All-County Taxpayers Association - Updates & Commentary - The People Have Prohibited It The Government Did It Anyway With Sysco (Legal Briefs)

GEORGE E. PATAKI individually and in his
official capacity as Governor of the State of New York;
PETER DELANEY, individually and in his prior official
capacity as Commissioner of the New York State Office
of General Services; JOSEPH SEYMOUR, individually
and in his official capacity as Commissioner of the New
York State Office of General Services;
CHARLES GARGANO, individually and in his official
capacity as member of the Board of Directors of the New
York State Purchasing Council; H. CARL MC CALL in
his official capacity as Comptroller of the State of New York;
and the SYSCO CORPORATION, - Defendants.
____________________________________________

1. Plaintiffs Robert L. Schulz, Gary T. Loughrey and William R. Nykorchuck, are citizens of the United States and of New York State. They reside in this judicial district. The principal offices of the State Defendants are located in this judicial district. This court has jurisdiction under 28 USC Sections 1331. The claims arise under the Sherman Anti-Trust Act, the Clayton Anti-Trust Act, the Robinson-Patman Act, the Perishable Agricultural Commodities Act 7, Article IV, Section 4 of the United States Constitution, 42 USC Section 1983, Article VII, Section 8 of the New York Constitution and under the New York State Finance Law.

2. This action is timely commenced. The action is commenced within three years after the first overt act done in furtherance of Contract P010307, which Contract has been continuous since June, 1995.

3. The "State action" doctrine regarding the federal anti-trust legislation does not apply here, i.e., the State defendants are not exempt from the federal anti-trust laws: the alleged anti-competitive activity has not been mandated by the State Legislature, acting as sovereign; the challenged restraint has neither been clearly articulated and affirmatively expressed as State policy, nor is it being actively supervised by the State itself. The "State action" rule applies not only to private parties but also to actions of State instrumentalities. Lafayette v. Louisiana Power & Light Co., (1978) 45 US 389, 55 L.Ed.2d. 364, 98 S.Ct. 1123, 1978-1 CCH Trade Cases para. 61936.

a) declaring that defendants have participated in a sham procurement, constituting a combination, conspiracy and monopoly in restraint of trade and commerce in food, household supplies and sundries, and that defendants have been and still are parties to agreement in restraint to such trade and commerce in violation of the Sherman Act (15 USC Sections 1 - 7), the Clayton and Robinson-Patman Acts (15 USC Sections 12 - 18), the Perishable Agricultural Commodities Act, [7 USC Section 499(a)-(t), and 7 CFR Part 46], 42 USC Section 1983, and

b) declaring that New York State Contract P010307 is violative of Article VII, Section 8 of the New York Constitution, and

c) declaring that New York State Contract P010307 is violative of New York State Finance Law, Section 160 et seq. [the State Purchasing Law], and

e) permanently enjoining defendants from entering into a similar contract in the future, and

f) directing SYSCO to pay $291 million to the State Treasury, which represents triple the $97 million damage done to the State’s taxpayers, and

h) directing George E. Pataki, Peter Delaney, Joseph Seymour and Charles Gargano to each pay a $350,000 fine, and

i) directing defendants to pay plaintiffs’ costs and disbursements, including legal fees, and

5. Robert L. Schulz is a citizen-taxpayer-voter of New York State. He resides in the Town of Fort Ann, Washington County. His mailing address is 2458 Ridge Road, Queensbury, New York 12804. He is an individual taxpayer and property owner liable to pay taxes upon an assessment of more than $1,000 in the Town of Fort Ann, Washington County, and in Queensbury, Warren County, New York. He pays State income and sales tax. He pays federal taxes. He is a registered voter registered to vote in the Town of Fort Ann, Washington County, New York. He voted in the last general election in New York State. He is eligible to vote in the next general election in New York State.

6. Gary T. Loughrey is a citizen-taxpayer-voter of New York State. He resides in the Town of Queensbury, Warren County. His mailing address is 58 Western Avenue, Queensbury, New York 12804. He is an individual taxpayer and property owner liable to pay taxes upon an assessment of more than $1,000 in the Town of Queensbury, Warren County, New York. He pays State income and sales tax. He pays federal taxes. He is a registered voter registered to vote in the Town of Queensbury, Warren County, New York. He voted in the last general election in New York State. He is eligible to vote in the next general election in New York State.

7. William R. Nykorchuck is a citizen-taxpayer-voter of New York State. He resides in the Town of Clifton Park, Saratoga County. His mailing address is 21 Mountain Laurel Drive, Clifton Park, New York 12065. He is an individual taxpayer and property owner liable to pay taxes upon an assessment of more than $1,000 in the Town of Clifton Park, Saratoga County, New York. He pays State income and sales tax. He pays federal taxes. He is a registered voter registered to vote in the Town of Clifton Park, Saratoga County, New York. He voted in the last general election in New York State. He is eligible to vote in the next general election in New York State. He is the sole shareholder of a damaged corporation, W.R. Nykorchuck & Co., Inc. which is a private organization incorporated under the laws of the State of New York. W.R. Nykorchuck & Co., Inc. is also known in the trade as MAN of N.Y. and operates as a food services distribution company in the business of ordering food, household supplies and sundries from suppliers located in many states throughout the United States of America and selling and delivering those products to governmental facilities located in many states throughout the United States of America. During each of the ten years preceding the 1995 challenged action, W.R. Nykorchuck & Co., Inc. successfully completed contracts awarded to it by the New York State Office of General Services ("OGS") under OGS competitive procurement procedures. Since 1995 the State has all but written W.R. Nykorchuck off its qualified vendor/procurement list(s).

9. Peter Delaney was the Commissioner of the New York State Office of General Services in 1995 and 1996. He was appointed by Governor George E. Pataki. He is now employed by the New York State Power Authority.

10. Joseph Seymour is the Commissioner of the New York State Office of General Services. He was appointed by Governor George E. Pataki in December, 1996.

