United States: FTC Scores Decisive Win In Challenge To Food Distribution Merger

On Tuesday, a federal judge issued an injunction blocking the Sysco – US Foods ("USF") merger pending further administrative review by the FTC. The move, which ended Sysco's acquisition plans, represents a decisive victory for the FTC.

Background

The proposed $8.2 billion dollar Sysco/USF deal, first announced in December 2013, would have combined the two largest "broadline" food distribution firms in the United States. Broadline distributors – in contrast to specialist, systems, or "cash and carry" food sellers – provide a wide range of foods and food service products directly to customers at their place of business. According to the FTC's complaint, broadline firms are distinguished by their combination of product breadth and depth, private label inventory and customer service (including frequent and flexible delivery), setting them apart from other alternative suppliers.

In its opinion, the court found that the acquisition would create a single firm with a national broadline market share of 75% and local market shares approaching 100%. These market shares – and the accompanying HHIs – were held to trigger a presumption of illegality that the merging parties were unable to rebut, leading the court to find that the FTC had met its burden of proving that it would likely succeed at a full trial. While the court questioned some of the government's economic evidence, the parties' size and market position as reflected in industry and customer testimony proved decisive, with Judge Mehta ultimately holding that "there can be little doubt that the acquisition of the second largest firm in the market by the largest firm in the market will tend to harm competition in that market."1

A Structural Decision

As Judge Mehta noted, "[m]arket definition has been the parties' primary battlefield in this case."2

In contrast to other FTC and DOJ merger cases that have emphasized price interaction3  and so-called "bad documents"4 , the FTC's case against Sysco relied strongly on structural presumptions rooted in the market shares and market concentration. Citing the Supreme Court's 1962 Philadelphia National Bank opinion, the FTC's lawyers argued that the "overwhelming market share Sysco would attain" in broadline distribution alone rendered the merger presumptively unlawful.5 According to the FTC, such high market shares would allow the parties to discriminate against Sysco and USF's core customers, who for various reasons "require a broadline distributor and are unwilling or unable to replace their broadliner with an alternative form of distribution."6

The appropriateness of a national broadline-only market definition was hotly disputed by the defendants, who argued that, far from relying solely on national broadline distributors, "the typical independent customer uses twelve different supply sources."7 According to Sysco, the court should have considered the entire $231 billion foodservice distribution industry as a single market, within which the defendants compete with not only other broadliners, but also specialty distributors, systems distributors, and cash-and-carry stores like Restaurant Depot and Costco. This market definition would have resulted in combined shares of only approximately 25 percent.8

After extensive expert testimony as well as testimony from numerous customers and industry participants, the court ultimately accepted the FTC's argument that national broadline distribution is a separate market.9

Litigating the Fix

A significant feature of the litigation was Sysco's attempt to "fix" the deal by agreeing to divest 11 distribution centers in the west and Midwest to rival distributor Performance Foods Group ("PFG") once the merger closed. The divestiture was announced on February 2, 2015, only two weeks before the FTC formally filed suit. The divestiture would have given PFG, already the third largest distributor in the eastern US, a strong foothold in the west.

While the parties characterized the plan as designed to "fully address" the FTC's expressed concerns, the FTC disagreed, arguing that the divestiture would leave PFG with only 35 distribution centers as compared to USF's pre-transaction total of 61, as well as leaving PFG with "significant coverage gaps" in a number of local markets where Sysco and USF currently compete. In a signal of its hostility to the move, the FTC even opposed PFG's motion to enter an amicus brief explaining the transaction, characterizing the brief as an attempted "end run" around page limits by a party with interests identical to those of the defendants.10

Noting that "there is a lack of clear precedent providing an analytical framework for addressing the effectiveness of a divestiture that has been proposed to remedy an otherwise anticompetitive merger," the court nonetheless agreed with the FTC that the parties had not met their burden of showing that the PFG divestiture would "remedy the anticompetitive effects of the merger."11 In particular, the court cited internal emails between PFG decision-makers saying that "we need the package size to be bigger [than the 11 distribution centers offered by the parties] to... ever compete nationally."12 While Sysco argued that this internal discussion represented a "bargaining strategy" by PFG to secure more assets,13 the court found that the proposed divestiture size was insufficient to make "PFG... a viable alternative to the merged entity on day one."14

Conclusion

In the wake of the decision, Sysco has announced that it will terminate its merger agreement with USF.15 In light of the court's intensive review of the evidence in a detailed 128-page opinion and reliance on well-accepted statements of black letter merger antitrust law, an appeal likely would have little chance of success.

