Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Suit claims leading wholesale grocers allegedly conspired to eliminate competition in Midwest and New England, (Sep 30, 2014)

By Linda O’Brien, J.D., LL.M.

Two leading wholesale grocery distributors engaged in a conspiracy to restrain trade by agreeing to allocate customers and territories in their respective home markets through a sham asset exchange agreement, according to a complaint filed in the federal district court of Minneapolis (Elkhorn-Lueptows, Inc. v. C&S Wholesale Grocers, Inc., September 29, 2014).

C&S Wholesale Grocers and SuperValu Inc. are the largest wholesale distributors of grocery items by dollar volume in the United States. Grocery wholesalers purchase products directly from consumer goods manufacturers, store them in distribution facilities, and resell the products to grocery retailers. Grocery wholesalers compete for retail accounts principally on the basis of price and service. Elkhorn-Lueptows, Inc., Jefferson Lueptows, Inc., and East Troy Lueptows, Inc. (collectively, Lueptow’s), and Nemecek Markets, Inc. operate retail grocery stores in Wisconsin and paid activity based sell (ABS) fees on wholesale grocery products purchased from SuperValu distribution centers.

The complaint alleges that in 2003, to eliminate competition, C&S and SuperValu entered into an “asset exchange agreement” under which SuperValu acquired all of C&S’ distribution facilities and customer contracts in the Midwest in exchange for C&S acquiring all of SuperValu’s distribution facilities and customer contracts in New England. The agreement contained a secret provision whereby C&S and SuperValu agreed not to compete with each other in the Midwest and New England for business for at least five years. C&S and SuperValu took steps to conceal their secret non-compete agreement by removing any mention of it in each of their public disclosures regarding the asset exchange agreement.

The purpose of the agreement was to eliminate each other as a competitor in the Midwest and New England, allocating the Midwest market to SuperValu and New England to C&S. Within eight months of entering into the agreement, all of the distribution facilities that C&S and SuperValu had exchanged with each other were closed. The asset exchange agreement had no legitimate business purpose and was simply a sham transaction used by C&S and SuperValu to conceal their illegal non-compete agreement allocating the market and customers, the complaint charged.

According to the complaint, C&S and SuperValu used their secret customer and territorial allocation to harm retailers. The wholesalers have charged retailers higher prices for grocery wholesale goods than they would have paid if C&S and SuperValu had competed. SuperValu has continued its ABS pricing in the Midwest rather than having to engage in aggressive price competition with C&S. The overcharges have created a windfall for C&S and SuperValu, both of which have enjoyed higher margins from their customer and territorial allocation than they would have earned had the companies competed in the Midwest and New England.

By closing the distribution facilities, C&S and SuperValu eliminated substantial capacity and output for full-line grocery wholesale goods and services in the Midwest and New England. The reduction in the supply of full-line grocery wholesale goods and services to retailers has helped C&S and SuperValu maintain higher prices and perpetuate their dominance in the Midwest and New England as competing wholesalers no longer have the ability to efficiently enter territories through acquisition. Furthermore, the closing of the distribution facilities has increased transportation fees for numerous retailers that previously received products from the closed facilities.

High entry barriers exist in the full-line grocery wholesale goods and services. Substantial investments in resources and time are required to: (1) build distribution facilities; (2) hire and train employees; and (3) secure retail accounts. Additionally, C&S and SuperValu have expanded into new territories by acquiring other wholesalers, which requires substantial resources. By closing the distribution facilities in the Midwest and New England, C&S and SuperValu have increased barriers to entry in those territories, the complaint alleged.

The plaintiffs assert claims for conspiracy to restrain trade in violation of Section 1 of the Sherman Act. The action seeks declaratory relief, treble damages, pre- and post-judgment interest, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 0:14-cv-04031-PJS-SER.

Attorneys: W. Joseph Bruckner and Elizabeth R. Odette (Lockridge Grindal Nauen P.L.L.P.), Richard B. Drudel and Kimberly H. Schultz (Boies Schiller & Flexner LLP), Daniel A. Kotchen and Daniel L. Low (Kotech & Low LLP), and Douglas A. Kelley and Kevin M. Magnuson (Kelley, Wolter & Scott, P.A.) for Elkhorn-Lueptows, Inc., Jefferson Lueptows, Inc., East Troy Lueptows, Inc., and Nemecek Markets, Inc.

Companies: Elkhorn-Lueptows, Inc.; Jefferson Lueptows, Inc.; East Troy Lueptows, Inc.; Nemecek Markets, Inc.; C&S Wholesale Grocers, Inc.

News: Antitrust MinnesotaNews