions will repeal be implied.” Gordon, 422 U.S. at 682.
Gordon was concerned that the exchanges would be exposed to “conflicting standards,” because
“the sole aim of antitrust legislation is to protect competition, whereas the SEC must consider, in
addition, the economic health of the investors, the exchanges, and the securities industry.” Id. at
689. The Court concluded that “[t]o permit operation of the antitrust laws with respect to
commission rates . . . would unduly interfere, in our view, with the operation of the Securities
Exchange Act.” Id. at 685-86. The TVA is authorized to enter into contracts for the purpose of
“promot[ing] the wider and better use of electric power for agricultural and domestic use, or for
small or local industries.” 16 U.S.C. § 831i. Gordon’s rationale is applicable to § 831i, because the
TVA’s primary concern is to provide services, and concerns about competition would conflict with
the fulfillment of TVA’s purpose. Thus, the TVA is entitled to antitrust immunity on the basis of

at 472. However, the plaintiffs in this case allege that the Cooperatives themselves violated antitrust law, not that the
Cooperatives were injured by the actions of other corporations. See id. at 470 (explaining that Kreager’s company was
purportedly injured by a conspiracy between the defendant companies).
23
See City of Loudon v. TVA, 585 F. Supp. 83, 87 (E.D. Tenn.) (“In enforcing . . . its contract with Loudon,
TVA was engaged in valid governmental action and exempt from the antitrust laws of the United States.”), aff’d, 754
F.2d 372 (6th Cir. 1984); Webster County Coal Corp. v. TVA, 476 F. Supp. 529, 532 (W.D. Ky. 1979) (holding that the
TVA is “exempt from liability under the antitrust laws”); see also Sea-Land Serv., Inc. v. Alaska R.R., 659 F.2d 243, 246
n.5 (D.C. Cir. 1981) (citing Webster County), cert. denied, 455 U.S. 919 (1982).
24
For instance, the TVA has the power of eminent domain. 16 U.S.C. § 831c(h). See Flamingo, 540 U.S. at
747 (“Finally, the Postal Service has many powers more characteristic of Government than of private enterprise,
including its state-conferred monopoly on mail delivery, the power of eminent domain, and the power to conclude
international postal agreements.”).
No. 05-6477 McCarthy et al. v. Middle Tenn. Electric Membership et al. Page 12

the rationale explicated in Gordon. We affirm the district court’s dismissal of the plaintiffs’ antitrust
claims.25
F. Alternative Grounds for Dismissal
The defendants also argue that this court should affirm the district court’s grant of their
motions to dismiss because the plaintiffs failed to state a claim for a violation of the RECSCA, the
Tennessee Trade Practices Act, the Tennessee Consumer Protection Act, or for breach of a fiduciary
duty. For each of these state-law claims, the plaintiffs argue that the Cooperatives improperly
refused to issue patronage refunds or reduce rates and failed to maintain its patronage records. The
underlying premise of the plaintiffs’ arguments is that the Cooperatives mismanaged their excess
revenue, and mismanagement of funds is typically a derivative claim. Cato, 1996 WL 502500, at
*6. We need not address the merits of these arguments, because the district court correctly
dismissed these claims without prejudice so that the plaintiffs could raise them in a state-law
derivative suit.
III. CONCLUSION
For the reasons discussed above, we AFFIRM the judgment of the district court.

25
In addition, the Cooperatives are empowered to enter into contracts with the TVA pursuant to Tennessee’s
Rural Electric and Community Services Cooperative Act. TENN. CODE ANN. § 65-25-205. The Supreme Court has
recognized a state-action exemption from antitrust liability, reasoning that “when a ‘state in adopting and enforcing [a
regulatory] program . . ., as sovereign, imposed the restraint as an act of government,’ the program could not violate the
Sherman Act because the Act was directed against ‘individual and not state action.’” Brentwood Academy v. Tenn.
Secondary Sch. Athletic Ass’n, 442 F.3d 410, 440 (6th Cir. 2006) (alteration in original) (quoting Parker v. Brown, 317
U.S. 341, 352 (1943)). Because the Cooperatives conduct their activity “pursuant to state authorization,” the following
test applies: “First, the challenged restraint must be one clearly articulated and affirmatively expressed as state policy;
second, the policy must be actively supervised by the State itself.” Id. at 441 (quoting Cal. Retail Liquor Dealers Ass’n
v. Midcal Aluminum, 445 U.S. 97, 105 (1980)).
With regard to the first prong of the Midcal test, we do not require “explicit authorization,” Mich. Paytel Joint
Venture v. City of Detroit, 287 F.3d 527, 535 (6th Cir. 2002) (quoting Town of Hallie v. City of Eau Claire, 471 U.S.
34, 42-44 (1985)); rather, “[t]he Parker exemption applies as long as the suppression of competition is the foreseeable
or logical result of what the state authorizes,” id. Tennessee clearly authorizes the Cooperatives to enter into contracts
with the TVA. TENN. CODE ANN. § 65-25-205. In fact, “the general assembly . . . express[ed] its intent that public
electric systems replace competition with the monopoly public service.” TENN. CODE ANN. § 65-34-108. Tennessee
clearly intended to favor cooperatives, and “anticompetitive effects are the logical and foreseeable result” of the statutory
scheme. Mich. Paytel, 287 F.3d at 536.
There is no indication, though, that Tennessee supervises the electric cooperatives’ actions in entering into
contracts with the TVA. However, “the active state supervision requirement is not applicable in cases where the actor
is a municipality,” and there is some argument that “the same should go for cases in which the actor is a ‘state agency.’”
Brentwood, 442 F.3d at 443 n.25; see also Town of Hallie, 471 U.S. at 46 n.10 (“In cases in which the actor is a state
agency, it is likely that active state supervision would also not be required, although we do not here decide that issue.”).
Brentwood rejected this argument, stating, “circuit precedent suggests that it is only municipalities that are exempt from
the second prong of the test.” Brentwood, 442 F.3d at 443 n.25. However, the “circuit precedent” to which Brentwood
refers is Michigan Paytel, which merely held that private parties are required to satisfy both prongs of the Midcal test.
Mich. Paytel, 287 F.3d at 536.
The Seventh Circuit held that electric cooperatives should be exempt from antitrust liability due to their semi-
public status and the fact that their “only purpose is to provide power to [their] members as cheaply as possible.” Fuchs
v. Rural Elec. Convenience Coop., Inc., 858 F.2d 1210, 1217-18 (7th Cir. 1988), cert. denied, 490 U.S. 1020 (1989).
Fuchs held “that when an entity charged with an antitrust violation is neither a municipality nor a state agency but does
not have the attributes of a purely private actor, it may be held immune as a state actor without the active scrutiny of
market conditions which is a necessary prerequisite for holding a private entity immune.” Id. We agree with the Seventh
Circuit that the Cooperatives are neither state agencies nor purely private parties, which may require a grant of antitrust
immunity in spite of a lack of supervision. However, we do not need to decide today whether the Cooperatives are
entitled to immunity without any demonstration of state supervision, because of our conclusion that the TVA is entitled
to antitrust immunity.