Hawkeye Foodservice Distribution, Inc. v. Iowa Educators Corporation , 812 N.W.2d 600 ( 2012 )

IN THE SUPREME COURT OF IOWA
No. 08–2056
Filed February 24, 2012
HAWKEYE FOODSERVICE DISTRIBUTION, INC.,
Appellant,
vs.
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.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Robert J.
Blink, Judge.
Appellees seek further review of the court of appeals decision
reversing the district court’s dismissal of appellant’s claims based on a
lack of standing and failure to state a claim. DECISION OF COURT OF
APPEALS VACATED; DISTRICT COURT JUDGMENT REVERSED AND
CASE REMANDED.
Stephen R. Eckley and David W. Nelmark of Belin McCormick,
P.C., Des Moines, for appellant.
2
Jim D. DeKoster and Beth E. Hansen of Swisher and Cohrt,
P.L.C., Waterloo, for appellees.
3
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 Defendants sought further review,
which we granted. For the reasons set forth below, we reverse the
district court.
1Hawkeye’s petition was filed on June 17, 2008. It alleged the AEAs continue to
violate chapters 23A, 28E and 273 by their participation in IEC. The AEAs formed the
IEC in 2000. Therefore, if the AEAs violated chapters 23A, 28E and 273 by forming the
IEC, then those violations would have occurred in 2000. Any claim that the formation
of IEC was illegal might be barred by the statute of limitations in section 614.1.
However, this litigation is at its early stage and neither party has fully briefed or
developed facts relating to the issue. Hawkeye also claims the AEAs continue to violate
chapters 273 and 28E by managing and participating as both directors and members in
the operation of IEC. For purposes of this opinion, citation will be to the 2007 Code
unless otherwise indicated.
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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
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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.” 2 Id. §§ 23A.1(1), .2(1)(a). Hawkeye sought “[a]
2Counts IV and V, which were dismissed and not appealed, alleged IEC violated
Iowa’s open meeting (chapter 21) and open record (chapter 22) laws.
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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
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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. See Iowa 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.
8
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 actions of
IEC under section 504.1431.
While this conclusion may be correct, it does not end the inquiry.
In counts I and II of its complaint, Hawkeye seeks “[a] declaration that
the establishment, existence, and operation of the IEC are unauthorized
under Iowa law” and seeks “[e]quitable relief enjoining Defendants from
continued operations in violation of Iowa law.” The individual AEAs are
named as defendants, along with IEC. Hawkeye does not allege that
IEC’s actions violate its own corporate charter. Instead, Hawkeye alleges
the AEAs acted contrary to Iowa law by forming and continuing to
operate and manage IEC as a nonprofit corporation.
Various provisions of Iowa law burden the AEAs with legal
obligations that a chapter 504 nonprofit corporation would not have.
Chapter 273, which created and governs the authority and actions of the
AEAs, imposes limits on the AEAs. Hawkeye alleges one of those limits is
that AEAs are not authorized to form a separate nonprofit corporation for
the purpose of conducting statewide school purchasing programs.
Hawkeye further alleges that the AEAs are not authorized “to market
such programs to entities unrelated to the AEAs, nor does [the Code]
provide authority for the AEAs to market such programs in interstate
commerce.” An AEA is empowered to “furnish educational services and
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programs . . . to the pupils enrolled in public or nonpublic schools
located within its boundaries.” Iowa Code § 273.2(3). As a chapter 504
corporation, IEC is not burdened or limited by this statute.
Hawkeye also alleges “[t]he IEC was created and operates in
violation of . . . Chapter 28E.” Chapter 28E was enacted by the
legislature “to permit state and local governments in Iowa to make
efficient use of their powers by enabling them to provide joint services
and facilities with other agencies and to co-operate in other ways of
mutual advantage.” Iowa Code § 28E.1. Hawkeye alleged the AEAs are
“public agencies” under chapter 28E. If the requirements of chapter 28E
are met, public agencies can act jointly to create a separate legal entity to
carry out the purposes of the 28E agreement. Id. § 28E.4. However,
chapter 28E imposes numerous disclosure and reporting requirements
on any legal entity created by such an agreement. See, e.g., id.