Coming on the heels of the DOJ's successful opposition to the Applied Materials/Tokyo Electron merger16 and the Comcast/Time Warner deal17 as well as the FTC's recent decision to challenge the Steris/Synergy merger,18 it is clear that the US agencies are very willing to bring challenges and are more confident than ever of their ability to obtain blocking injunctions in court.

The decision also reinforces that despite a more recent focus on upward pricing pressure and direct analysis of competitive effects during the merger investigation phase, when it comes to litigation, the agencies and courts continue to apply an orthodox approach that has changed little in decades and that is heavy on market definition, market shares and presumptions of anticompetitive effects.

While the decision breaks little new ground in substance, the decision is to be welcomed for not relying on the very deferential "serious questions" test19 in deciding to grant the FTC a preliminary injunction. Instead, Judge Mehta found that the FTC showed a "likelihood of success on the merits." It is to be hoped that other courts adopt this approach to aligning DOJ and FTC litigation standards in merger challenges.

Footnotes

1 FTC v. Sysco Corp., No. 15-cv-00256, Slip Op. at 127 (D.D.C. Jun. 26, 2015) ("Memorandum Opinion") (citing FTC v. Whole Foods, 548 F.3d 1028, 1043 (D.C. Cir. 2008) (Tatel, J.)).

Id. at 18.

See FTC v. Staples Inc., 970 F.Supp. 1066 (D.D.C. 1997).

See United States v. Bazaarvoice Inc., 2014-1 Trade Cas. (CCH) ¶ 78,641 (N.D. Cal. Jan. 8, 2014).

5  Plaintiff's Memorandum of Law at 5, 10, FTC v. Sysco Corp., No. 15-cv-00256 (D.D.C. 2015).

Id. at 12. 

7  Defendant's Opposition Brief at 5, FTC v. Sysco Corp., No. 15-cv-00256 (D.D.C. 2015) (emphasis in original).

8  Memorandum Opinion at 19.

Id. at 28.

10 Opposition to Motion by Performance Food Group, Inc., to File a Brief as Amicus Curiae, FTC v. Sysco Corp., No. 15-cv-00256 (D.D.C. 2015). The court ultimately accepted PFG's amicus brief over the FTC's objections.

11 Memorandum Opinion at 100-101, 110 (holding that under Baker Hughes, once plaintiffs have shown undue concentration, the burden shifts to the defendant to rebut the presumption of anticompetitive effect).

12 Id. at 104.

13 Id. at 106.

14 Id. at 110.

15 Press Release, Sysco Corporation, Sysco Terminates Merger Agreement With US Foods, Jun. 29, 2015, available at http://investors.sysco.com/press-releases/Press-Release-Details/2015/Sysco-Terminates-Merger-Agreement-With-US-Foods/default.aspx.

16 Press Release, U.S. Dep't of Justice, Applied Materials Inc. and Tokyo Electron Ltd. Abandon Merger Plans After Justice Department Rejected Their Proposed Remedy, Apr. 27, 2015, available at http://www.justice.gov/opa/pr/applied-materials-inc-and-tokyo-electron-ltd-abandon-merger-plans-after-justice-department.

17 Press Release, U.S. Dep't of Justice, Comcast Corporation Abandons Proposed Acquisition of Time Warner Cable After Justice Department and the Federal Communications Commission Informed Parties of Concerns, Apr. 24, 2015, available at http://www.justice.gov/opa/pr/comcast-corporation-abandons-proposed-acquisition-time-warner-cable-after-justice-department.

18 In re Steris Corp., FTC File No. 151-0032 (May 29, 2015).

19 Under this standard, the Commission meets its burden if it "raise[s] questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals." FTC v. Warner Commc'ns, 742 F.2d 1156, 1162 (9th Cir. 1984) (collecting citations); accord FTC v. H.J. Heinz Co., 246 F.3d 708, 714-15 (D.C. Cir. 2001); FTC v. CCC Holdings, Inc., 605 F. Supp. 2d 26, 30 (D.D.C. 2009); FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1035 (D.C. Cir. 2008) (Brown, J.); id. at 1042 (Tatel, J.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions