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...