§ 28E.6(2), (3). Many of these duties and responsibilities are not imposed
on a chapter 504 nonprofit corporation. Hawkeye does not rely on
section 504.1431 when attempting to challenge the actions of the AEAs
and IEC. Hawkeye has not claimed that IEC has violated its own articles
of incorporation or bylaws. Hawkeye has alleged that the AEAs, by
forming and operating IEC, have violated the provisions of chapters 273
and 28E. 3
The main focus of counts I and II of Hawkeye’s petition is that the
AEAs themselves acted illegally when they first formed IEC. Hawkeye
also claims that by continuing to be members of IEC, and having a
representative of each AEA serve on the board of directors of IEC, the
3Hawkeye has alleged that the AEAs formed IEC in violation of chapter 273 and
that by incorporating as IEC, instead of as a 28E entity, the AEAs are improperly
exceeding their authority granted by statute.
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AEAs continue to violate chapters 273 and 28E. Under this component
of counts I and II, Hawkeye seeks to prevent the AEAs from illegally
banding together through IEC and to stop their continued management
and administration of IEC. This component of counts I and II was not
addressed by the district court when it dismissed Hawkeye’s petition.
When the suit against the individual AEA defendants is considered, the
standing analysis moves out of the realm of nonprofit corporation law.
Hawkeye seeks an injunction against the AEAs to prevent their
continued operation of IEC and an injunction against IEC to prevent it
from acting contrary to Iowa law. Hawkeye is not seeking judicial
dissolution under section 504.1431, so we do not need to determine
whether Hawkeye has standing under chapter 504. To determine
whether Hawkeye has standing to bring this action, we turn to our
traditional standing analysis.
There are two elements to the test we use to determine whether a
private party has standing to challenge government action: “A plaintiff
‘must (1) have a specific personal or legal interest in the litigation, and
(2) be injuriously affected.’ ” Godfrey, 752 N.W.2d at 418 (quoting Alons
v. Iowa Dist. Ct., 698 N.W.2d 858, 864 (Iowa 2005)). To satisfy the first
element, “we require the litigant to allege some type of injury different
from the population in general.” Id. at 420. To satisfy the second
element, “the injury cannot be ‘conjectural’ or ‘hypothetical,’ but must be
‘concrete’ and ‘actual or imminent.’ ” Id. at 423 (quoting Alons, 698
N.W.2d at 867–68). The alleged injury can be harm done to the
competitive interests of a company by government action that gives an
advantage to a competitor. See id. (approving of a finding of standing
where “the injury alleged to support standing involved the competitive
interests of banks affected by agency rules that were claimed to give a
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competitive advantage to credit unions” (citing Iowa Bankers Ass’n v.
Iowa Credit Union Dep’t, 335 N.W.2d 439, 444 (Iowa 1983))). An injury is
more likely to be imminent, and therefore sufficient to support standing,
if the plaintiff alleges that it has “actually lost business in the past as a
result of” improper governmental action. Id.
At this stage in the proceedings, we must accept every allegation
contained in the pleadings as true. McGill, 790 N.W.2d at 116. Hawkeye
alleged that the AEAs, through their operation of the IEC, violated and
continue to violate two separate chapters of the Iowa Code by forming
IEC and participating in IEC’s management. Hawkeye’s interest in these
violations goes beyond that of the average citizen. By acting in concert to
award Hawkeye’s competitor a prime vendor contract, the AEAs are
allegedly taking business away from Hawkeye. This personal interest is
beyond that of an average citizen and satisfies the first element of the
standing analysis.