11. Charles Gargano is the Commissioner of Economic Development for New York State and is a member of the New York State Purchasing Council. He was appointed by Governor Pataki.

12. Carl McCall is the duly elected New York State Comptroller and is a member of the New York State Purchasing Council.

13. SYSCO Corporation is a private, investor owned, publicly traded corporation registered in the State of Delaware. It is the nation’s largest food service marketing and distribution organization with corporate headquarters in Houston, Texas. It has many subsidiary and operating companies including SYSCO Food Services of Albany with offices located at 71 Fuller Road, Albany, New York 12205, which entered into Contract P010307 with the New York State Office of General Services in June of 1995. The SYSCO Corporation is in the business of ordering food, household supplies and sundries from suppliers located in many states throughout the United States of America and selling and delivering those products to private and governmental facilities located in many states throughout the United States of America.

14. Robber barons are back in business. The original robber barons were princes of industry -- American capitalists in the latter part of the 19th century, who became wealthy by exploiting governmental influence.

15. By their actions, the robber barons contracted, combined and conspired with people in high government and political office to further private aims, at the expense of the public good.

16. By their actions, the robber barons and their governmental cronies and co-conspirators engaged in business practices that restricted competition and tended to monopolize trade and commerce, unreasonably depriving consumers, including taxpayers, of the benefits of competition, resulting in higher prices for inferior products and services.

18. They were kept largely at bay for the past century by public indignation and public pressure for the adoption of protective devices that followed, such as our federal anti-trust laws, state constitutional prohibitions against the use of public funds for private purposes, and state purchasing and bidding laws.

19. However, the robber barons have indeed returned. Certain corporations are once again becoming wealthy through governmental influence in New York State. We see grants, tax credits, tax forgiveness, operating subsidies and unnecessary bond underwritings being steered by the state to big business and corporate giants. We see contracts being awarded without competitive bid. And, we see money flowing the other way. We see high government officials acting as ‘bag men’".

20. This case concentrates on one instance of this type of conspiratorial behavior -- OGS Contract P010307. New York State officials and the SYSCO Corporation are charged with violating federal anti-trust laws. This is a felony. The scope of the illegal activity is sweeping; the amounts of money involved are prodigious. The charges include violations of federal anti-trust laws, the State Constitution and the state’s purchasing and bidding laws.

21. Contract P010307 was given to SYSCO in June 1995 in response to an Invitation For Bid (IFB), which asked bidders to bid 24 commodities to be supplied to 66 downstate prisons and hospitals for a period of 3 months -- July, August and September, 1995. A contract was awarded to SYSCO to supply those 66 facilities, during July, August and September 1995, with the 24 commodities which were bid plus 886 commodities which were not bid, bringing the total number of commodities to 910. Ostensibly this was to take place while the state prepared, for public bid a Request For Proposals (RFP) which asked bidders to bid 90 commodities to be supplied to all 266 state prisons and hospitals for a period of two years. Lo and behold, the results of this latter bid were never disclosed. Instead, in October, 1995, the state simply informed the bidders that the state had extended Contract P010307 -- to have SYSCO supply all 910 commodities to all 266 facilities, for a period of 18 months. Lo and behold, after 18 months, the state again extended SYSCO Contract P010307 -- this time for a period of 24 months, bringing the overall contract period to 4 years, raising the total value of the contract to over $300 million.

22. To add insult to injury the contract stood the federal Perishable Agricultural Commodities Act and state purchasing laws on their head: rather than the required low bid procedures, the contract was awarded on the basis of "cost plus percentage bid," a contracting technique not used for "off-the-shelf" products but, instead, used for one-of-a-kind research and development endeavors; rather than the vendor being reimbursed by the state for actual costs, the vendor could invoice the state and be reimbursed at the inflated list price, keeping industry-traditional rebates, discounts and allowances to himself, commonly referred to in the industry as "shelter income"; rather than requiring the vendor to stick to his bid price for the contract period the vendor would be allowed to raise his prices every 7 - 30 days.

23. To further add insult to injury, Contract P010307 is repugnant to the New York Constitution because, by its very nature, it constitutes a gift: it was not bid; the vendor fixes the prices; and, the rebates, often amounting to more than 30% of the list price, and ordinarily belonging to the state under a cost-plus contract, have been left with the vendor. Over the 4 year contract period this would amount to about $97 million.

24. The contract was not competitively bid. The contract was awarded to SYSCO by the state after an imitation or counterfeit procurement process purporting to be genuine. The state went through the external motions necessary to this counterfeit procurement. Taxpayers and small businesses were shammed.

25. The evils of monopolization and restraints on trade are appearing. The case highlights key questions with respect to our traditional, small-business-oriented system of open competition and societal values. The long-term economic implications are clear. The constitutional implications are equally clear.

26. SYSCO Corp. is the nation’s largest food service marketing and distribution organization, with sales totaling more than $14 billion. SYSCO commenced operations in March, 1970. SYSCO’s growth has been due in large part to its acquisition of competitors. Through July, 1996, fifty-two companies had been acquired by SYSCO Corp. On information and belief, the owner of the acquired company would be given a large cash payment, stock in SYSCO, made a Vice President of SYSCO Corp. and allowed to continue running the local business organization which had been converted into a wholly owned subsidiary of the SYSCO Corp., with an appropriate name change. See Complaint Exhibit A.

27. On or about November 20, 1990, SYSCO Food Services, Inc. was charged by the U.S. Justice Department with conspiring with other government contractors in the wholesale grocery products business "to submit collusive, non-competitive and rigged bids" to public entities, in violation of the Sherman Antitrust Act, a felony. The charge claimed SYSCO held discussions with other companies during which they agreed who would be the low bidder, the prices each would bid on the contracts, and who would not bid. The scheme resulted in the public entities paying too much for the food, often with some federal and State money involved. See Complaint Exhibit B.

