The opinion of the court was delivered by: Judge Sylvia H. Rambo
In this Robinson-Patman Act case, Plaintiff Feesers, Inc., a broadline food distributor,claims that Defendant Michael Foods discriminated against Plaintiff by offering lower prices on its egg and potato products to Defendant Sodexho, a food service management company. Feesers charges Michael Foods with a violation of Section 2(a) of the Robinson-Patman Act for price discrimination, and Sodexho with a violation of Section 2(f) for inducing the price discrimination.
This lawsuit was initiated by Feesers on March 17, 2004. Thereafter, the parties moved for summary judgment. In May 2006, this court found that Feesers had established the first three elements of the prima facie case of price discrimination, but granted summary judgment to Defendants on the ground that Plaintiff had failed to offer sufficient evidence to establish competitive injury. Plaintiff appealed the adverse holding to the Third Circuit Court of Appeals, which reversed this court's holding that there was no evidence of competitive injury and remanded the case for trial. See Feesers, Inc. v. Michael Foods, Inc., 498 F.3d 206 (3d Cir. 2007).
Over the course of three weeks in January 2008, this court held a trial and received evidence on the five issues remaining to be decided. First, whether Plaintiff is entitled to an inference of competitive injury, the fourth element of the prima facie case of price discrimination. Second, if Plaintiff receives an inference of competitive injury, whether Defendants have rebutted that inference by breaking the causal connection between the lower prices and any competitive injury. Third, whether Defendants have established the affirmative defense of "meeting competition" by showing that the lower prices to Sodexho were offered to meet the equally low prices offered by Michael Foods' competitors. Fourth, whether Plaintiff has proven that Sodexho induced price discrimination. Finally, whether Plaintiff is entitled to equitable relief. The following are the court's findings of facts and conclusions of law.
II. Prima Facie Case of Price Discrimination
The Robinson-Patman Act was passed by Congress to respond to the issue of large chain stores utilizing their great purchasing volume to secure lower prices than their smaller competitors. Section 2 of the Clayton Act, as amended by the Robinson-Patman Act, provides in pertinent part:
It shall be unlawful for any person engaged in commerce . . . to discriminate in price between different purchasers of commodities of like grade and quality, . . . where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them.
15 U.S.C. § 13(a).Where a disfavored purchaser establishes that a price discrimination has caused lost sales or profits, competitive injury is established. However, in Morton Salt, the Supreme Court held that because the Robinson-Patman Act aims to prevent such injury, proof of lost sales or profits is not necessary to seek injunctive relief under the Act. F.T.C. v. Morton Salt, 334 U.S. 37, 49--51 (1948). Specifically, the Court recognized that a permissible inference of competitive injury may arise where a favored purchaser receives a significant discount from the price received by its competitors that endures over a substantial period of time. Id.
Accordingly, to establish an inference of price discrimination under the Robinson-Patman Act in the absence of lost sales or profits, a plaintiff must show: "(1) that sales were made to two different purchasers in interstate commerce; (2) that the product sold was of the same grade and quality; (3) that defendant discriminated in price as between the two purchasers; and (4) that the discrimination had a prohibited effect on competition." Feesers, Inc. v. Michael Foods, Inc., 498 F.3d 206, 212 (3d Cir. 2007) (citing Texaco Inc. v. Hasbrouck, 496 U.S. 543, 556 (1990)).
Here, the court has already found that Plaintiff has established the first three elements of the prima facie case of price discrimination.*fn1 Feesers Inc. v. Michael Foods, Inc., 2006 WL 1274088, at *5--8 (M.D. Pa. May 4, 2006). The only element at issue is the final one-competitive injury. The Third Circuit has instructed that:
"Competitive injury" is established prima facie by proof of "a substantial price discrimination between competing purchasers over time." In order to establish a prima facie violation of section 2(a), Feesers does not need to prove that Michael Foods' price discrimination actually harmed competition, i.e., that the discriminatory pricing caused Feesers to lose customers to Sodexho. Rather, Feesers need only prove that (a) it competed with Sodexho to sell food and (b) there was price discrimination over time by Michael Foods. This evidence gives rise to a rebuttable inference of "competitive injury" under § 2(a). The inference, if it is found to exist, would then have to be rebutted by defendants' proof that the price differential was not the reason that Feesers lost sales or profits.
Feesers, 498 F.3d at 213 (citing Falls City Indus., Inc. v. Vanco Beverage, Inc., 460 U.S. 428, 434--35 (1983)).
