Hawkeye Foodservice Distribution, Inc. v. Iowa Educators Corp.

• Decision Date: 24 February 2012
• Docket Number: No. 08–2056.,08–2056.
• Citation: 812 N.W.2d 600,279 Ed. Law Rep. 1194
• Parties: HAWKEYE FOODSERVICE DISTRIBUTION, INC., Appellant, v. IOWA EDUCATORS CORPORATION d/b/a Iowa Educators Consortium; Keystone Area Education Agency, Area Education Agency 267, Prairie Lakes Area Education Agency, Mississippi Bend Area Education Agency, Grant Wood Area Education Agency, Heartland Area Education Agency, Northwest Area Education Agency, Loess Hills Area Education Agency, Green Valley Area Education Agency, and Great Prairie Area Education Agency, Appellees.
• Court: Iowa Supreme Court

812 N.W.2d 600

279 Ed. Law Rep. 1194

HAWKEYE FOODSERVICE DISTRIBUTION, INC., Appellant,

v.IOWA EDUCATORS CORPORATION d/b/a Iowa Educators Consortium; Keystone Area Education Agency, Area Education Agency 267, Prairie Lakes Area Education Agency, Mississippi Bend Area Education Agency, Grant Wood Area Education Agency, Heartland Area Education Agency, Northwest Area Education Agency, Loess Hills Area Education Agency, Green Valley Area Education Agency, and Great Prairie Area Education Agency, Appellees.

No. 08–2056.

Supreme Court of Iowa.

Feb. 24, 2012.

Stephen R. Eckley and David W. Nelmark of Belin McCormick, P.C., Des Moines, for appellant.

Jim D. DeKoster and Beth E. Hansen of Swisher and Cohrt, P.L.C., Waterloo, for appellees.

ZAGER, Justice.

Hawkeye Foodservice Distribution, Inc. (Hawkeye) filed a petition for declaratory and injunctive relief against the Iowa Educators Corporation (IEC) and ten Area Education Agencies (AEAs). Hawkeye asked the court to declare the establishment, existence, and operation of IEC was unauthorized and in violation of chapters 273 and 28E of the Iowa Code. It also asked the court to enjoin the AEAs and IEC from further operation in violation of Iowa law. Hawkeye also sought injunctive and declaratory relief on the ground that the AEAs and IEC operate in violation of chapter 23A. The district court found Hawkeye lacked standing to bring the chapter 273 and 28E claims and granted the defendants' motion to dismiss. The court also found Hawkeye had failed to allege sufficient facts demonstrating it was entitled to relief under chapter 23A and granted the motion to dismiss on this basis. Hawkeye appealed the dismissal. The court of appeals reversed, holding that the district court erred in concluding Hawkeye lacked standing to challenge the actions of the defendants under chapters 273 and 28E. The court of appeals also held that the district court erred by concluding Hawkeye had failed to allege sufficient facts showing a facial violation of Iowa Code chapter 23A (2007).¹ Defendantssought further review, which we granted. For the reasons set forth below, we reverse the district court.

I. Factual Allegations in Hawkeye's Petition.

Hawkeye is a wholesale foodservice distributor and consultant that provides food and services to Iowa schools and other institutions. AEAs were created by statute in 1974 with the intent “to provide an effective, efficient, and economical means of identifying and serving children ... who require special education.” Iowa Code § 273.1. The stated intent was also to provide for media services and other programs and services for children requiring special education. Id. Iowa's AEAs incorporated IEC in 2000. The purpose of IEC was to provide a voluntary purchasing program for Iowa schools which would allow the schools to take advantage of aggressive pricing based on greater purchasing volume. This pricing is offered through IEC's chosen prime vendors. IEC assists its prime vendor in negotiating with manufacturers in order to secure favorable prices. These prices result in savings which are passed on to the AEAs. In return for favorable pricing, the AEAs are required to purchase at least sixty percent of their foodservice needs from the prime vendor. The prices charged by the prime vendor to IEC members are determined by a markup over the prime vendor's IEC-negotiated cost. At the direction of IEC, IEC's costs to the prime vendor are generally not available to potential competitors such as Hawkeye.

For its efforts, IEC collects an “administrative fee” from the prime vendor based upon a percentage of the sales the vendor obtains through the direction of IEC. According to Hawkeye's petition, “[t]his fee funds the general expenses of the IEC including executive salaries and benefits, discretionary pension contributions, automobiles, and expenses related to pursuing prospective members located in states other than Iowa.” The fees generated by the food purchases controlled by IEC are substantial and continue to increase as IEC increases its control over the marketplace. IEC also receives funding through grants and the AEAs' general budgets.

Since its formation, IEC has always selected Martin Brothers Distributing Co., Inc. (Martin Brothers) as its prime vendor for foodservice and related products, regardless of arguably superior bids from other qualified vendors. The director of IEC is Dan Dreyer, a former employee of Martin Brothers. Hawkeye alleges that it has lost revenue from customers who purchase foodservice and products through IEC's prime vendor Martin Brothers, and that IEC assists Martin Brothers in the sale, offering for sale, delivery, distribution or advertising of goods and services offered by private enterprise.