28. On or about July 15, 1991, SYSCO admitted to engaging in "bribes, kickbacks, and bid rigging," to providing poorer quality food than they contracted to provide and to overcharging. SYSCO plead guilty to the charge and paid a $2 million fine. See Complaint Exhibit C.

29. On or about May 15, 1992, new charges were made against SYSCO, by other public entities, for rigging bids, setting prices and jacking up sales. On information and belief, SYSCO paid out over $1 million in restitution. See Complaint Exhibit D.

30. On or about December 12, 1994, SYSCO agreed to a demand by the federal government that SYSCO refund $1.5 million to customers with whom SYSCO had signed a "cost-plus" contract. An investigation by the U.S. Department of Agriculture had disclosed that "SYSCO’s computation of cost under cost-plus contracts" was illegal because SYSCO failed to take rebates, volume discounts, bill-back money, advertising and merchandising money, sales goals money and other such allowances and internal charges (also referred to herein as "supplier kick-backs"), into account in pricing produce sold under cost-plus contracts. As a result, invoices from SYSCO and its subsidiary corporations failed to accurately price produce based on SYSCO’s cost as that term was defined by contract. See Complaint Exhibit E.

31. In the Spring of 1995, shortly after the beginning of the Pataki administration, the State decided to privatize the services of its upstate (Rotterdam, NY) food distribution center which, until then, had been owned by the State and operated by the Office of General Services’ Supply Support Services. This government center had been purchasing from private vendors all the food consumed at 266 State institutions (hospital, prisons, etc.). The private contractors would deliver the food to the distribution center, but OGS would then deliver the food to the individual institutions using OGS’ fleet of tractor trailers.

32. The decision to privatize the functions being performed by OGS meant private contractors would not only bring the food into the State but would actually be responsible for delivering the food directly to the State institutions. The private sector would be responsible for getting the food from the food processors all the way to the prisons and hospitals.

33. Prior to the Pataki administration, the State used the traditional procurement method known as "Invitation For Bids," which included the specifications of the products to be purchased, a delivery schedule, and notice of the State’s quality control procedures to include USDA inspection and grading of numerous products. Interested vendors were asked to quote their prices, which prices had to be good for the contract period (normally 4-12 months). The vendor with the lowest price and with the willingness and capability of satisfying all of the State’s rigorous terms and conditions as expressed in the Invitation For Bid received the contract.

34. Prior to the Pataki administration there were one hundred or more relatively small but independent business organizations, including W.R. Nykorchuck & Co., Inc., that had traditionally competed for the business of supplying the State’s food distribution center with the needed food and sundry items. In 1994, that business totaled more than $65 million annually. Prior to the Pataki administration, SYSCO had not successfully bid for much of that business.

35. On information and belief, the State planned to phase out the OGS food distribution center by October or November, 1995. To accomplish the phase out, without disrupting the flow of food to the State facilities, OGS commenced two procurements which OGS publicly stated were otherwise unrelated to one another.

36. On or about April, 1995, OGS issued an Invitation For Bid (IFB) for only 24 items, to be delivered directly to state facilities in the following counties: Southern Orange, Rockland, Westchester, New York, Bronx, Staten Island, Kings, Queens, Nassau and Suffolk. The Contract Period was intended to be for only July, August and September, although the IFB had a clause which read: "a contract may be extended by the State under the same terms and conditions for an additional period not to exceed twelve (12) months." The site locations listed in the IFB were 66 specific State facilities in said downstate counties.

37. The IFB had a clause which read: "Since the current state warehouse and distribution system is closing, the contract(s) to be let may require backing-up and delivery to other parts of the state. The bidder is to have the ability and resources to successfully deliver needed products to most areas, if not all areas, of the state." The bidders were to present their price for each of the 24 selected items for the quantities listed. The price was to be based on "cost-plus" formula. The contract was to be a "cost-plus percentage fee" contract. As such, the bidders were to show the "invoiced cost" (i.e., the supplier’s price to bidder), the "percent bid" (i.e., the fee as a fixed percentage that the contractor would add to the "invoiced cost"), and the "net-state price" (the sum of the "invoiced cost" and the "percent bid"). The "invoiced cost" was to be the price the suppliers charged the state’s wholesale vendor (i.e., the supplier’s price), but was otherwise not defined and, as such, could end up being the supplier’s "list" price to the vendor, i.e., the price before the application of rebates, volume discounts and other things of value that would be returned to the state’s contractor as a result of a payment by the contractor for the supplier’s products.
(footnote 1: The industry had a long history of being one of the most competitive industries in America. As such, most manufacturers and suppliers offer substantial rebates, volume discounts and so forth. The industry is replete with such supplier "kick-backs".)

38. The IFB implied that the award would be based on the lowest "percent-bid" and the contractor would be reimbursed its product cost.

39. However, the IFB also had a clause which allowed the vendor to raise his prices: every 7 days in the case of fresh fruit and produce products, and in the case of meat and poultry products; and every 30 days on all other products.

40. NOTE: This was the first time the state had ever indicated its intent to buy these products on any basis but that of lowest price. It was also the first time that vendors were allowed to raise the contract price within the contract period.

43. On May 30, 1995, OGS opened the bids. Complaint Exhibit G contains the bid results.

44. On June 21, 1995, OGS awarded the contract to SYSCO Food Services, based on the fact that SYSCO’s "percent-bid" was the lowest. The contract period was "July 1, 1995, to September 30, 1995, w/option to extend beyond September 30, 1995." There was no mention of whether the "percent fee" was to be calculated as a margin on sell or mark-up on cost. There was no mention of how rebates and other supplier kick-backs were to be handled. Complaint Exhibit H is a copy of the Notice of Contract Award.

45. On June 23, 1995, OGS issued a Purchasing Memorandum (see Complaint Exhibit I), directing purchasing personnel at State facilities to place their orders with SYSCO for delivery after June 30, 1995, using SYSCO supplied "relative pricing."