Accordingly, in order to establish a prima facie showing of price discrimination, Feesers must demonstrate by a preponderance of the evidence that
(1) it was in actual competition for the same dollar with Sodexho for the sale of food to institutional customers, and (2) Michael Foods' discrimination in price between Sodexho and Feesers was substantial over time. If this burden is met, then Feesers is entitled to an inference of competitive injury. These two elements will be discussed in turn.
The Third Circuit has instructed that "[t]o determine whether Sodexho and Feesers compete to resell food products to the same group of customers '[the court] must conduct a careful analysis of each party's customers. Only if they are each directly after the same dollar are they competing.'" Feesers, 498 F.3d at 214 (quoting M.C. Mfg. Co. v. Tex. Foundries, Inc., 517 F.2d 1059, 1068 n.20 (5th Cir. 1975)). However, Feesers need not prove that the price of Michael Foods' products was the determinative factor in any customer's decision to choose Sodexho or Feesers. Feesers, 498 F.3d at 213--216. Instead, in order to demonstrate actual competition for the same dollar, Feesers must show that it competes with Sodexho for the same portion of an institution's food service budget. Id.
With this standard in mind, the court turns to the evidence presented at trial in this case. Feesers claims that the evidence demonstrates that it competes with Sodexho to sell Michael Foods egg and potato products to certain institutional food service customers within a 200 mile radius of Harrisburg, Pennsylvania. Defendants argue that the evidence demonstrates that Feesers and Sodexho offer two completely different services-Feesers food distribution and Sodexho food management-and that customers do not perceive the two companies to be in competition with each other. In evaluating the evidence, the court will first discuss the distribution chain in the food service industry generally, and the roles played by the parties to this suit within that system. Thereafter, the court will examine the customers for whose business Feesers claims that both it and Sodexho compete. In particular, the court will focus on the decision making process that occurs when a customer decides how to purchase food, including the timing of the decision and the factors informing it.*fn2 The following are the court's factual findings, established by a preponderance of the evidence presented at trial.
The Food Service Industry Generally
This case concerns competition for the sale of Michael Foods' egg and refrigerated potato products to institutions providing dining services. In order to put this competition in context, a general description of food manufacturing, distribution, and institutional dining services is required. Institutional dining services consists of meals prepared away from home. Institutions providing dining services include colleges and universities; educational institutions such as elementary and high schools; hospitals, nursing homes, and other group living institutions; and corporations.
An institutional dining services program encompasses a number of discrete functions. These include menu planning, procurement of food, delivery of the food, hiring and supervision of employees to prepare and serve the food, and maintenance of a kitchen and cafeteria. Institutions have a wide range of options to accomplish these tasks. An institution may choose to self-operate ("self-op") its dining services program and perform all dining services tasks internally. On the other hand, an institution may choose to outsource part or all of these functions.
When an institution makes the decision to outsource, it has essentially two options. The first is that the institution can act as a general contractor, and hire other companies to perform one or more food services tasks. The other option is that the institution may choose to hire a food service management company to act as a general contractor. In turn, the food service management company subcontracts the responsibility of providing one or more food service functions to other companies.
Regardless of how institutions choose to organize their dining services, all must purchase food (procurement) and have it delivered to the loading dock of the institution (distribution). Distribution is always performed by a distributor. However, for procurement-which in this context includes both bargaining for the price of the food, and purchasing the food-an institution has a number of options. It may procure food from distributors, or contract with a group purchasing organization (GPO) or food service management company to procure food. GPOs generally bargain for a lower price, but do not actually purchase the food for resale to institutions. On the other hand, food service management companies bargain with manufacturers for lower food prices and arrange for the purchase and delivery of that food for resale to the institution.
The court now turns to the particular roles played by the parties to this case within the food service industry. Plaintiff Feesers is a broadline food distributor, carrying thousands of lines of food and food-related products from many different manufacturers. Feesers is a regional distributor based in Harrisburg, Pennsylvania, and it does most of its business within a 200 mile radius of Harrisburg, an area encompassing parts of Pennsylvania, New Jersey, Maryland, Virginia, and Delaware. Feesers' customers include all segments of the food service market; however, this litigation concerns Feesers' institutional food service customers such as hospitals, schools, nursing homes, colleges, and corporations. In addition to directly distributing food to self-op food services providers, Feesers also contracts with food service management companies to deliver food to institutional food service companies that they manage.
Defendant Michael Foods is a national manufacturer of egg and refrigerated potato products. Its egg products are sold under the brand names "Papetti's" and "M.G. Waldbaum" and its refrigerated potato products under the brand name "Northern Star." Michael Foods is the largest producer of liquid eggs in the nation.
