Longtime supplier mistreated Calgary Co-op in bitter dispute over switch to new food source, court finds

Justice Marilyn Slawinsky found FCL unfairly targeted Co-op by creating a loyalty program that automatically disqualified Co-op from entering unless it dropped a new agreement with Save-On Foods

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After a more than six-decade union went sour, Calgary Co-op has won a 2½-year legal battle against Federated Co-operatives Ltd., with a judge ruling FCL unfairly targeted the grocer for switching to a new food supplier.

In a lawsuit that saw Co-op seek more than $160 million of its equity investment in FCL, Court of King’s Bench Justice Marilyn Slawinsky wrote in a Thursday decision that FCL will pay Co-op an amount equal to what it would have received as a result of a loyalty program FCL implemented that “directly disadvantaged” Co-op.

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Saskatoon-based FCL is a wholesaler and fuel producer, which is provided to its approximately 170 co-operative association members for retail resale. The two co-operatives had been in business together since the 1950s and remained so until January 2023.

They will now work toward agreeing on what amount FCL will pay Co-op, which will likely be determined sometime in the first three months of 2024.

Conditions of FCL’s loyalty program were impossible for Co-op to meet without abandoning private grocer agreement, judge finds

The dispute began in August 2019 when Co-op notified FCL it was discontinuing its grocery deal for a new one with Save-On Foods, though Co-op said it would continue to honour its fuel contracts with the co-operative.

Three months later, in November 2019, FCL implemented a novel loyalty program without consultation or approval from its members.

The new loyalty program stipulated that for members to qualify, they would have to purchase at least 90 per cent of their total products from FCL — a condition that would be impossible for Co-op to meet unless it pulled out of its new grocery deal, Slawinsky wrote.

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Members who qualified — notably all of FCL’s members except for Calgary Co-op — would be paid a quarterly “petroleum discount/rebate,” as described by Slawinsky, at a specified rate for the number of litres of fuel it purchased from FCL.

Federated Co-operatives Ltd. (FCL) fuel trucks
Federated Co-operatives Ltd. (FCL) fuel trucks. Photo by Troy Fleece /Postmedia

The move departed from the co-operative’s long-standing payment system in which patronage returns aren’t received by members until fiscal year-end. The strain on members caused by that system was partially addressed in 2020 when FCL began a “mid-year payment.”

(FCL’s members heavily rely on patronage returns from the company; from 2000 to 2019, Calgary Co-op received more than $720 million from FCL, about two-thirds of which came from fuel purchases, the rest from groceries, reads the decision.)

Calgary Co-op alleged the loyalty program distributed profits in a manner that treated it unfairly and unequally, while FCL’s position was the program was a step to protect it and its members from collapse should other members make similar decisions to end the partnership. (It also contended consultation and input was not required.)

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After being informed of the program in late November 2019, Co-op was told there would be no mid-year payment, at which point it initiated the lawsuit.

In the decision, Slawinsky wrote that FCL knew Co-op couldn’t participate in the program unless it abandoned its new grocery supply arrangement and “Calgary Co-op was directly disadvantaged by the disproportionate distribution of FCL profits.”

FCL internal communications showed a notation reading, “cause some pain. Show that there is pain here. Can’t let someone leave without punishment. Has to be consequences . . . CC pain points . . . loyalty program.”

‘Secretive,’ ‘scheming’: Tensions between Co-op and FCL long preceded lawsuit

Tensions between Co-op and FCL were brewing for several years before Co-op’s decision to swap food wholesalers, Slawinsky wrote.

“It is undisputed that the relationship between FCL and Calgary Co-op had become strained for a number of years prior to Calgary Co-op’s withdrawal from food purchasing,” Slawinsky wrote.

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Disclosure of internal business records from Co-op and FCL revealed Co-op “perceived the FCL Board and organization as too paternalistic, pedantic and secretive,” while FCL “felt that Calgary Co-op was scheming, demanding and underhanded, and that its CEO was egomaniacal, manipulative, condescending and arrogant.”

Those conflicts created an “environment of distrust” that interfered with their efforts to address respective business concerns, Slawinsky wrote.

Co-op ‘extremely pleased’ with decision, says it was unfairly deprived of profits to which it was entitled

Calgary Co-op was FCL’s largest member: Before the dispute, it held about 10 per cent of total equity membership in FCL and purchased between $250 million and $350 million annually in grocery-related products.

When it withdrew from FCL’s food business, it represented just under 20 per cent of that side of FCL’s operations, and purchased more than $400 million a year in fuel products.

As a result of the lawsuit, the two companies’ fuel agreement was cancelled in January 2023.

In a statement to Postmedia, Calgary Co-op said it was “extremely pleased” with the decision.

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“Calgary Co-op is delighted that its own members will now see the long-overdue benefit from the court’s order that Federated must pay to Calgary Co-op the value of the profits of which Calgary Co-op was unfairly deprived,” a spokesperson wrote in a statement.

FCL did not immediately respond to a request for comment.

Co-op and FCL now have 90 days to calculate FCL’s payout to Co-op, which Slawinsky said should be an amount equal to what Co-op would have received at the loyalty program’s rates for all its fuel purchases from November 2019 to January 2023, when it discontinued its fuel purchases.

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