Hawkeye also alleges that it has lost and continues to lose
business based on the AEAs’ illegal actions. The allegation of a loss of
business in the past is sufficiently concrete to support a claim of
imminent harm and satisfy step two of the standing analysis. Godfrey,
752 N.W.2d at 423. Hawkeye has standing to sue the AEAs for violations
of chapters 273 and 28E. The district court’s dismissal of counts I and II
based on a lack of standing is reversed. 4
4We note that the district court also found Hawkeye satisfied the traditional
standing analysis, but nonetheless granted the motion to dismiss based on section
504.1431. As discussed above, section 504.1431 is not relevant to Hawkeye’s claims
against the AEAs, or by extension, to IEC.
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IV. Motion to Dismiss Hawkeye’s Petition for Failure to State
a Claim.
The AEAs and IEC responded to Hawkeye’s petition by filing a
motion to dismiss. In their motion, they assert not only that Hawkeye
lacks standing, but also claim that the AEAs are authorized by statute to
form a nonprofit corporation such as IEC and to provide foodservice to
school districts and students. They also claim that, on its face,
Hawkeye’s petition fails to allege that they have operated in violation of
Iowa Code chapter 23A. Before we address the specific arguments
presented in this case, we will first discuss some general principles
regarding a motion to dismiss.
Iowa Rule of Civil Procedure 1.421(1)(f) allows a defendant to make
a motion to dismiss for “[f]ailure to state a claim upon which any relief
may be granted.” In reviewing the district court’s ruling granting IEC
and the AEAs’ motion to dismiss under rule 1.421(1)(f), the court of
appeals stated, “We will affirm a dismissal only if the petition shows no
right of recovery under any state of facts.” Similarly, the district court
stated, “A motion to dismiss can only be sustained when it appears to a
certainty that a plaintiff would not be entitled to relief under any
statement of facts that could be proved in support of the claims
asserted.” In its application for further review, IEC and the AEAs argue
that this court should reconsider the standard for dismissal in light of
“recent federal authority discarding [the no-right-of-recovery-under-any-
state-of-facts] standard.”
The United States Supreme Court has recently revised its
dismissal standard under Federal Rule of Civil Procedure 12(b)(6), in Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d
929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L.
Ed. 2d 868 (2009). Following Iqbal, and quoting Twombly extensively,
13
the Supreme Court defined the federal standard for a motion to dismiss
as follows:
To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to “state a claim
to relief that is plausible on its face.” A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged. The
plausibility standard is not akin to a “probability
requirement,” but it asks for more than a sheer possibility
that a defendant has acted unlawfully. Where a complaint
pleads facts that are “merely consistent with” a defendant’s
liability, it “stops short of the line between possibility and
plausibility of ‘entitlement to relief.’ ”
Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949, 173 L. Ed. 2d at 884 (citations
omitted). IEC and the AEAs encourage this court to similarly construe
Iowa Rule of Civil Procedure 1.421(1)(f). We decline to do so.
The “plausibility standard” created by the two cases has generated
a great deal of discussion, much of it negative. See generally Robert G.
Bone, Plausibility Pleading Revisited and Revised: A Comment on Ashcroft
v. Iqbal, 85 Notre Dame L. Rev. 849, 849 (2010) (“Iqbal does much more
than clarify and reinforce key points in Twombly; it takes Twombly’s
plausibility standard in a new and ultimately ill-advised direction.”);
Stephen R. Brown, Reconstructing Pleading: Twombly, Iqbal, and the
Limited Role of the Plausibility Inquiry, 43 Akron L. Rev. 1265, 1266–67
(2010) (defending the framework created by Twombly and Iqbal, but
noting that the cases were followed by “a deluge of criticism”); Kevin M.
Clermont & Stephen C. Yeazell, Inventing Tests, Destabilizing Systems,
95 Iowa L. Rev. 821, 823 (2010) (“[B]y inventing a new and foggy test for
the threshold stage of every lawsuit, [Twombly and Iqbal] have
destabilized the entire system of civil litigation.”).