Defendant Sodexho is a multinational food service corporation headquartered in France and which does business around the world, including the five state area in which Feesers operates. As a result of recent mergers with other food service management companies including Marriott and the Wood Company,*fn3
Sodexho is currently both the largest food service management company and the largest private purchaser of food in the world. Sodexho's customers are large institutions across the country, including many schools, hospitals, nursing homes, corporations, and universities within Feesers' geographical zone of operation.
Competition between Feesers and Sodexho
As a general rule, institutions with dining services fall into two categories: self-op and managed. Feesers only sells food to self-op institutions, and Sodexho only sells food to managed institutions in conjunction with its food management services. When a self-op institution procures its food from Feesers, it generally bargains with Feesers over both the price of the food and the distribution fee for delivery of that food.*fn4 Alternatively, a self-op may choose to utilize the services of a GPO to bargain for a lower price. In this case, the institution purchases food from a distributor at the GPO-negotiated price plus a payment to the distributor for delivery. On the other hand, an institution managed by Sodexho contracts with Sodexho to arrange for the procurement and delivery of raw food to the institution. Sodexho then bargains for a lower food price from the manufacturer and hires a distributor to purchase food at the Sodexho-negotiated price for resale to Sodexho at that price plus a distribution fee. Sodexho in turn bills the customer for the cost of food at Sodexho's negotiated price, plus the distribution fee. Thus, a self-op institutional food service customer purchases food from a distributor such as Feesers, while a managed institution purchases the same food from a food service management company such as Sodexho.
Though it would appear that Feesers and Sodexho serve two discrete groups of customers, in fact institutional customers regularly switch from self-op to management and vice versa. Some Feesers customers have switched to Sodexho, including the Jewish Home of Greater Harrisburg and St. Mary's Catholic School.
More rarely, some Sodexho customers such as the Meadows have switched to self-op and become Feesers customers. Both Feesers and Sodexho actively seek the business of self-op institutions. The testimony at trial from both Feesers and Sodexho employees, as well as Sodexho's securities filings and strategic planning documents demonstrate that Sodexho seeks to convert self-op institutional customers to food service management. Moreover, the same documents demonstrate that Sodexho has been successful in this goal.
Sodexho's internal documents also demonstrate competition with distributors such as Feesers to sell food to institutions such as schools, hospitals, nursing homes, and colleges. For instance, in Sodexho's Form 20-F filed with the U.S. Securities and Exchange Commission Sodexho describes its competition for the business of self-ops as follows:
Our success depends on our ability to retain and renew existing client contracts and to obtain and successfully negotiate new client contracts. . . .
Our business and growth strategies depend in large part on the continuation of a trend in business, education, healthcare and government markets toward outsourcing services. The decision to outsource depends upon customer perceptions that outsourcing may provide higher quality services at a lower overall cost and permit customers to focus on core business activities. We cannot be certain that this trend will continue or not be reversed or that customers that have outsourced functions will not decide to perform these functions themselves.
Management has also identified a trend among some of our customers towards the retention of a limited number of preferred vendors to provide all or a large part of their required services. (Sodexho Form 20-F, P303 at 8.) Additionally, in describing opportunities for future growth, Sodexho notes the following:
Healthcare represents the largest potential market for Food and Facilities Management Services with outsourcing rates comparatively low. We estimate that more than half of this market is in short-stay centers (public and private hospitals) and the remainder in long-term care facilities for the elderly and the dependent. On average, we estimate that about one third of this food service market is currently outsourced, with short-stay facilities generally more likely to outsource than long-stay facilities by a ratio of almost two-to-one.
We estimate that the education market is about one-third outsourced in food service, with about one quarter of private sector institutions and about three quarters of public institutions outsourcing food service. (P303 at 22.)
Sodexho tracked both new self-op conversions and accounts lost back to self op in documents it referred to as "churn reports." One such churn report demonstrates that from 2000 until 2003, Sodexho gained approximately $330 million dollars in market share from self-op conversions in the hospital market, while losing approximately $142 million in accounts that converted back to self-op. (Health Care Services, Hospitals Strategic Plan, FY05--07, P160 at 40.) By contrast, competing food service management companies gained $408 million of the market in new self-op conversions while losing $253 million back to self-op. (Id.) Accordingly, Sodexho concludes that it "is converting self-op faster than any other single competitor, and is closing 45% of all Self-Op conversions in the market." (Id.) Churn reports demonstrate that institutions regularly switch back and forth between self-op and management, but that management has been gaining market share in recent years.
