Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Foodservice distributor charged with committing anticompetitive conduct, abuse of process, (May 28, 2014)

By Linda O’Brien, J.D., LL.M.

A leading foodservice distributor has engaged in anticompetitive conduct by filing litigation against a regional competitor in retaliation for the competitor’s refusal to agree to the distributor’s solicitation to purchase its company and by pressuring customers not to do business with the competitor, according to a complaint filed in the federal district court of Hattiesburg, Mississippi (The Merchants Company d/b/a Merchants Foodservice v. U.S. Foods, Inc., May 23 2014).

U.S. Foods, Inc. is one of the leading broadline foodservice distributors in the United States, offering more than 350,000 national brand and private label products to restaurants, educational institutions, and governmental, healthcare, and hospitality entities. The Merchants Company is a family-owned regional broadline foodservice distributor, serving eight southeastern states. Merchants sells approximately 12,000 products and has four distribution centers.

The complaint alleged that, in November 2011 and May 2013, U.S. Foods contacted a Merchants executive to discuss its interest in purchasing Merchants. Merchants responded that it was not interested in selling its business to U.S. Foods. In September 2013, U.S. Foods met with a Merchants executive to again discuss its interest in purchasing Merchants. U.S. Foods indicated that it wanted to buy Merchants and implied that, if Merchants did not sell to U.S. Foods, U.S. Foods had plans to harm Merchants in the marketplace.

After U.S. Foods announced plans in December 2013 to merge with Sysco Corporation, the largest broadline foodservice distributor in the United States, Merchants received numerous employment applications from former U.S. Foods employees and hired several of them. Some of these former employees had signed non-solicitation/non-disclosure agreements (NSNDAs). U.S. Foods contacted Merchants and requested assurances that the former employees would abide by their contractual obligations. Although Merchants responded that it would take all reasonable steps to ensure that the agreements would not violated, U.S. Foods filed suit against Merchants and the former employees, alleging breach on the NSNSAs, the complaint stated.

According to the complaint, U.S. Foods had no good faith basis to allege wrongdoing by Merchants in hiring its former employees. Instead, the filing of the lawsuit was designed to intimidate Merchants; force it to spend significant time, energy, and expense in defending an unnecessary action; and harm its business relationships with its employees and customers. U.S. Foods’ allegedly anticompetitive conduct includes a comprehensive scheme to file litigation against regional and local competitors, seeking to enforce arguably unenforceable NSNDs, for the purpose of intimidating and threatening its rivals and quell competition.

U.S. Foods has also harmed its former employees by restricting their ability to compete in the market for the distribution and sale of food and food-related products. After soliciting and obtaining business from a new customer on behalf of Merchants, one of the former U.S. Foods employees was contacted that the new customer would not do business with Merchants due to pressure from U.S. Foods. An existing customer declined to order from Merchants after meeting with representatives from U.S. Foods.

There are significant barriers to entry in the broadline foodservice distribution market, such as significant capital expenditures for infrastructure, a diverse product mix for diverse customer segments of the market, and a low density population in the relevant geographic region. The market is also highly seasonal.

The complaint alleges that senior U.S. Foods executives made false and defamatory statements about Merchants during a presentation to its entire sales force. U.S. Foods employees who formerly worked for Merchants used unlawfully retained Merchants’ confidential employee lists and proprietary information to solicit current Merchants employees to work for U.S. Foods. As a result of U.S. Foods conduct, competition in the distribution and sale of food and foodservice products has been suppressed and eliminated.

Merchants asserts claims for unfair competition, tortious interference with contractual and business relationships, abuse of process, and violations of Section 2 of the Sherman Act. The action seeks injunctive relief, disgorgement, compensatory and treble damages, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 2:14-cv-00071-KS-MTP.

Attorneys: David M. Ott and Kris A. Powell (Bryan Nelson P.A.) and Kara M. Marciel (Epstein Becker & Green, P.C.) for The Merchants Company.

Companies: The Merchants Company; U.S. Foods, Inc.

News: Antitrust MississippiNews