14
For the most part, state high courts have declined to adopt the new
standard announced in Twombly and Iqbal. See Cent. Mortg. Co. v.
Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 537 (Del.
2011); Webb v. Nashville Area Habitat for Humanity, Inc., 346 S.W.3d
422, 424 (Tenn. 2011); McCurry v. Chevy Chase Bank, FSB, 233 P.3d
861, 863–64 (Wash. 2010); Roth v. DeFeliceCare, Inc., 700 S.E.2d 183,
189 n.4 (W. Va. 2010). But see Doe v. Bd. of Regents, 788 N.W.2d 264,
278 (Neb. 2010). These courts have given a variety of reasons for
refusing to incorporate the new federal standard in their state rules. For
example, the Washington court concluded that the plausibility factor
adds a determination of the likelihood of success on the
merits, so that a trial judge can dismiss a claim, even where
the law does provide a remedy . . ., if that judge does not
believe it is plausible the claim will ultimately succeed.
McCurry, 233 P.3d at 863. The Washington court also noted that the
Supreme Court’s plausibility standard was predicated on policy
determinations not applicable to the Washington courts. Id.
We find this conclusion to be especially pertinent to this case. IEC
and the AEAs have not presented this court with any evidence that our
state court system is facing the sort of systemic pressures that
contributed to the Supreme Court’s decisions in Twombly and Iqbal. See
Cent. Mortg., 27 A.2d at 537; McCurry, 233 P.3d at 863–64; cf. Webb, 346
S.W.3d at 435–36 (finding, after full briefing on the issue, that the policy
concerns that justified the change in the interpretation of the federal rule
did not justify a similar change in Tennessee’s standard for a motion to
dismiss). Nor has any party addressed countervailing policy
considerations that may exist. McCurry, 233 P.3d at 863. IEC and the
AEAs rely only on the similarities between the federal rule and the Iowa
rule to support their position. Based on this record, there is an
15
insufficient basis to make such an important change in our rules. The
appropriate forum for revising the Iowa rules is the rulemaking process.
See Twombly, 550 U.S. at 579, 595, 127 S. Ct. at 1979, 1988, 167 L. Ed.
2d at 955, 964 (Stevens, J., dissenting). “This process permits policy
considerations to be raised, studied, and argued in the legal community
and the community at large.” McCurry, 233 P.3d at 864. Accordingly,
we decline to depart from our well-established standard for reviewing a
motion to dismiss.
Under our well-established standard for a motion to dismiss under
rule 1.421(1)(f), “The motion to dismiss admits . . . [the] well-pleaded
facts in the petition for the purpose of testing their legal sufficiency.”
Herbst v. Treinen, 249 Iowa 695, 699, 88 N.W.2d 820, 823 (1958); see
also Rieff v. Evans, 630 N.W.2d 278, 284 (Iowa 2001). Recently, we have
described the standard for granting a motion to dismiss as follows:
A court should grant a motion to dismiss if the petition
fails to state a claim upon which any relief may be granted.
In considering a motion to dismiss, the court considers all
well-pleaded facts to be true. A court should grant a motion
to dismiss only if the petition “ ‘ “on its face shows no right of
recovery under any state of facts.” ’ ” Nearly every case will
survive a motion to dismiss under notice pleading. Our
rules of civil procedure do not require technical forms of
pleadings. . . .
A “petition need not allege ultimate facts that support
each element of the cause of action[;]” however, a petition
“must contain factual allegations that give the defendant ‘fair
notice’ of the claim asserted so the defendant can adequately
respond to the petition.” The “fair notice” requirement is met
if a petition informs the defendant of the incident giving rise
to the claim and of the claim’s general nature.
U.S. Bank, 770 N.W.2d at 353–54 (citations omitted). The only issue
when considering a motion to dismiss is the “petitioner’s right of access
to the district court, not the merits of his allegations.” Rieff, 630 N.W.2d
at 284 (citations and internal quotation marks omitted). The court
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cannot rely on evidence to support a motion to dismiss, nor can it rely on
facts not alleged in the petition. Id. We now turn to Hawkeye’s petition
to determine whether IEC and the AEAs have met their burden and
shown that Hawkeye’s petition fails to state any set of facts which would
entitle it to relief.
A. Counts I and II: The Alleged Violations of Chapters 273 and
28E. After finding Hawkeye lacked standing to bring counts I and II, the
district court dismissed those counts of Hawkeye’s petition. As noted
above, this was an error. Therefore, the district court did not reach the
alternative ground argued by IEC and the AEAs that Hawkeye had failed
to state a claim for relief under chapters 273 and 28E. Our cases have
been somewhat inconsistent as to whether we should decide such issues
on appeal. “It is a fundamental doctrine of appellate review that issues
must ordinarily be both raised and decided by the district court before
we will decide them on appeal.” Meier v. Senecaut, 641 N.W.2d 532, 537
(Iowa 2002). However, our cases also articulate the appellate principle
that “we assume the district court rejected each defense to a claim on its
merits, even though the district court did not address each defense in its
ruling.” Id. at 539. The AEAs and IEC were the successful parties in the
district court. “It is established that a successful party in the district
court may, without appealing, save the judgment . . . based on grounds
urged in the district court but not included in that court’s ruling.”
Interstate Power Co. v. Ins. Co. of N. Am., 603 N.W.2d 751, 756 (Iowa
1999); see also Krohn v. Judicial Magistrate Appointing Comm’n, 239
N.W.2d 562, 563 (Iowa 1976) (“[W]e may affirm the ruling on a proper
ground urged but not relied upon by the trial court.”). In other words,
when reviewing a trial court’s ruling,
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[w]e first examine the basis upon which the trial court
rendered its decision, affirming on that ground if possible. If
we disagree with the basis for the court’s ruling, we may still
affirm if there is an alternative ground, raised in the district
court and urged on appeal, that can support the court’s
decision.
Fencl v. City of Harpers Ferry, 620 N.W.2d 808, 811–12 (Iowa 2000)
(citations omitted). We have likewise applied the rule in reversing a
district court ruling. Id. at 811–12, 818–19 (reversing district court
ruling quieting title in city and remanding for entry of judgment quieting
title in plaintiff based upon equitable estoppel, a ground plaintiff urged in
the district court but not considered by that court). We will consider an
alternative ground raised in the district court and urged on appeal even
though the district court has not had an opportunity to rule on the
alternative ground. See Kern v. Palmer Coll. of Chiropractic, 757 N.W.2d
651, 662–66 (Iowa 2008) (reversing grant of summary judgment after
considering grounds for summary judgment that were presented to, but
not ruled on by, the district court). 5 Since we disagreed with the district
court’s decision that Hawkeye lacked standing to bring the action, we
must now determine whether the district court’s dismissal can be
5In Kern, the district court granted Palmer Chiropractic College’s (Kern’s
employer) motion for summary judgment after finding, as a matter of law, the employer
had not breached the employment contract. 757 N.W.2d at 654, 657. Kern’s suit
accused three officials at the college of intentional interference with contractual
relations. Id. at 657. Once it found Palmer had not breached the contract, the district
court “reasoned that because, as a matter of law, Palmer committed no breach of Kern’s
employment contract, the individual defendants could have no liability for tortiously
causing Palmer to breach that contract.” Id. at 661.
We reversed the district court’s ruling granting Palmer’s motion for summary
judgment. Id. Once that reversal occurred, the original grounds the district court
relied on when granting the individual defendants’ motions for summary judgment no
longer existed. Rather than remand the case for a new determination in light of our
ruling on Palmer’s motion for summary judgment, we “consider[ed] whether the
summary judgment record [could] sustain the summary judgment in favor of the
individual defendants.” Id. at 661–62. We concluded, based on the record, that
summary judgment was still appropriate for two of the three individual defendants. Id.
at 662–65.