In addition to describing competition for self-ops, Sodexho repeatedly refers to competition with self-ops. For example, in its securities filing, Sodexho describes competition with other food service management companies, and then goes on to describe self-ops as a source of competition:
Competition in the Industry
There is significant competition in the food and facilities management services business from local, regional, national and international companies of varying sizes, a number of which have substantial financial resources. . . . Existing or potential clients may also elect to self-operate their food or other services, or to utilize other purchasing arrangements, thereby reducing or eliminating the opportunity for us to serve them or compete for the account. (P190 at 9.) This characterization of self-ops as a competitor also appears in Sodexho strategic planning documents assessing competition in various segments of the institutional food services industry. (See, e.g., Sodexho Health Care Division Three Year Plan FY01-03, P189 at 25 (describing self-op acute care institutional customers as "an increasingly formidable competitor able to effectively replicate contractor offerings" and noting that "market dynamics and internal cultural actors cause many self-op institutions to 'think twice' before outsourcing."); Sodexho Competitive Intelligence Overview Findings, Health Care Services: Hospitals Phase I, 2003, P170 at 2 (identifying self-op as Sodexho's number one competitor).)
As noted above, Sodexho, like other food service management companies, essentially performs the function of a general contractor. When a selfop becomes a Sodexho-managed institution, it relies upon Sodexho to perform all dining services functions for which it was previously responsible, including procurement and distribution of food. Though this function is still performed by a distributor, the institutional customer does not select, contract with, or pay the distributor selected by Sodexho, as it would if the institution were self-op. Thus, when an institution switches from self-op to management, the incumbent distributor is displaced. Conversely when a managed institution switches to self-op, the functions previously performed by a food service management company, including the sale and delivery of food, are once again performed by a distributor.
Accordingly, Feesers and Sodexho compete for the same portion of an institutions' food service budget.
As Sodexho recognized in a number of strategic planning documents, Self-operated businesses can be expected to continue to seek the appropriate balance of cost savings, operational quality (including regulatory compliance), and patient satisfaction that meet the organization's needs and culture.
The balance described above will be achieved with or without contractors depending upon an organization's needs and capabilities at any given time -- there will be limited loyalty to outsourcing, in general, or any one contractor.
Self-operated facilities can be expected to use contractors opportunistically -- the moment value in excess of cost is not perceived (facility is now clean/in regulatory compliance, obvious cost improvements have been made, step increase in patient satisfaction has been achieved, etc.) the contracting relationship will be at risk.
The 'Battle for Value' will intensify (Competitive Intelligence Overview Findings, Health Care Services: Hospitals Phase I, 2003, P170 at 3; P182 at 2. ) Similar assessments appears in other Sodexho strategic planning documents for the Senior Services sector, (see, e.g., P178 at 15; P166 at 4), in the Education sector, (P190 at 103 (describing self-ops as Sodexho's number one competitor).) In its Senior Services Executive Abstract Phase I: FY 03-05, Sodexho offered the following "Summary of Competitor Strategy for Self-operated institutions:
Support services, especially food and dining services, is considered a 'core competency' and an integral part of the resident offer provided by Senior's facilities. Contractors, therefore, are perceived as taking away administrators' value and expertise. Until contractors prove that they can provide needed value to respond to new market issues, there will be little movement towards outsourcing.
Facilities will continue to receive much of the critical expertise they require through government resources, consultants, or vendors (e.g. menus through Sysco). (P178 at 15; see also Senior Services Strategic Plan FY04-06, Competitive Intelligence, P166 at 4.)
Defendants argue that the fact that the strategic planning documents do not specifically mention distributors as a competitor category demonstrates that distributors such as Feesers do not compete with Sodexho. To the contrary, it is clear that when Sodexho refers to self-op as a "competitor," it means that self-ops are able to replicate the same functions that Sodexho itself provides. This includes procurement of food from distributors such as Feesers. Thus, when Sodexho refers to self-ops as "competitors" this includes all other companies providing functions that Sodexho seeks to contract to perform, including distributors.
In response to the trend towards segmentation of functions, Sodexho explored the possibility of unbundling its services to win self-op accounts. In the Executive Abstract, Senior Services Phase I Strategic Plan FY03--05, Sodexho took note of the following "Future Opportunit[y]"
Co-Sourcing: This concept has been in development and some testing over the past 18 months in both the former Wood and Sodexho companies. A contractual approach to 'consulting', this offer may allow us to sell our services in an 'unbundled' portfolio to Systems, as well as smaller facilities. We need to continue to energetically pursue this offer as a possible solution to penetrating the self-op market. (P178 at 29.)
