Divestiture Offer Fails To Save Merger Where FTC Wins On Market Definition Based On Customer Type

Eighteen months after the deal was first announced, Sysco Corporation ("Sysco") and US Foods, Inc. ("USF") abandoned their $3.5 billion merger following the Federal Trade Commission's (the "FTC" or "Commission") decisive victory in obtaining a preliminary injunction blocking the transaction. FTC v. Sysco Corp., 1:15-cv-00256 (D.D.C. June 26, 2015). While Judge Mehta's comprehensive opinion can in large measure serve as a hornbook for judicial merger analysis, the decision is significant in its acceptance of the FTC's view that a particular customer type can serve as the basis for defining the relevant antitrust market. The decision also provides valuable insight as to the analysis a court might apply to a proposed divestiture remedy designed to adequately restore competition and thus salvage an otherwise anticompetitive deal.

Acknowledging that the parties had announced their intent to abandon the transaction if a preliminary injunction was granted, the district court recognized the "real-world impact" of its decision beyond the question presented of whether the transaction should be enjoined until it could be fully reviewed on the merits by an FTC Administrative Law Judge. The district court's opinion on the FTC's Section 13(b) motion for a preliminary injunction reads as a full decision on the merits, focused largely on the FTC's market definitions. While merger cases brought by the antitrust agencies frequently heavily rely on evidence of price competition between the parties and so-called "bad documents" (and documents did play a confirming role in this case), the FTC here emphasized the presumption of anticompetitive effects based on market shares and market concentration derived from its market definitions.

The case is one of the first major decisions for U.S. District Court Judge Mehta who was just confirmed last December. The FTC investigated the proposed merger, announced by the parties in December 2013, for more than a year before voting 3-2 to file an administrative complaint in February 2015 to block the transaction. The FTC sought a temporary restraining order and a preliminary injunction in federal court to prevent the parties from consummating the deal prior to the conclusion of the administrative proceeding on the merits. Over two short months, the case included millions of discovery documents, dozens of depositions, nearly 100 declarations by competitors and customers, and eight days of testimony, which included dueling economic testimony.

The Food Service Distribution Industry

While the decision goes into great detail about the complex food service distribution industry, a review of at least the basics is necessary to understand the district court's analysis and findings with regard to the antitrust relevant markets here.

The $230+ billion foodservice distribution business supplies food and related products to restaurants, hospitals, cafeterias, sports arenas, and a host of other places that serve prepared food. As many as 16,000 companies compete at some level in the foodservice distribution marketplace, with Sysco and USF being the two largest. The industry generally recognizes four categories of foodservice distribution companies: (i) broadline distributors, (ii) systems distributors, (iii) specialty distributors, and (iv) cash-and-carry or club stores. Broadline distributors are characterized by their product breadth, private-label product offerings, frequent/flexible delivery, and value-added services. Systems distributors carry and deliver proprietary products manufactured for specific customers. Specialty distributors offer and deliver limited product categories, such as meat or dairy or seafood. Finally, cash-and carry stores offer a self-service model of food distribution.

Within the broadline category, there are three types. National broadliners have their own nationwide service capabilities. There are only two such companies: Sysco and USF. Regional broadliners generally offer the same products and services as national broadliners, but their distribution capabilities are concentrated in discrete regions of the country. The largest regional broadliner is Performance Food Group, Inc. ("PFG"). There are also many local broadline companies that operate within more limited geographic areas. Several regional...