46. On June 23, 1995, OGS issued Request For Proposals No. 872, with proposals due July 28, 1995, from private industry to supply all of the products (nearly 1000 products) then being delivered by OGS’s two distribution centers to all of the state’s institutions (about 266 institutions). The RFP contained much of the same language, terms and conditions found in the IFB awarded to SYSCO a few days earlier, on June 21, 1995. The major differences were as follows:

	IFB	RFB
Number of Products	24 bid 886 not bid	90 bid 820 not bid
Using facilities (State)	66 (N.Y.C. Area)	266 (state-wide)
Contract	Cost plus percent fee	Cost plus percent mark-up on cost
Each Unit Cost	Vendor to identify cost of only 24 of the 910 items in his bid, but vendor allowed to increase cost of each item, every month, subject to "audit".	Vendor to identify cost of only 90 of the 910 items in his bid, but vendor allowed to increase cost of each item, every month, subject to "audit".
"Kick-backs"	Not mentioned	Not mentioned initially (footnote 2)
Contract period	July, August, Sept. 1995 with option to extend Up to 12 months.	Two years with three one-year options.

(footnote 2: Only after the issue was raised by SYSCO’s competitors at the July 7, 1995, pre-bid conference did the State amend the RFP to require that all rebates, volumes discounts and other things of value received from suppliers by the vendor had to be turned over to the State. Following this amendment, SYSCO prevailed upon the State to drop the RFP approach and to extend the Contract awarded under IFB No. 1942-2 to all 910 items, statewide, for 3 � more years, while allowing SYSCO to keep whatever kick-backs they could extract from their suppliers.)

48. On June 27, 1995, OGS scheduled a pre-bid conference for July 7, 1995. See Complaint Exhibit K.

49. The pre-bid conference was held on July 7, 1995. It was well attended. Many questions were asked of OGS at the conference. However, in reply to most questions, OGS said "we will get back to you on that."

50. On July 21, 1995, OGS amended RFP 872. See Complaint Exhibit L. The amendment took the form of written answers to questions received at the pre-bid conference and written amendments to Section 2.3 ("Price List") and Section 7.1.1 (Pricing Specifications). Several amendments are noteworthy.

a) In response to Question No. 16 the State confirmed that the main evaluative criteria to be used in awarding the contract would be the percentage mark-up.

b) The State refused to answer questions about: the involvement of outside vendors, such as SYSCO, in the development of the State’s revamping process, the RFP, the time frame of the revamping process; the procurement record regarding the contract with Peat Marwick to develop the RFP; studies (if any) on alternatives to the procurement approach reflected in the RFP, particularly the cost-plus-fixed fee contract.

c) In response to Question No. 23, the State confirmed that each of the State’s 266 facilities will be responsible for quality control after the shut-down of the State’s distribution center with its laboratory. (footnote 3: The facilities did not have the quality control laboratories or the contract administration capability that the OGS distribution center had.)

d) In response to Question No. 35, the State said "Bid #1942-Z was a separate process and is unrelated to this RFP. In fact, Bid #1942-Z was specifically designed to provide interim service to downstate facilities while the State had time to award contract(s) under this RFP." (footnote 4: However, after receiving four bids in response to the RFP the State decided not to make any award under the RFP. Instead, the State simply gave all the business to SYSCO by simply amending the contract awarded to SYSCO under Bid #1942-Z, i.e., without competitive bid.)

e) In response to a question about rebates and allowances from suppliers, (Question No. 52), the State announced that it had added Section 2.3.4 on Rebates to the RFP and that with that amendment the State now intended "to get the best price possible, including volume discounts," i.e., the State would get all kick-backs.

f) In response to another question about rebates, discounts and allowances from suppliers (Question No. 78), the State said they must receive "100% of the value of these items," i.e., the State would be the beneficiary of all kick-backs.

g) In response to a question about the "percent fee," the State said it is to be calculated "as a mark-up on cost."

52. On August 9, 1995, the State informed the vendors that the due date for proposals was August 14, 1995. See Complaint Exhibit N.

53. On or about October 15, 1995, a five page memo was secretly circulated among certain State legislators. See Complaint Exhibit O. The memo was entitled "Prime Supplier Contract". The memo "announced" that the State was going to drop the RFP procurement and, instead, give all the business to SYSCO simply through an extension of the contract awarded to SYSCO under IFB 1942-Z. (footnote 5: The memo justifies the award to SYSCO on the basis of the advantages to the State of privatization, rather than on the basis of SYSCO’s competitive position relative to others in the industry.)

54. On October 17, 1995, without explanation, the State notified those companies that had submitted proposals in response to the RFP that the State had decided not to make an award pursuant to the RFP but, instead, was giving all the business to SYSCO as an extension of its IFB contract No. 1942-Z. In effect, this allowed SYSCO, rather than the State, to reap all the monetary benefits from rebates, volume discounts and other things of value received from its suppliers. This also allowed SYSCO to apply the 6% fee to higher "costs", and to raise its prices every seven to thirty days. See Complaint Exhibit P. (footnote 6: On information and belief, the State received four proposals in response to the RFP: SYSCO; W.R. Nykorchuck d/b/a M.A.N. of N.Y.; SOFCO; and BI-LO d/b/a Trading Port. BI-LO has since gone out of business. SOFCO has since been forced to sell out to a large national firm.)

55. On November 20, 1995, SYSCO sent all potential suppliers (many of whom were in competition with SYSCO) a "Supplier Profile Form" which the suppliers were expected to complete if they expected to do business with SYSCO. Each supplier was expected to tell SYSCO how far the supplier was willing to go by way of rebates, discounts, allowances, bill-back promotions, off-invoice promotions, etc. In other words, SYSCO was communicating to their potential suppliers that SYSCO was looking for and would be doing business with those suppliers who were the "most generous." See Complaint Exhibit Q.