Though Sodexho's strategic planning documents do not specifically mention distributors as competitors, they do discuss the competitive threat posed by GPOs, whose functions overlap with distributors. These documents shed further light on competition between Sodexho and distributors, including Feesers. GPOs negotiate with manufacturers for lower prices on behalf of their members. Additionally, GPOs may arrange for the sale and distribution of food at a discount, generally by contracting with a distributor. Thus, like distributors such as Feesers, GPOs perform some, but not all of the functions provided by food service management companies such as Sodexho.
Distributors and food service management companies compete with GPOs for the business of institutions providing dining services. In its strategic planning documents, Sodexho noted that "GPOs are an increasingly aggressive competitor" and warned to "[l]ook for individual GPOs to emerge as competitors in future years." (Competitive Intelligence Overview Findings, Health Care Services: Hospitals Phase I, 2003, P170 at 2.) Sodexho found that self-ops had an "[i]ncreasing perception that comparable or better purchasing economies can be obtained through GPOs. Accordingly, there is an increasing number of facilities seeking/joining GPOs." (Id. at 4.)
The trend continued in the following years. In Phase I: FY 03-05 Health Care Services Strategic Plan, Sodexho describes the health care industry as "highly dynamic, challenged, and cost focused," in part due to "GPOs and e-commerce producing a commodity approach." (P182 at 2.) Accordingly, "as a result of these trends, health care executives will look to [Sodexho] to. . . [p]rovide products and services that deliver cost savings at acceptable quality levels or predictable cost with higher satisfaction levels." (Id. at 3.)
In the Hospitals 04--05 Strategic Plan -- Phase II, Strategy and Ambition, Sodexho defined the Battle for Value as follows:
Part of our business dilemma and in fact, the whole industry's business dilemma, is that our value proposition has lost its 'edge.' This challenge is clearly indicated by low penetration rates that haven't materially moved in years. Under current market dynamics, our forecast is that the hospital market will not produce enough "actionable" outsourcing decisions to sustain growth for the major competitors (see sales plan). In general, the lines between [Sodexho], contractor capabilities, and self-operated capabilities have blurred.
Contractors, therefore, are competing for the same small slice of a churning market resulting in a commodity mentality and a strained market. This phenomenon has also, in effect, raised the basic 'price of admission' higher - features previously viewed by contractors as value added are now necessary base components of an expected offer. This is the "Battle For Value." (P167 at 12 (emphasis added).)
Later, in its Health Care Services Hospitals FY05--07 Strategic Plan, Phase II, Sodexho observed the trend of increased competition with GPOs continuing:
GPOs / E-Commerce: The growing number and complexity of GPOs combined with the emergence of e-commerce business applications in the procurement arena have, in effect, equalized the playing field enabling all entities to gain procurement leverage. Even a non-GPO aligned stand-alone facility can aggregate its buy with other facilities through E-commerce. Our historical pricing advantage is dramatically minimized. Additionally, GPOs increasingly dictate many or all aspects of the procurement process including product selection, distribution, etc. (P160 at 16.) The implication of this trend for Sodexho Health Care Services is that "[h]istorical and clear point of differentiation will not be there for us in the future" "[i]ncreasing amount of time defending and explaining (market baskets, meetings, etc.) our prices" "[w]e are on the defensive and our credibility suffers" and "[c]ompetitors may gain access to our accounts through 'back door' purchasing relationships." (P160 at 16.)
In a summary of competitor strategy for Summary of Competitor Strategy for GPOs, Sodexho observed the following:
! GPOs will become even more aggressive and sophisticated in the analysis, pricing, and level of detail required from their preferred partners procurement programs
! Increasingly setting pricing structures to compete with and/or win market baskets
! Emergence of more GPOS that will target our high volume accounts . . .
! Capture all volume discount allowances possible for their members
! Require preferred partners to run all product procurement through the GPO rather than their own programs
! GPOS will increasingly act as for profit entities as they seek to add services and products for their members
! The line between alliance partner and competitor will continue to blur, and likely disappear, as GPO services and products overlap with and contradict [Sodexho's] products and services (consulting, etc.)
! Continue to improve food procurement skills
! May even begin to bid services via e-commerce
! Require partners to adhere to their program specifications
(distributor, purchasing program, product specs, etc.) and impose financial penalties per contract terms for non-compliance (P160 at 10.) Sodexho concluded: "Our primary response should be to a) re-evaluate our pricing strategy so we are competitive at the 'loading dock', . . . c) explore ways to expand Entegra's role and presence in the healthcare industry." (P160 at 10.) Sodexho's strategy to achieve dominant market share includes "Establish competitive food pricing so [Sodexho] is competitive at the loading dock versus GPO pricing structure." (P160 at 31.) In its Health Care Services Hospitals FY05--07, Strategic Plan Phase I, Sodexho acknowledged that it needed to reconsider its relationships with GPOs because "[t]he line between alliance partner and competitor will continue to blur, and likely disappear, as GPO services and products overlap with and contradict [Sodexho's] products and services (consulting, etc.)." (P161 at 50.)
This evidence demonstrates that GPOs, like distributors such as Feesers, compete with Sodexho to perform some, but not all, of the functions Sodexho offers to its customers. Institutional customers may choose to procure food from Sodexho in conjunction with its management services, or they may choose to self-op and procure food from either a GPO or a distributor such as Feesers.
Evidence of Sodexho's increasingly fierce competition with GPOs indicates that Feesers, Sodexho, and GPOs are all competing for business of the same group of institutional customers.
One response by Sodexho to increasing segmentation of functions in the food service industry was to develop its own GPO, Entegra, to provide food service procurement unbundled from the distribution and management services typically provided by Sodexho. Entegra is a wholly owned subsidiary of Sodexho, and it has access to Sodexho deviated pricing. Entegra is not a defendant to this action, but its strategic planning documents shed light on competition between Feesers and Sodexho by offering further evidence of the increasing segmentation in the institutional dining services market and the increasing interest of institutions in saving money by lowering food prices.
In a strategic planning document, Entegra describes the Health Care and Senior Services market as follows:
Heath Care and Senior Services will be dominated by a few key GPO's . . . these health care GPO giants will lose market share as large systems opt to self-contract. In response, the GPO's will seek to maintain their profits by spilling over into the schools and campus markets where they will take hold over the next two to three years. They will find a responsive customer due to strong plays by Sysco and US Foodservice [both broadline distributors] to increase their margins in the wake of waning national competition. (Entegra's Three-Year Plan, FY2005-2007, Phase I, P163 at 4.) Further in the same document, Entegra describes a trend towards segmentation of procurement and food service management: "It is becoming increasingly more common that health care systems will look at procurement and management as two different functions . . . Some customers are going a step further and looking at distributor and manufacturer relationships as two different functions to be outsourced." (Id. at 19.) Entegra summarized the risks and opportunities of this trend as follows:
There is an increasing tendency of systems in health care to look at procurement as a separate function from the management services Sodexho provides. . . This can lead to further utilization of entegra with a resulting erosion in margins. We will need to compete for this procurement business in order to continue to have access to our contracted products. . .
As systems pull back from GPO relationships they will look for providers such as Sodexho to offer services that address the needs of all of their facilities-management for some, procurement for others, co-sourcing for yet others. This can be a risk and an opportunity. . .
It is likely that current entegra clients will bid distribution and procurement services as two different activities in the future. . . . We expect that many will negotiate their own distribution agreements and look for a third party to provide manufacturer agreements. (P163 at 20.)
The Entegra Procurement Services Three Year Plan FY 2005--2007, Phase II supports this trend:
Opportunities, Risks & New Business -- Risks continue to be in the area of pricing competitiveness and the spread of group purchasing organizations. While pricing competitiveness is a challenge for entegra from a sales and retention perspective it is increasingly becoming an issue for the retention of purchasing in Sodexho-managed business.
Due to this, entegra is being considered more frequently as an option for Sodexho business. (P159 at 6.) Entegra continued to observe the market trend towards segmentation:
It is becoming increasingly more common that health care systems will look at procurement and management as two different functions . . . Some customers are going a step further and looking at distributor and manufacturer relationships as two different functions to be outsourced. (Id. at 12.) "A strong systems offer that includes management services for select sites and procurement services for others can be a strong retention activity with existing clients or a lead-in with a potential client." (Id. at 13.)
Defendants argue that regardless of the evidence that Feesers and Sodexho compete for the same institutional customers, they are not in actual competition for any one customer because Sodexho typically competes only in a formal bidding process in which distributors such as Feesers do not participate. However, contrary to Defendant's assertions, the evidence presented at trial demonstrates that competition occurs not just in the formal request for proposal ("RFP") process, but also on an informal basis all the time. Sodexho sales employees regularly make informal contacts with targeted institutions, some of which are Feesers customers.
