Small Tortilla Makers Lose Antitrust Suit Against Rival

A federal judge has thrown out an antitrust lawsuit against giant tortilla maker Gruma Corp., flattening the hopes of manufacturers in California and elsewhere that had accused the industry leader of unfairly wresting control of the U.S. retail tortilla market.

Attorneys said Monday that U.S. District Judge Kenneth Hoyt in Houston dismissed the suit late last month after deciding that the 18 plaintiffs had failed to prove their allegations. They had sought $70 million in damages, claiming that Gruma had broken the law by, among other things, paying grocery stores to stock its products and eliminate competing brands.

The ruling was a blow to some of the oldest tortilla makers in California. They were counting on the court to take a hard line on so-called slotting fees, the controversial practice of buying shelf space at supermarkets that many small firms say makes it impossible for them to compete with deep-pocketed rivals.

“We were shocked,” said Philip Manly, owner and general manager of Los Angeles-based El Dorado Mexican Food Products, a 58-year-old, family-owned firm and one of eight California companies among the plaintiffs. “But we’re not giving up.”

Manly said the small tortilla makers planned to appeal the ruling.

Irving, Texas-based Gruma is the American subsidiary of Mexican conglomerate Gruma, which dominates the fast-growing U.S. market in packaged tortillas -- estimated at $5.2 billion last year -- with a stable of brands that includes the popular Mission and Guerrero labels.

Gruma officials maintained that they had done nothing improper, paying slotting fees only if retailers demanded them. The company also contends that many grocers have turned to Gruma because the firm has adapted to a changing retail climate, instituting rigid quality control systems and providing rapid, nationwide distribution that has become the standard for the industry.

The judge’s ruling “sends a clear message that ... competitors would be well advised to spend their efforts to try to do a better job in the marketplace rather than complaining about them in court,” Gruma’s attorney, Gregory Huffman, said.

In his ruling, Judge Hoyt wrote that slotting fees, co-op advertising, discounts and other deals hammered out between retailers and their vendors were long-standing practices and not illegal on their face. He said the plaintiffs had failed to show that the deals that Gruma struck with supermarkets had resulted in rivals being shut out of the market or in consumers paying more for tortillas.

In addition, Hoyt noted that some of the plaintiffs hurt themselves by refusing to pay slotting fees and that they shouldn’t blame Gruma for playing by the rules set down by its retail customers.

“The plaintiffs have refused, based on principle, to negotiate with retailers for shelf space,” Hoyt wrote in his Dec. 24 ruling. “Thus, the plaintiff’s evidence suffers a self-inflicted wound.”

Filed in 2001, the lawsuit against Gruma was notable because relatively few small businesses have mounted legal challenges to the slotting fees some vendors pay to retailers.

Introduced decades ago by supermarkets to cover the cost of adding new products to their lineups, the fees have morphed into a complex and shadowy system of selling shelf space -- a practice that may or may not be legal depending on how the deals are structured.

The tortilla lawsuit didn’t provide details of the alleged slotting deals between Gruma and the supermarkets, none of which were named. Nor did it specify how much money changed hands.

For the entire grocery industry, experts have estimated slotting fees at as much as $9 billion annually, but the practice is so shrouded in mystery that exact figures are hard to come by.

Manufacturers are so afraid of retaliation by retailers that many refuse to speak out about perceived abuses. Witnesses at a Senate hearing in 1999 on slotting payments wore hoods over their heads to conceal their identities.

The few companies that have challenged the practice have gone after large competitors, accusing them of using shelf fees as a means of harming or eliminating their rivals.

Some have prevailed. Thomas Stanley, attorney for the tortilla plaintiffs, won a $14-million judgment against Coca-Cola Co. on behalf of five independent soft-drink bottlers in Texas, Arkansas and Louisiana over anti-competitive practices similar to those alleged in the Gruma case.

Whether the small tortilla makers win their case on appeal remains to be seen. But antitrust experts say that, despite the long odds of success, other manufacturers probably will take up the issue down the road.

“It’s s a gray and squishy area, but I think that you’ll probably see a few more cases because a lot is riding on it,” said Bert Foer, president of the American Antitrust Institute.

“Businesses feel that they are being hurt quite substantially by these practices, and there is nowhere else to turn but the courts.”