56. On November 22, 1995, the State announced that it had extended the cost-plus contract period under IFB Award 1942-Z from September 30, 1995, to April 30, 1997 (eighteen months), and had expanded the list of "core" products available from SYSCO under the contract from 24 to approximately 910 products. See Complaint Exhibit R.

57. On May 23, 1996, SYSCO sent a memorandum to all of its suppliers, advising them that SYSCO was allowing the State to audit SYSCO invoices to the State by allowing the State to send a copy of an invoice to the appropriate SYSCO supplier along with a letter asking the supplier to "verify that the attached invoice is accurate, including any promotional allowances reflected on the invoice." (emphasis added). The letter from the State would also request the supplier to "please advise us of any deviated allowances or rebates which you have authorized for the State of New York."

58. The May 23, 1996, memo from SYSCO told its suppliers to limit their response to the affirmation of the invoice the State attaches to their inquiry, to provide the State auditor with any current "deviated" allowances or rebates specifically authorized for the State of New York if they request it, and to send to SYSCO a copy of any other correspondence the supplier receives from the State of New York. Complaint Exhibit S is a copy of the SYSCO letter with its attachment. (footnote 7: SYSCO obviously had the power to adversely affect the level of business of any of its suppliers that did not cooperate with SYSCO.)

59. On June 19, 1996, OGS notified all State facilities that the facilities should be reviewing all purchasing options when products are available from more than one contract because "substantive differences [in prices] can occur depending on the quantity ordered and the periodic price changes which occur with the SYSCO (P010307) contract." See Complaint Exhibit T. NOTE: In July, 1995, the first month of its contract under IFB 1942-Z, SYSCO raised the invoiced cost of almost every one of the 24 items, most by substantial amounts. Since July, 1995, SYSCO has changed the prices every month on almost all of the items, in amounts well above what others were paying. See Exhibit U.

60. On February 28, 1997, the State announced that it was extending the contract awarded to SYSCO under IFB 1942-Z to April 30, 1999, adding two more years to the contract period, and raising the contract amount to nearly $300 million. See Complaint Exhibit V. (footnote 8: Most of the food service distribution companies that bid the IFB and RFP competed with SYSCO in the free market place prior to 1995 and had been winning a certain level of business awarded by the State of New York. Since the 1995 award of the contract to SYSCO, most of those competitors have either gone out of business or been forced to sell out to a large, publicly traded, national firm.)

61. On April 21, 1997, the Citizen Patriot (Michigan) published an article which reported that after switching from its traditional practice of awarding contracts to the lowest bidder to awarding contracts on the basis of "cost-plus percentage mark-up on cost," the cost of feeding inmates in the Jackson area’s farm prisons suddenly went up by 33% due in part to the fact that, "The vendor comes in with a lower cost, and then later says they can’t provide the service for that amount...The next thing you know, they are holding the State hostage." See Complaint Exhibit W.

62. On information and belief, SYSCO has been violating its contract by supplying less than Grade B products to the State.

63. During 1996, the United States Department of Defense, Defense Logistics Agency, Defense Personal Support Center, in an effort to better define "cost" under its "cost-plus" contracts with SYSCO for full service food distribution support for Navy ships at Norfolk Station Virginia, and for military installations, hospitals and Job Corps Centers, added a "Rebates/Discounts" provision and other price related terms and conditions to its RFPs. SYSCO protested the new terms of the RFP to the federal General Accounting Office (GAO). The GAO undertook an administrative investigation. On July 9, 1996, during the investigation, SYSCO sent a letter to their suppliers. See Exhibit X hereto. On January 6, 1997, the GAO issued its decision, denying SYSCO’s protest. See Exhibit Y hereto.

64. The Sherman Anti-Trust Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that unrestrained interaction of competitive forces will yield the best allocation of economic resources of the country, the lowest prices, the highest quality and greatest material progress while at the same time providing an environment conducive to the preservation of democratic political and social institutions. Northern Pacific v U.S., Wash. 1958, 78 S.Ct. 514, 356 U.S. 1, 2 L.Ed.2d 545 and Norman’s on the Waterfront, Inc. v Wheatley, D.C. Virgin Islands 1970, 317 F.Supp. 247, affirmed 444 F.2d 1011.

65. The sole aim of the Sherman Anti-Trust Act and related anti-trust legislation is to protect competition. Gordon v New York Stock Exchange, Inc., U.S.N.Y. 1975, 95 S Ct. 2598, 422 U.S. 659, 45 L.Ed.2d 463. The particular acts being challenged herein come within the condemnation of the Sherman Anti-Trust Act.

66. The economic reality of Contract P010307 is that it unlawfully restrains and monopolizes interstate trade and commerce. Contract P010307 not only limits competition, it fixes prices -- at whatever SYSCO determines those prices should be.

67. Contract P010307 and the events leading up to it represents the type of evil the Sherman Anti-Trust Act was aimed at preventing. Contract P010307 is repugnant to the broad public policy favoring competition and condemning monopoly.

68. Contract P010307 resulted in economic concentration in the food and non-food products distribution business and has resulted in forcing a number of small competitors, including W.R. Nykorchuck & Co., Inc., out of the business of competing for the right to supply the State with the products in question or out of the food service distribution business all together. Contract P010307 has restrained and limited free competition. The basic purpose of 15 USCA Section 1-7 and Sections 12-27 and the 1950 Celler-Kefauver Anti-Merger Bill, amending sections 18 and 21, of Title 15, was to prevent economic concentration in the American economy by keeping a large number of small competitors in business. U.S. v Von’s Grocery Co., U.S. Cal. 1966, 86 S.Ct. 1478, 384 U.S. 270, 16 L.Ed.2d 555.

69. Contract P010307 is a combination of the resources of the State of N.Y. and SYSCO which combination restrains competition and monopolizes interstate trade, in violation of the Sherman Anti-Trust Act.