As a general matter, Defendants are correct that the evidence demonstrates that most self-op institutions engage in a formal RFP process prior to signing a contract with a food service management company. The RFP process generally only includes food service management companies such as Sodexho, Compass, and Aramark. Depending on the size and type of institution, the RFP process may be extremely detailed and lengthy and include bids on a wide range of services not provided by distributors. However, not every RFP process concludes with a contract with a food service management company. As Sodexho noted in a strategic planning document, sometimes "Self-Ops use contractors to 'fix' current problems and then return to self-op or use the RFP process to gain ideas but remain in-house." (P190 at 19.)
Additionally, Sodexho competes with distributors such as Feesers outside of the formal RFP process. Jay Marvin, Sodexho's Senior Vice President for Sales and Marketing for the Health Care Division, described how Sodexho seeks to acquire a new client. For self-ops, Sodexho first identifies institutions that meet its client profile (generally larger institutions). Sodexho sales team then makes contacts and forms relationships at the institution. The team gauges the institution's interest in management and determines whether there are any particular problems to be solved. If the institution is interested in management, then it puts out an RFP. The RFP process for hospitals is usually quite lengthy and formal, and generally only involves other food service management companies such as Aramark and Compass. The process can be less formal with senior services institutions, but a proposal is still generally required.
Moreover, in some cases, Sodexho's proposals themselves demonstrate direct competition with distributors. This can occur when a self-op institution chooses to utilize Sodexho management services while retaining distributors for some or all food procurement. For instance, in a proposal to the Beth Sholom Home of Eastern Virginia, Sodexho urged the institution, which was already a Sodexho customer, to utilize Sodexho's procurement program as well:
Utilization of the Sodexho purchasing program provides great financial benefits to our partner facilities. As the industry leader in food procurement with purchasing responsibility for approximately 5,300 facilities throughout the United States, Sodexho is able to purchase food at pricing that is not able to be realized by smaller organizations. Currently the full resources of the Sodexho procurement program are not being utilized. A significant portion of the department purchasing is done utilizing US Foodservice [a broadline food distributor]. It is our recommendation that Beth Sholom Home of Eastern Virginia take full advantage of the kosher procurement program and pricing afforded by its partnership with Sodexho. Use of the Sodexho kosher vendors would not only streamline the ordering process but would substantially reduce pricing, specifically in the kosher poultry market. (P77 at 2.)
Defendants also called ten customer witnesses who testified unanimously that they did not perceive Feesers to be a competitor with Sodexho.*fn5
However, the court does not infer from this testimony that Feesers is not in competition with Sodexho for the sale of food to institutional customers for a number of reasons. It appeared that the witnesses believed that two companies are competitors only if they offer precisely the same set of services. At least one witness (Shippensburg) was under the impression that Feesers was seeking the opportunity to bid against Sodexho in the RFP process. Many other institutions had already committed to either self-op or management at the time they were considering either Feesers or Sodexho, and accordingly their choices were limited to either distributors or management companies.
No testimony was presented by any witness for an institution that was considering a switch from self-op to management, or vice versa. However, it is clear from Sodexho's own internal documents that many institutions do regularly switch from self-op to management. Thus, the court cannot infer from the testimony of the ten customer witnesses who were not considering such a switch that no customer ever does consider such a switch. Accordingly, the court gives no weight to the conclusions of the ten customer witnesses that Feesers does not compete with Sodexho.
Based on the above findings of fact, the court concludes that Feesers and Sodexho are in actual competition for the same dollar in the sale of Michael Foods products to institutional customers within Feeser's geographical zone of operation. Feesers and Sodexho both compete to sell Michael Foods egg and refrigerated potato products to the same institutional customers. The court will take this opportunity to address a few of Defendants' arguments on this point.
First, Defendants argue that Feesers competes only with other distributors such as Sysco, rather than food service management companies such as Sodexho. In support of this argument, Defendants point out that Sodexho has no delivery trucks or warehouses, and does not directly perform distribution for its clients. However, the fact that Sodexho chooses to subcontract the physical delivery of food to a distributor (generally Sysco) rather than perform this function itself is of no significance in determining whether Sodexho competes with Feesers. From the perspective of the institutional customer, that customer contracts with Sodexho to provide food and distribution, notwithstanding the fact that Sodexho in turn contracts with a distributor to perform the function. Thus, Sodexho competes with distributors in the sale of food and distribution to institutional food service customers. The Supreme Court has repeatedly stated that the Robinson-Patman Act should not be construed in a way that "would allow price discriminators to avoid the sanctions of the Act by the simple expedient of adding an additional link in the supply chain." Perkins v. Standard Oil Co. of Cal., 395 U.S. 642, 647 (1969); accord Texaco Inc. v. Hasbrouck, 496 U.S. 543, 567 n.26 (1990) (applying same principle to similar facts).
It is also not significant that Feesers and Sodexho have never simultaneously submitted an RFP to the same customer at the same time. As noted above, the evidence presented at trial demonstrates that competition in the industry is not confined to the formal RFP bidding process. For instance, Sodexho sales employees testified that they solicit the business of self-op facilities that have never before considered food service management. Additionally, the evidence established that some customers initiate the RFP process in order to gain ideas for how to improve their food service programs, but ultimately decide to remain self-op. Other customers utilize food service consultants to submit a self-op bid in the RFP process. Finally, some customers hire a food service management company to correct problems with their food service programs, only to return when the problems are fixed. In this competitive environment, the fact that no distributor has ever submitted a proposal in a food service management RFP process does not establish that distribution companies are not in competition with food service management companies for those accounts. Instead the evidence demonstrates that competition occurs when a customer considers switching from self-op to food service management, or vice versa. Although the customer's decision may be influenced by the RFP process, competition for an account is not confined to the process.
Defendants cite Volvo Trucks North Am., Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006), in support of their claim that Feesers was not in competition with Sodexho for the sale of Michael Foods products. In Volvo Trucks, the Court held that a truck manufacturer did not violate the Robinson-Patman Act by offering different discounts to dealers submitting bids for custom-made trucks to customers because there was no actual competition between the dealers for the same customers. In reaching this conclusion, the Court carefully examined the competitive process for the sale of custom-made trucks. The record revealed that customers purchased custom-made trucks through a competitive bidding process. Customers solicited bids from numerous dealerships selling different brands of trucks, but because Volvo dealers generally operated in separate geographic zones, customers rarely submitted simultaneous bids from two different Volvo dealers at the same time. In preparing a bid, Volvo dealers often requested a discount from Volvo. In the rare instance that two Volvo dealers were submitting a bid to the same customer, Volvo's policy was to offer the same discount to both dealers. ReederSimco complained that other dealers received steeper discounts from Volvo, but the Court held that this was an inappropriate comparison to make because those sales involved only other non-Volvo dealers. In other words, because the competitive process for the sale of custom-made trucks was formal and limited to only a handful of dealers, Reeder-Simco was not in actual competition with other Volvo dealers in transactions in which it did not submit a bid. The Court acknowledged that ReederSimco competed with other Volvo dealers for the opportunity to bid on sales, but noted that at this stage in the competition, no dealership had secured any discount from Volvo that they could use to gain a competitive advantage over other Volvo dealers. Id. at 178--179. Accordingly, the Court concluded that the discounts received by other Volvo dealers during the course of any bidding process in which Reeder-Simco did not bid did not result in competitive injury to Reeder-Simco. Id. at 179.
Volvo Trucks teaches that in order to determine whether two purchasers are in actual competition, a court must carefully examine both the competitive process and the customers. Defendants attempt to draw an analogy between Volvo Trucks and the facts of this case, claiming that the competitive process for the sale of Michael Foods products is narrowly confined to the RFP process, in which Feesers and other distributors do not directly participate. However, as noted above, the court rejects Defendants' narrow view of competition in this case. The evidence presented at trial establishes that competition for the sale of Michael Foods egg and potato products to institutional food service customers was ongoing and not limited to the formal RFP process. Food service management companies, distributors, and GPOs all compete formally and informally for the sale of food to institutions. Even when a company initiates the RFP bidding process, which includes only food service management companies, that choice is not final or limited to the companies submitting a bid. Volvo Trucks is not controlling because competition in this case is much broader than that at issue in that case. Unlike Volvo Trucks, the fact that Feesers does not participate in head-to-head bidding against Sodexho in a formal RFP process does not demonstrate that Feesers does not compete with Sodexho for the sale of Michael Foods products to those customers.
B. Substantial Price Discrimination Over Time
In order to pose a risk of injury to competition, there must be substantial price discrimination over time. "The presumption of the requisite adverse competitive effects contemplated by section 2(a) is most likely to arise when the price differential is (1) substantial enough to influence a disfavored customer's resale price; or (2) occurs in a market with low profit margins and intensive competitive conditions." J.F. Feeser v. Serv-A-Portion, 909 F.2d 1524, 1538 (3d Cir. 1990) (internal citations omitted). Temporary or trivial price differences are not normally enough to risk an injury to a disfavored competitor. However, the ...