18
affirmed on any of the other grounds that IEC and the AEAs raised in
that court and urged on appeal. See Fencl, 620 N.W.2d at 811–12.
IEC and the AEAs also asked the district court to dismiss counts I
and II for failing to state a claim upon which relief could be granted.
This issue was raised at the district court level and urged on appeal. We
also conclude that the record made before the district court is sufficient
to allow us to decide this issue and militates against remand to the
district court. We will now determine whether we can affirm the district
court’s dismissal of counts I and II on the ground that Hawkeye failed to
state a claim upon which relief can be granted.
In count I, Hawkeye alleges chapter 273 does not grant the AEAs
the authority to form and operate IEC. In count II, Hawkeye alleges that
the AEAs violated chapter 28E by forming and continuing to operate IEC
as a nonprofit corporation instead of a 28E intergovernmental entity.
Chapter 273 created and governs the AEAs. According to section
273.2(2), “[a]n area education agency established under this chapter is a
body politic as a school corporation for the purpose of exercising powers
granted under this chapter, and may sue and be sued.” Hawkeye alleges
that, as school corporations, the AEAs operate under the Dillon Rule.
The Dillon Rule is “a rule for the determination of local government
power” that was first established in Merriam v. Moody’s Executors, 25
Iowa 163, 170 (1868), an opinion authored by former Chief Justice John
Dillon. Polk Cnty. Bd. of Supervisors v. Polk Commonwealth Charter
Comm’n, 522 N.W.2d 783, 790 (Iowa 1994). Under the Dillon Rule,
municipal and county governments could only possess and
exercise powers which were: “(1) expressly granted by the
legislature; (2) necessarily or fairly implied in or incident to
the powers expressly granted; and (3) those indispensably
essential—not merely convenient—to the declared objects
and purposes of the municipality.”
19
Id. at 790–91 (quoting Gritton v. City of Des Moines, 247 Iowa 326, 331,
73 N.W.2d 813, 815 (1955)). The “home rule” amendments, which gave
local and county governments greater power to enact legislation, were
added to the state constitution in 1968 and 1978, and “removed the
Dillon doctrine from Iowa law.” Id. at 791. However, the constitutional
amendments refer only to the home rule doctrine as applied to counties
and municipalities and do not mention other entities. See Iowa Const.
art. III, §§ 38A, 39A.
In the decades following the home rule amendments, we have
continued to state that the only powers a school district has are those
that are expressly granted or necessarily implied in governing statutes.
See Lockhart v. Cedar Rapids Cmty. Sch. Dist., 577 N.W.2d 845, 848
(Iowa 1998); Ne. Cmty. Educ. Ass’n v. Ne. Cmty. Sch. Dist., 402 N.W.2d
765, 767 (Iowa 1987); McFarland v. Bd. of Educ., 277 N.W.2d 901, 906
(Iowa 1979). Notwithstanding these cases, IEC and the AEAs claim the
applicability of the Dillon Rule to school corporations like the AEAs has
been called into question by Gannon v. Board of Regents, 692 N.W.2d 31(Iowa 2005). In Gannon, we were asked to determine whether the Iowa
State University Foundation was fulfilling a government function under
the Iowa Freedom of Information Act when it engaged in “the solicitation
and management of private funds for a public university.” Gannon, 692
N.W.2d at 39. The district court found “the solicitation and management
of private donations was not a duty or function of ISU” because it was
not listed in the state or federal statutes that described the objectives of
the university. Id. at 40. We “reject[ed] such a narrow and archaic
interpretation of the function of a university” and reversed the district
court’s ruling. Id.
20
However, Gannon does not bear the doctrinal weight the AEAs and
IEC place upon it. The issue in Gannon was whether the ISU Foundation
was performing a government function and was therefore subject to the
provisions of the open records act. Id. at 39. That case did not address
the Dillon Rule or the applicability of the home rule statutes to school
corporations. Our prior cases regarding the authority of school
corporations as expressed in the Dillon Rule are still applicable to this
dispute.
