Federal Trade Commission v. Sysco Corporation
2015 WL 3958568, 113 F.Supp.3d 1 (2015)
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Rule of Law:
A merger that creates a firm with an undue percentage share of a relevant market and results in a significant increase in market concentration is presumed to substantially lessen competition in violation of Section 7 of the Clayton Act. This presumption warrants a preliminary injunction if the merging parties fail to rebut it by showing the proposed remedy is sufficient to restore competition or that claimed efficiencies are both merger-specific and substantial enough to outweigh the anticompetitive harm.
Facts:
- Sysco Corporation (Sysco) and US Foods, Inc. (USF) are the number one and number two largest 'broadline' foodservice distributors in the United States, respectively.
- Broadline distributors are distinct from other channels like systems distributors, specialty distributors, and cash-and-carry stores due to their vast product breadth, private-label offerings, frequent delivery capabilities, and value-added services.
- Sysco and USF are the only two broadline distributors with a true nationwide service capability, which makes them uniquely positioned to serve large, geographically dispersed 'national customers' such as group purchasing organizations (GPOs), foodservice management companies, and hospitality chains.
- Many national customers rely on the competition between Sysco and USF, often playing them against each other in negotiations to secure better prices and services.
- On December 8, 2013, Sysco and USF entered into an agreement for Sysco to acquire all shares of USF for a total transaction value of $8.2 billion.
- To gain regulatory approval for the merger, Sysco and USF announced an agreement to divest 11 of USF's distribution centers to the industry's third-largest competitor, Performance Food Group (PFG).
Procedural Posture:
- The Federal Trade Commission (FTC) and a group of states filed a lawsuit in the U.S. District Court for the District of Columbia against Sysco Corporation and US Foods, Inc.
- The plaintiffs sought a temporary restraining order (TRO) and a preliminary injunction under Section 13(b) of the FTC Act to block the proposed merger.
- The lawsuit's purpose was to halt the merger pending the outcome of a full administrative trial before an FTC Administrative Law Judge.
- The defendants stipulated to a TRO, agreeing not to merge until the district court ruled on the motion for a preliminary injunction.
- The U.S. District Court for the District of Columbia held an eight-day evidentiary hearing on the FTC's motion for a preliminary injunction.
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Issue:
Does a proposed merger between the nation's two largest broadline foodservice distributors, which would result in a significant increase in market concentration in both national and local markets for broadline distribution, have a reasonable probability of substantially lessening competition in violation of Section 7 of the Clayton Act, thus warranting a preliminary injunction?
Opinions:
Majority - Mehta, J.
Yes, the proposed merger has a reasonable probability of substantially lessening competition in violation of Section 7 of the Clayton Act because it would lead to undue market concentration in well-defined product and geographic markets. The court first defined the relevant product markets as (1) broadline foodservice distribution and (2) broadline foodservice distribution to national customers, finding that other channels like systems or specialty distributors were not reasonable substitutes. The court then found the FTC established a prima facie case by showing the merger would result in a firm controlling at least 59-71% of the national customer market and would significantly increase market concentration (HHI) in both national and numerous local markets. This concentration, combined with the elimination of head-to-head competition between the two closest rivals, created a strong presumption of anticompetitive harm. The defendants failed to rebut this presumption, as the court found their proposed divestiture to PFG was insufficient to replace the competitive intensity lost from USF's exit from the market. Furthermore, the court found the defendants' claims of merger-specific efficiencies were not sufficiently verifiable or substantial enough to outweigh the likely harm to competition.
Analysis:
This decision reinforces the traditional Brown Shoe 'practical indicia' framework for defining relevant markets in antitrust litigation, affirming that a unique cluster of products and services can constitute a distinct market. It also validates the government's ability to define narrow sub-markets based on the specific needs of a customer group, such as the 'national customers' market in this case. The court’s rigorous rejection of the proposed divestiture as an adequate remedy sets a high bar for future merging parties, demonstrating that a 'fix' must create a competitor truly capable of replacing the competition lost, not just a marginally stronger third player. The opinion serves as a modern blueprint for how the government can successfully challenge a merger of the top two firms in a concentrated industry.