70. Contract P010307 tends to raise prices and otherwise controls the market to the detriment of the State and its taxpayers.

71. Congress intended to extend substantive prohibitions of Title 15 to the farthest reaches of its power under the commerce clause of the U.S. Constitution (Article I, Section 8, Clause 3), even to contracts between States and wholesale distribution firms engaged in interstate commerce, thereby mandating for this nation a competitive business economy. See Gaugh v Rossmoor Corp., C.A.9 (Cal.) 1973, 487 F2d 373.

72. Contract P010307 imposed unreasonable and undue restraints on the competitive economic system, hindering and retarding the free interplay of vital competition in the market place, transgressing the national interest.

73. Plaintiffs seek the restoration and maintenance of a competitive environment in which all companies which could meet the competitive challenge, including W.R. Nykorchuck & Co., Inc., may have an opportunity to survive. See Calnetics Corp. v Volkswagen of America, C.D. Cal. 1973, 353 F. Supp. 1219.

74. In violation of the Sherman Anti-Trust Act, SYSCO and the State of N.Y. have become associates in a common plan which is found to reduce the opportunity of SYSCO’s competitors, including W.R. Nykorchuck & Co., Inc., to buy or sell the things in which the groups compete. See U.S. v Insurance Bd. of Cleveland, N.D. Ohio 1956, 144 F.Supp. 684

DEFENDANTS HAVE VIOLATED THE CLAYTON
ANTI-TRUST ACT AND THE ROBINSON-PATMAN ACT,
15 USCS SECTIONS 12-18

75. In order to destroy competition and eliminate competitors, defendants entered into Contract P010307, a "cost plus percent fee" contract, on the basis of an unreasonably low (6%) percent fee, while allowing SYSCO to be reimbursed for their "invoiced costs," which invoiced costs did not include supplier discounts, rebates, allowances, advertising service charges, or other "supplier kick-backs." On information and belief, the bids received from SYSCO’s competitors in May of 1995 and in August of 1995 were based on "actual costs," rather than on invoiced costs, taking "supplier kick-backs" into account in their computation of costs.

76. Contract P010307 involves interstate commerce and, as such, is violative of 15 USCS Sections 12 et.seq., particularly Section 13(a), the purpose of which is to strengthen the provisions of the Clayton Act regarding price discrimination and particularly monopolistic -- predatory pricing. United States v. National Dairy Products Corp., (1963) 372 US 29, 9 L Ed 2d 561, 83 S Ct 594, reh denied 372 US 961, 10 L Ed 2d 13, 83 S Ct 1011.

77. The ultimate purpose of the Clayton Act is to secure the protection of the public against the evils which result from the lessening of competition. International Shoe Co. v. FTC, (1930) 280 US 291 74 L Ed 431, 50 S Ct 89.

78. It is the purpose of the Clayton Act to nip monopoly in the bud. US v. E.I. DuPont de Nemours & Co., (1957) 353 US 586, 1 L Ed 2d 1057, 77 S Ct 872.

79. The intent of Congress in passing the Clayton Act (15 USCS Section 12 et.seq.) was to promote competition through the protection of viable, small, locally-owned businesses. Brown Shoe Co. v. US, (1962) 370 US 294, 8 L Ed 510, 82 S Ct 1502; Ford Motor Co. v US, (1972) 405 US 562, 31 L Ed 2d 492, 92 S Ct 1142.

80. The purpose of the Clayton Act is to advance the public interest by securing the fair opportunity for play of contending forces ordinarily engendered by the honest desire for gain, and to this end it is essential that those who adventure their time, skill and capital should have a large degree of freedom of action in the conduct of their own affairs. California Rice Industry v. FTC, (1939 CA9) 102 F 2d 716.

DEFENDANTS HAVE VIOLATED THE FEDERAL
PERISHABLE AGRICULTURAL COMMODITIES ACT,
USCS SECTION 499(a)-(t) AND 7 CFR PART 46

81. Under Contract P010307 SYSCO receives, buys, sells, ships and handles perishable agricultural commodities in interstate commerce.

82. The Perishable Agricultural Commodities Act (PACA) and its regulations require SYSCO to fully disclose all information regarding supplier kick-backs under its cost-plus contract. PACA was enacted to regulate the entire perishable agricultural commodities industry not solely relationship between growers and shippers.

83. On information and belief, SYSCO failed to tell the State about such rebates, discounts and allowances, much less pass that money on to the State.

"The money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking...."

85. In violation of Article VII, Section 8 of the NY Constitution, State defendants have given money to SYSCO, money that belongs to the State’s taxpayers.

86. The State has signed a contract with SYSCO to give SYSCO nearly $300 million over a 4 year period. The contract was not bid. The contract is a "cost-plus-fee" contract. "Cost" is not defined, neither is "fee". Prices are whatever SYSCO decides they will be. Prices can be increased every 7 to 30 days. On information and belief, the State has been reimbursing SYSCO for costs which SYSCO has not incurred. SYSCO has not passed on to the State things of value which they have received from their suppliers in exchange for payment. "Reimbursable costs" have thus been inflated. SYSCO’s "fee" has not only been applied to the inflated cost but has been calculated as a "margin on sale" rather than "mark-up on cost". On information and belief, the State has not been properly auditing SYSCO. On information and belief, SYSCO’s products are neither being inspected nor graded.

87. Obviously, under the State’s "cost-plus" contract, SYSCO should not be reimbursed for costs it did not incur. For instance, if SYSCO orders 1000 cases of American cheese from Land O’Lakes, which has a list price of $31.00 per case, sends Land O’Lakes a check for $31,000 but receives a rebate from Land O’Lakes in the amount of $10,000 in exchange for the order and payment from SYSCO, then SYSCO’s reimbursable cost to the State is $21,000 not $31,000.

88. If the State allows SYSCO to keep the rebate while paying SYSCO $31,000 then the State has gifted $10,000 to SYSCO plus $600. (footnote 9: The difference between $31,000 x 6%, which equals $1,860, and $21,000 x 6%, which equals $1,260.)

89. On information and belief, the State has gifted to SYSCO the value of all rebates, volume discounts, advertising and merchandising money, bill-back money, off-invoice promotions, sales goals money and other things of value, including the difference between the product of SYSCO’s percentage fee times SYSCO’s invoiced cost and the product of SYSCO’s percentage fee times SYSCO’s actual reimbursable cost. The value of this gift is approximately $97 million.

90. The Governor, the Commissioner of the Office of General Services, the State Comptroller, the Director of the Division of the Budget and the Commissioner of Economic Development have violated the State Finance Law Section 160 by failing to ensure, in both policy and application, that the state’s procurement practices:

a) Provide for the wise and prudent use of public money in the best interests of the taxpayers of the state,

b) guard against favoritism, improvidence, extravagance, fraud and corruption, and

c) facilitate the efficient and timely acquisition of commodities and services of the highest quality at the lowest practicable cost within available resources.

91. Defendants have violated SFL Section 160 by awarding SYSCO a contract in June 1995 for the wholesale supply of 24 "off-the-shelf" products:

92. Defendants have violated SFL Section 160 by awarding SYSCO an 18 month contract, effective October 1, 1995, without any competitive bidding, for the wholesale supply of 910 "off-the-shelf" products:

93. Defendants have violated SFL Section 160 by awarding SYSCO a 24 month contract, effective April 1, 1997, without any competition bidding, for the wholesale supply of 910 "off-the-shelf" products:

94. Defendants have violated SFL 163.2(a) by failing to promote purchases from responsive and responsible small businesses.

95. With sales of $14 billion annually and with thousands of employees, SYSCO is a big business in every sense of the phrase.

96. Defendants not only failed to promote the purchase of the 910 products from responsive and responsible small businesses, defendants acted to deliberately cut out the dozens of small businesses that had been effectively providing the State with those products at a lower cost.

97. It is worth noting that of the nine bidders that bid IFB 1942-Z, eight were small businesses and three of them never recovered from the loss of the business given to SYSCO.

98. Defendants have violated SFL 163.2(b) by failing to document the process for soliciting bids and proposals; by failing to use a balanced and fair method, established in advance of the receipt of offers, for evaluating offers and awarding contracts; and failing to use terms and conditions that protect the state’s interest and promote fairness in contracting with the business community.

99. Defendants used an unbalanced and unfair approach in soliciting and evaluating bids and then in awarding the contract to SYSCO. And, the terms and conditions of the contract work more to the benefit of SYSCO and those political committees and individuals to whom SYSCO contributes money than to the public good.

100. Defendants have violated SFL 163.2(c) by failing to ensure offerers are appraised of the procurement opportunities.

101. Defendants never appraised SYSCO’s competitors and potential offerers that the IFB 1942-Z procurement for the 3 month supply of 24 items to 66 downstate facilities had within it the opportunity to be extended to the four or five year supply of nearly 1000 separate items to 266 State facilities, under a cost-plus-percentage-fee contract, in which prices could be raised every month, "reimbursable cost" could include all kick-backs from suppliers and the percentage fee could be applied to the "invoiced cost", i.e., the contractor’s cost before the kick-backs from the contractor’s suppliers.

102. Defendants have violated SFL 163.2(d) by failing to ensure that contracts are awarded consistent with the best interests of the state.

103. The contract as initially awarded under IFB 1942-Z was certainly not in the best interest of the State. Nor is the contract extension(s).

104. Defendants have violated SFL 163.2(e) by failing to ensure that officers and employees of the state do not benefit financially, or otherwise, from the award of the contracts.

105. On information and belief, officers and employees of the State, including the Governor, have benefited, and will continue to benefit, from contributions to their political campaigns and to their political State committees.

106. Defendants have violated SFL 163.2(f) by failing to ensure regular and critical reviews of the efficiency, integrity and effectiveness of the overall procurement process.

107. On information and belief, defendants have failed to conduct any critical review of the efficiency, integrity and effectiveness of the process by which the State is procuring the products called for under IFB 1942-Z.

108. Defendants have violated SFL 163.3(a) by awarding contracts on the basis of other than lowest price.

109. On information and belief, defendants are paying approximately 30% more for products covered by IFB 1942-Z than other users are paying for the same products.

110. Defendants have violated SFL 163.7 by not competitively bidding the original SYSCO contract and each extension thereof, and by not documenting the determination of the method of procurement and the basis of an award in a procurement record, in advance of the receipt of offers or afterwards, including the evaluation criteria (quantifiable or otherwise) and the process to be used in the determination of the best value and the manner in which the evaluation process and selection shall be conducted.

111. The contract awarded under IFB 1942-Z was not competitively bid. And, prior to the receipt of offers under IFB 1942-Z, defendants did not document the fact that the contract entered into with the contractor selected would eventually be extended, without further input from the offerers, to include not a 3-month but a 4 or 5 year supply of not 24 but 910 separate products, not to 66 but to 266 separate facilities.

112. Defendants have violated SFL 163.8 by not advertising the full nature of the contract in the state’s procurement opportunities newsletter.

113. The advertisement for IFB 1942-Z was fraudulent. Neither it, nor the procurement process itself, provided information to potential offerers that the contract would be what it became in October 1995.

114. Defendants have violated SFL 163.9(a) by failing to document the determination to utilize the RFP procurement method and then to abandon the RFP method in favor of the Invitation For Bid procurement method.

115. On information and belief, defendants failed to document, prior to the receipt of offers in response to IFB 1942-Z that the procurement actually had two components, an IFB and an RFP, that after defendants awarded the cost-plus percentage fee contract under the IFB, without reference to supplier kick-backs, they would use the RFP solicitation to contract for the big prize, unless the vendors got wise to the kick-back issue, in which case they would simply abandon the RFP solicitation and convert the contract awarded under the IFB to a contract for everything that had been solicited under the RFP, absent, of course, any terms or conditions regarding supplier kick-backs.

