$21M Judgment vs. Foodbuy May Improve Transparency in GPO Industry

An attorney representing juice cup manufacturer Gregory Packaging Inc. predicted a recent $21.2 million federal court decision in Gregory’s favor will change the way manufacturers negotiate their contracts with group purchasing organizations.

U.S. District Court Judge Frank D. Whitney ruled Aug. 3 that Foodbuy LLC, a wholly owned subsidiary of international foodservice giant Compass Group, actively concealed its billing practices, deceived manufacturers and systemically overcharged despite binding agreements by applying volume allowances even in cases where such allowances were not part of the contract.

The decision is under appeal.

“The court’s decision only applies to Foodbuy although it notes that Foodbuy has acted the same way against other manufacturers,” attorney Russ Ferguson told The Food Institute. “As to the industry as a whole, the case will likely change how manufacturers negotiate their contracts with all GPOs.  Hopefully the decision brings more transparency to the GPO industry. “

Foodbuy would bill based on data from distributors and then wait for manufacturers to point out discrepancies rather than actively tracking how much of a manufacturer’s products actually were sold. The system made it virtually impossible for Gregory Packaging to protect itself from the alleged deceptive practices.

Ferguson said manufacturers would be well-advised “to negotiate for as much data as they can possibly get” from companies like Foodbuy and to validate invoices early to catch any errors.

Ferguson said he expects the appellate court to uphold the ruling, calling the order “solid.”

Gregory Packaging became suspicious of Foodbuy’s invoices “when it found that more cases were accounted for by deviations and Foodbuy invoices than actually were shipped to certain distribution centers,” which triggered a hunt for more data from distributors – a move Foodbuy blocked once alarms had been raised.

Gregory Packaging found instances in which it had been double-billed because of the way clients purchased their products.

“Foodbuy attempted to conceal its breach, deterred further investigation by [Gregory Packaging], employed deceptive practices for the purpose of continuing to receive the benefits of the agreement, and engaged in systemically overcharging more than the agreement allows,” the judge wrote, ordering $7 million in compensatory damages and $14.1 million in punitive damages.

The court also determined the practices were not limited to Gregory Packaging.

“This ruling will likely cause companies to be more up front about the cost of their products and services, and it will also cause them to be more transparent about the discounts they offer,” said Robert Donnelly, chief financial officer of Marketplace fairness. “This ruling is good for the food industry because it will create a more fair and transparent marketplace, which will benefit both consumers and businesses.”