We now turn to the AEAs’ motion to dismiss Hawkeye’s claim that
the AEAs violated chapter 273 when they formed a nonprofit corporation
to perform the functions IEC is performing. “The only powers of a school
district are those expressly granted or necessarily implied in governing
statutes.” Lockhart, 577 N.W.2d at 848 (citation and internal quotation
marks omitted). While an AEA is not a school district, it “is a body politic
as a school corporation for the purpose of exercising powers granted
under [chapter 273].” Iowa Code § 273.2(2). A school district is also “a
body politic as a school corporation . . . and as such may . . . exercise all
the powers granted by law.” Iowa Code § 274.1. Therefore, like a school
district, an AEA has only those powers expressly granted or necessarily
implied by law. Hawkeye has alleged that chapter 273 does not provide
the AEAs with the authority to form IEC, that chapter 273 does not
expressly or impliedly provide AEAs with the authority to form a
statewide school purchasing program, and that even if the AEAs did have
this authority, they could not delegate this authority to another entity
without express statutory authorization.
To survive a motion to dismiss, Hawkeye’s petition need only allege
facts that, if proven, would entitle Hawkeye to recovery. See U.S. Bank,
770 N.W.2d at 353 (“A court should grant a motion to dismiss only if the
21
petition on its face shows no right of recovery under any state of facts.”
(citation and internal quotation marks omitted)). IEC and the AEAs have
not shown Hawkeye’s petition fails to meet this standard. Hawkeye has
alleged that the Dillon Rule applies to the AEAs. Because the rule
applies, Hawkeye has also alleged the AEAs have only those powers
expressly granted to them, “those necessarily implied or necessarily
incident to the powers expressly granted, and those absolutely essential
to the declared objects and purposes of the school corporation.”
Hawkeye lists the powers and purposes of the AEAs that are found in
chapter 273, and then alleges that “Chapter 273 does not give the AEAs
the right to jointly form a separate corporation for the purpose of
conducting statewide school purchasing programs.” Additionally, even if
the AEAs had the authority to create IEC, which is not conceded, there is
no express or clearly implied authority under chapter 273 for the AEAs
or IEC to conduct a statewide food purchasing program. If these
allegations are true, which we assume they are for the purpose of testing
the petition’s legal sufficiency, then the AEAs exercised a power they had
not been granted, which is a violation of chapter 273. Under the well-
pleaded facts asserted in the petition, we conclude that an adequate
claim has been asserted by Hawkeye which would defeat a motion to
dismiss on this basis.
Much of the same logic and reasoning applies to count II of
Hawkeye’s petition, the alleged violation of section 28E. Hawkeye alleged
that “[t]he IEC was created and operates in violation of Iowa Code
Chapter 28E . . . .” It is undisputed that the AEAs did not comply with
chapter 28E when they formed IEC. The issue is whether the entity
formed as a result of the cooperation among the AEAs is the type of
entity that still must be governed by a 28E agreement. Hawkeye has
22
alleged IEC is such an entity and that chapter 28E is the exclusive
mechanism for such action, without conceding a 28E entity is even
authorized. If Hawkeye is able to establish the facts contained in the
petition, then it has established a violation of chapter 28E. Accordingly,
it was improper to dismiss Hawkeye’s petition for failure to state a claim
upon which relief can be granted. The district court erred when it
dismissed counts I and II of Hawkeye’s petition.
B. Count III: The Alleged Violation of Chapter 23A. Regarding
count III, the violation of chapter 23A, the well-pleaded facts in the
petition preclude the granting of the motion to dismiss. The AEAs are
school corporations for the purposes of exercising their powers. Iowa
Code § 273.2(2). A school corporation is a political subdivision under
Iowa Code section 23A.1(1). Unless specifically authorized by a statute,
rule, ordinance or regulation, political subdivisions are prohibited from
[e]ngag[ing] 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 unless such goods or services
are for use or consumption exclusively by the state agency or
political subdivision.
Iowa Code § 23A.2(1)(a).
Hawkeye has alleged IEC and the AEAs “assist[ed] Martin Brothers
in the sale, offering for sale, delivery, distribution, or advertising of goods
or services offered by private enterprise.” Hawkeye has also alleged the
AEAs and IEC are not authorized to engage in such practices.
Specifically, Hawkeye alleged the AEAs, acting through IEC, have
“solicit[ed] for membership entities” outside of Iowa. Hawkeye also
alleged IEC gets an administrative fee from the prime vendor, which has
always been Martin Brothers, based on a percentage of the sales the
prime vendor receives through its IEC contract. Hawkeye alleged IEC
23
markets aggressively to increase its membership and in doing so
increases the sales “volume for their chosen prime vendor [Martin
Brothers], which in turn creates additional fee revenue to the IEC.”
Hawkeye alleged that IEC is actively competing with private enterprise to
secure this additional volume for their chosen prime vendor. Hawkeye
alleged that the price discrimination created by IEC’s activities (including
aggressive marketing and advertising) destroys fair competition in the
marketplace. As pled, these allegations support the claim that IEC or the
AEAs are involved in the offering for sale or advertising of goods or
services.
Further, Hawkeye must have alleged the activity the AEAs or IEC
engaged in was directed “to the public.” Hawkeye has alleged that IEC
advertises and assists its prime vendor in securing sales to Iowa schools
and school districts, as well as “entities outside the State of Iowa.”
Hawkeye has also alleged that “IEC is providing services to entities other
than schools and school districts in Iowa.” When ruling on a motion to
dismiss, the court must view the factual allegations “in the light most
favorable to the plaintiff with doubts resolved in that party’s favor.”
Geisler v. City Council, 769 N.W.2d 162, 165 (Iowa 2009) (citation and
internal quotation marks omitted). It is possible that “prospective [IEC]
members located in states other than Iowa” and “entities other than
schools and school districts in Iowa” constitute members of the public. If
they do, then Hawkeye has alleged that IEC and the AEAs engage in
activity directed to the public. At this preliminary stage, Hawkeye’s
petition sufficiently alleges IEC and the AEAs sold goods to the public, or
advertised goods and services for sale to the public.
Hawkeye also alleged those goods or services provided by the AEAs
or IEC are also offered by private enterprise. Hawkeye has alleged that it
24
is a foodservice distributor and offers food and food-related items to
school districts as well as other institutional consumers.
Hawkeye must allege that the goods the AEAs provide are not used
or consumed exclusively by the AEAs. Hawkeye alleged that “the IEC is
providing services to entities other than schools and school districts in
Iowa.” Entities that are not school districts in Iowa could not be
members of an AEA. If this allegation is taken as true, then the AEAs,
acting through IEC, are operating in violation of section 23A.2 by
operating IEC.
Though other issues have been raised regarding count III, we do
not need to resolve them at this time. This litigation is in its early stages.
Our only goal at this time “is to test the legal sufficiency of the petition.”
Geisler, 769 N.W.2d at 165. The facts as alleged in Hawkeye’s petition, if
proved, state a claim under chapter 23A and are therefore sufficient to
survive a motion to dismiss count III.
V. Disposition.
The district court erred in dismissing counts I and II of Hawkeye’s
petition against IEC and the AEAs for lack of standing. Hawkeye’s
petition alleges facts that give it standing to challenge the actions of the
AEAs and IEC. It was also error to dismiss counts I, II, and III based on
a failure to state a claim upon which any relief can be granted. The
factual allegations set forth in the petition, if proved, state statutory
claims sufficient to defeat a motion to dismiss.
DECISION OF COURT OF APPEALS VACATED; DISTRICT
COURT JUDGMENT REVERSED AND CASE REMANDED.
All justices concur except Wiggins, Waterman and Mansfield, JJ.,
who take no part.