116. Defendants have violated SFL 163.9(a) by failing to provide a clear statement of need.

117. On information and belief, defendants have failed to document the State’s need to procure these off-the-shelf products in the way they have procured them, including: the need to move away from contracting on the basis of lowest price to cost-plus-percentage-fee; and the need to move away from one-year, firm prices to seven day and monthly increases; the need to move away from one-year to multiple year contracts.

118. Defendants have violated SFL Section 163.9(a) by failing to describe the required specifications governing performance and related factors.

119. For instance, defendants have failed to describe what SYSCO is require to do regarding all supplier kick-backs, other than not mention them.

120. Defendants have violated SFL Section 163.9(a) by failing to ensure a competitive field.

121. Regarding the contract awarded to SYSCO in June 1995, defendants failed to ensure a competitive field by allowing SYSCO to bid a low percentage mark-up on cost while not subtracting supplier kick-backs from their "cost", and allowing SYSCO’s competitors to bid a higher percentage mark-up on cost after subtracting supplier kick-backs from their costs and then awarding the contract to SYSCO on the basis of its lower percentage mark-up on cost.

122. Also, defendants did not competitively bid the contract given to SYSCO in October 1995, or the contract given to SYSCO in April of 1997.

123. Defendants have violated SFL Section 163.9(a) by failing to provide a fair and equal opportunity for offers to submit responsive offers.

124. Defendants failed to provide a level playing field before awarding the contract under the IFB. Defendants’ method of awarding the contract and its two extensions was anything but balanced and fair. It did not offer vendors an equal opportunity for the business. It was crooked.

125. Defendants have violated SFL Section 163.9(a) by failing to ensure a balanced and fair method of award.

126. Defendants failed to provide a level playing field before awarding the contract under the IFB. Defendants’ method of awarding the contract and its two extensions was anything but balanced and fair. It did not offer vendors an equal opportunity for the business. It was crooked.

127. Defendants have violated SFL Section 163.9(a) by failing to quantify the criteria to be applied in the award of the contract to SYSCO in June 1995. The contract awarded in June 1995 did not quantify "cost" or "percent fee". No numbers at all were requested by the State or supplied by SYSCO for 886 of the 910 products contracted for. The contracts awarded to SYSCO in October 1995, and in April 1997, were not based on any criteria, quantified or otherwise; those contracts weren’t bid.

129. Defendants did not solicit offers before awarding the contract to SYSCO in October 1995, or the contract awarded to SYSCO in April 1997.

130. Defendants have violated SFL 163.9(b) by failing to disclose the general manner in which the evaluation and selection shall be conducted.

131. Defendants failed in every respect to disclose the manner in which defendants would solicit, evaluate and award the contract it awarded to SYSCO in October 1995 and the contract it awarded to SYSCO in April 1997. There was no solicitation and no evaluation of proposals for the 3 � year supply of nearly 910 separate products to about 266 separate facilities, on the basis of "cost-plus-percentage mark-up on cost" where the "cost" was to be the supplier’s price to the vendor, before the supplier’s kick-back to the vendor, and the vendor would be able to keep any and all kick-backs that it could wrest from the suppliers, by bribery or otherwise.

132. Defendants have violated SFL 163.9(g) by failing to prepare an adequate procurement record, identifying, with supporting documentation, all decisions made by the Commissioner. TWENTY FIFTH CLAIM DEFENDANTS HAVE VIOLATED SFL SECTION 163.10

133. Defendants have violated SFL 163.10 by awarding contracts on other than the basis of lowest price. 134. Lowest price does not mean lowest percentage mark-up on cost. Lowest price means lowest net price to the State supplier kick-backs included.

135. Defendants have violated SFL 163.10(a) by failing to adequately document the basis for determining the award.

136. Defendants have violated SFL 163.11 by failing to ensure that the quality and the price of the purchase "makes sense" and by failing to ensure that purchasing is conducted in a manner consistent with the best interests of the state.

137. From a political point of view, it makes a great deal of sense, but it makes no sense from a governmental point of view, to allow SYSCO to raise its prices every 7 to 30 days and to bill the State on the basis of cost plus percentage mark-up on cost where SYSCO’s "cost" is not their actual cost because it does not include supplier kick-backs and other things of value which SYSCO receives in exchange for its payment of the supplier’s "list price".

138. Neither does it make any sense for the State to award contracts like this to SYSCO without knowing how the State is going to test the quality of products being supplied by SYSCO and without requiring SYSCO to submit the reports which were called for in the RFP but not required under the IFB contract.

SYSCO IS GUILTY OF BREACH OF CONTRACT,
FRAUD AND UNFAIR TRADE PRACTICES BY
OVERSTATING ITS COSTS

139. On information and belief, SYSCO has overstated its costs on its invoices to the State by not including in the calculation of "costs" things of value which SYSCO received, known by a myriad of terms, and which were directly attributable to sales resulting from orders submitted by the State or the State’s facilities.

140. On information and belief, the State has not received rebates and discounts and allowances equal to or better than SYSCO’s most favored commercial or other government customer.

141. Though it is generally best to let market forces dictate prices, it is also important that all businesses be required to play by the same rules.

a) declaring that defendants have participated in a sham procurement, constituting a combination, conspiracy and monopoly in restraint of trade and commerce in food, household supplies and sundries, and that defendants have been and still are parties to agreement in restraint to such trade and commerce in violation of the Sherman Act (15 USC Sections 1 - 7), the Clayton and Robinson-Patman Acts(15 USC Sections 12 - 18), the Perishable Agricultural Commodities Act, [7 USC Section 499(a)-(t), and 7 CFR Part 46], 42 USC Section 1983, and