IOWA CITY, Iowa (AP) — In a case closely watched by food companies and schools, the Iowa Supreme Court on Friday revived a lawsuit that challenges the legality of a nonprofit corporation formed to negotiate discounts from vendors who serve public schools.
The court said a judge erred by dismissing a lawsuit that claims school officials across Iowa did not have the authority to form and operate the Iowa Educators Corporation. Iowa Area Education Agencies formed the nonprofit known as IEC in 2000 to pool their purchasing power and negotiate contracts it claims have saved schools millions of dollars on everything from lunch food to sporting equipment.
Hawkeye Foodservice Distribution, Inc., filed the lawsuit after rival Martin Brothers Distributing Co. won a contract to serve as the group's prime food vendor. Coralville-based Hawkeye, a family-owned business that operates throughout the Midwest, contends the AEAs had no authority to form the corporation and that it is illegally competing with private enterprise.
Polk County Judge Robert Blink found the company had no legal standing to bring the lawsuit, but the justices overturned that decision in a unanimous 7-0 ruling Friday.
Writing for the majority, Justice Bruce Zager said Hawkeye's alleged loss of business gave it legal standing to bring the case. He said more proceedings were needed to determine whether the AEAs overstepped their legal bounds when they formed the corporation, a power that state law did not specifically grant them, and whether Hawkeye was entitled to damages.
Justices also kept alive Hawkeye's claim that IEC's contract with Martin Brothers violates a state law that prohibits government agencies from competing with goods and services sold by private businesses. Hawkeye's lawsuit contends IEC received a fee from Martin Brothers based on its sales and aggressively helped the company increase its market share so both get more revenue.
"We're pleased with the court's ruling today and look forward to the next step in this judicial process," Hawkeye President Jeff Braverman said.
While the high court was considering the case, Hawkeye filed a second lawsuit in federal court alleging that IEC and Martin Brothers were using their relationship to establish a monopoly on food service to Iowa schools. Then, a national consumer rights law firm filed a lawsuit seeking class-action status on behalf of parents who overpaid for school lunches as a result of the contract which it claimed drove up food prices for school lunches and restricted competition. Both of those cases remain pending.
All three lawsuits claim IEC and Cedar Falls-based Martin Brothers had a cozy relationship that centered around Dan Dreyer, a former Martin Brothers employee who became the first director of the IEC.
In court documents, IEC said Dreyer is no longer its director and that it ended its food service program last year. Iowa Area Education Agencies have since formed a different group called the Iowa Association for Education Purchasing, which is headed by Dreyer, serves the same purpose and has a contract with Martin Brothers. It is organized as a government agency, not as a corporation, which addresses one of the claims in Hawkeye's lawsuit.
Hawkeye's federal lawsuit says Martin Brothers has dramatically expanded its market share in the Iowa school lunch business and run out competitors. The IEC paved the way by negotiating discounts with food manufacturers and telling those companies they must give the prices exclusively to Martin Brothers, the lawsuit claims. IEC's member schools — more than 375 — had to buy at least 60 percent of their food from Martin Brothers.
The lawsuit also claims Dreyer gave Martin Brothers a no-bid contract after IEC was formed and manipulated the bidding process to make sure it won bids to retain the deal in 2002 and 2007. Dreyer didn't immediately return a phone message seeking comment.