On June 17, 2008, Hawkeye filed its petition against IEC and the ten AEAs now comprising IEC. Count I alleged the AEAs did not have authority under Iowa Code chapter 273 to establish or operate IEC. Count II alleged the AEAs violated chapter 28E when they created and operated IEC and have otherwise failed to comply with the various provisions of chapter 28E. See id. §§ 28E.1–.42 (governing the joint exercise of governmental power by “public agencies”). Count III alleged the AEAs and IEC violated chapter 23A, “Noncompetition by Government,” “[b]y engaging in and assisting Martin Brothers in the sale, offering for sale, delivery, distribution, or advertising of goods or services offered by private enterprise.” Specifically, chapter 23A prohibits a school corporation from engaging in the “manufacturing, processing, sale, offering for sale, rental, leasing, delivery, dispensing, distributing, or advertising of goods or services to the public which are also offered by private enterprise.” ²Id. §§ 23A.1(1), .2(1)( a). Hawkeye sought “[a] declaration that the establishment, existence, and operation of the IEC are unauthorized under Iowa law;” “[e]quitable relief enjoining the AEAs and the IEC from continued operations in violation of Iowa law;” and attorney fees and costs.

The AEAs and IEC filed a motion to dismiss on August 14, 2008. In their motion, the defendants alleged—among other things—that Hawkeye lacked standing to seek dissolution of IEC or to challenge the validity of its actions, and they further alleged that the petition, on its face, failed to state a claim for relief under the Iowa Code chapters pled. Following a hearing, the district court found:

The actions of the AEAs and IEC have resulted in damages to Hawkeye. It has lost and continues to lose substantial revenue from customers who purchase food products and services from IEC's prime vendor. Further, Hawkeye continues to lose out on word-of-mouth advertising and referrals.

However, the district court treated Hawkeye's petition as a request to dissolve IEC under section 504.1431. See id. § 504.1431 (providing the grounds for judicial dissolution of nonprofit corporations). It then concluded Hawkeye did not have standing to file its claims under Iowa Code chapters 273 or 28E because it did not fall within the class of persons Iowa law allows to seek the dissolution of a nonprofit corporation or to attack the actions of a nonprofit corporation (IEC). It further concluded Hawkeye failed to state a claim of a violation of chapter 23A because it failed to allege the goods offered by IEC's prime vendors are sold to the public, rather than to IEC's members—the AEAs and schools.

Hawkeye filed a motion to reconsider the ruling. Following the court's denial of the motion, Hawkeye filed a timely notice of appeal. We transferred the case to the court of appeals. The court of appeals determined the district court erred in ordering the dismissal of all three counts. The AEAs and IEC made application for further review, which we granted.

II. Standard of Review.

“We review a decision by the district court to dismiss a case based on the lack of standing for errors at law.” Godfrey v. State, 752 N.W.2d 413, 417 (Iowa 2008); see also U.S. Bank v. Barbour, 770 N.W.2d 350, 353 (Iowa 2009). When reviewing a motion to dismiss, we accept the facts alleged in the petition as true. McGill v. Fish, 790 N.W.2d 113, 116 (Iowa 2010). Dismissal is proper “ ‘only if the petition shows no right of recovery under any state of facts.’ ” Southard v. Visa U.S.A. Inc., 734 N.W.2d 192, 194 (Iowa 2007) (quoting Comes v. Microsoft Corp., 646 N.W.2d 440, 442 (Iowa 2002)).

III. Counts I and II: Hawkeye's Standing to Challenge the Actions of the AEAs.

The district court found Hawkeye lacked standing to challenge the existence of IEC or the actions of the AEAs and dismissed counts I and II of Hawkeye's petition on that basis. Hawkeye has named IEC and the individual AEAs as defendants in its suit. In counts I and II of its petition, Hawkeye seeks an injunction against IEC's continued operation. Regarding count I, while IEC is run by the AEAs, IEC itself is not an AEA, so chapter 273 does not govern its actions. Regarding count II, IEC is a nonprofit corporation organized under chapter 504. Hawkeye has alleged each individual member of IEC is a public agency under Chapter 28E. SeeIowa Code § 28E.2. IEC itself is a legal entity just like any other nonprofit corporation organized under chapter 504. As such, it is not a public agency and is therefore not subject to chapter 28E's rules governing the joint exercise of governmental powers. See id. § 28E.3.

In its ruling, the district court focused on Hawkeye's challenges to the validity of IEC's existence and actions. The district court determined that Hawkeye was not one of the parties entitled to seek judicial dissolution of IEC under section 504.1431. See id. § 504.1431(1) (listing parties permitted to bring an action for judicial dissolution of a nonprofit corporation). The court's conclusion was, in this respect, correct. Hawkeye is not the attorney general and it is not a member of IEC and therefore does not have standing to challenge the existence or...