Fed. Trade Comm'n v. Sysco Corp., Civil No. 1:15–cv–00256 (APM)

• Decision Date: 23 June 2015
• Docket Number: Civil No. 1:15–cv–00256 (APM)
• Citation: 113 F.Supp.3d 1
• Parties: Federal Trade Commission, et al., Plaintiffs, v. Sysco Corporation, et al., Defendants.
• Court: U.S. District Court — District of Columbia

113 F.Supp.3d 1

Federal Trade Commission, et al., Plaintiffs,

v.Sysco Corporation, et al., Defendants.

Civil No. 1:15–cv–00256 (APM)

United States District Court, District of Columbia.

Signed June 23, 2015

Stephen Weissman, Federal Trade Commission, Alexis Gilman, Catherine Sanchez, Christopher Abbott, David J. Laing, Jeanne Nichols, Krisha A. Cerilli, Kristian Sjoberg Rogers, Mark Seidman, Matthew McDonald, Melissa Davenport, Michael Derita, Ryan Quillian, Sophia Vandergrift, Stephen Mohr, Thomas H. Brock, Federal Trade Commission, Bureau of Competition, Nicholas Alan Bush, DC Office of the Attorney General, Washington, DC, Natalie S. Manzo, Office of the Attorney General, Los Angeles, CA, Robert W. Pratt, Illinois Office of the Attorney General, Antitrust, Chicago, IL, Layne M. Lindebak, Iowa Department of Justice, Special Litigation Division, Des Moines, IA, Gary Honick, Office of the Maryland Attorney General, Baltimore, MD, Benjamin Jack Velzen, James William Canaday, Office of the Minnesota Attorney General, St. Paul, MN, Kimberly Rae Parks, Office of the Ohio Attorney General, Columbus, OH, James A. Donahue, III, Office of the Attorney General, Antitrust Section, Jennifer Ann Thomson, Office of the Attorney General, Commonwealth of Pennsylvania, Harrisburg, PA, Victor J. Domen, Jr., Tennessee Attorney General's Office, Public Interest Division, Nashville, TN, Sarah Oxenham Allen, Office of the Attorney General, Consumer Protection Section, Stephen John Sovinsky, Office of the Attorney General of Virginia, Richmond, VA, Kip David Sturgis, North Carolina Department of Justice, Raleigh, NC, for Plaintiffs.

Haidee L. Schwartz, Ian Simmons, Katrina M. Robson, Richard G. Parker, Benjamin J. Hendricks, Edward D. Hassi, Scott Schaeffer, Haidee L. Schwartz, O'Melveny & Myers LLP, Peter Coyne Thomas, Abram J. Ellis, Jonathan D. Porter, Peter C. Herrick, Philip Mirrer-Singer, Sara M. Clingan, Simpson Thacher & Bartlett, LLP, Washington, DC, Joseph F. Tringali, Andrea B. Levine, Joseph F. Tringali, Joshua Polster, Simpson, Thacher & Bartlett LLP, New York, NY, Erika Rasch, O'Melveny & Myers LLP, Newport Beach, CA, James Pearl, Jennifer Middleton, O'Melveny & Myers LLP, Los Angeles, CA, for Defendants.

MEMORANDUM OPINION

Amit P. Mehta, United States District Judge

TABLE OF CONTENTS

INTRODUCTION ... 14

BACKGROUND ... 15

I. The Foodservice Distribution Industry ... 15

A. Overview ... 15

B. Channels of Foodservice Distribution ... 16

1. Broadline Distributors ... 16

2. Systems Distributors ... 17

3. Specialty Distributors ... 18

4. Cash–and–Carry and Club Stores ... 18

C. Foodservice Distribution Customers ... 18

1. Group Purchasing Organizations ... 18

2. Foodservice Management Companies ... 19

3. Hospitality Chains ... 19

4. Restaurant Chains ... 19

5. Government Agencies ... 20

6. "Street" Customers ... 20

II. Case History ... 20

A. Sysco and USF ... 20

B. History of the Merger ... 20

C. History of these Proceedings ... 21

LEGAL STANDARD ... 22

I. Section 7 of the Clayton Act ... 22

II. Section 13(b) Standard for Preliminary Injunctions ... 23

III. Baker Hughes Burden–Shifting Framework ... 23

DISCUSSION ... 24

I. The Relevant Market ... 24

A. Broadline Distribution as a Relevant Product Market ... 25

1. Legal Principles Affecting the Definition of the Relevant Product Market ... 25

2. The Brown Shoe "Practical Indicia" ... 27

3. Expert Testimony ... 33

4. Conclusion as to the Broadline Product Market ... 37

B. National Broadline Distribution as a Relevant Product Market ... 37

1. Legal Basis for Defining Relevant Product Market Based on Customer Type ... 38

2. Evidence Supporting a National Broadline Product Market ... 40

C. Product Market Summary ... 48

D. Relevant Geographic Market ... 48

1. National Market ... 49

2. Local Markets ... 50

II. The Probable Effects on Competition ... 52

A. Concentration in the National Broadline Customer Market ... 53

1. Dr. Israel's National Broadline Customer Market Shares Calculations ... 53

2. Defendants' Arguments ... 54

3. The Court's Finding as to National Broadline Customer Market Shares ... 55

B. Concentration in the Local Markets ... 56

1. Dr. Israel's Local Broadline Customer Market Shares Calculations ... 56

2. Defendants' Arguments ... 57

3. The Court's Finding as to Local Broadline Customer Market Shares ... 61

C. Additional Evidence of Competitive Harm ... 61

1. Unilateral Effects—National Customer Market ... 61

2. Merger Simulation Model—National Customer Market ... 66

3. Unlateral Effects—Local Markets ... 67

4. Local Event Studies ... 70

5. Summary ... 71

III. Defendants' Rebuttal Arguments ... 72

A. PFG Divestiture ... 72

1. Competitive Pressure Exerted by Post–Divestiture PFG ... 73

2. Additional Disadvantages Faced by Post–Merger PFG ... 76

3. Post–Merger PFG as an Independent Competitor ... 77

B. Existing Competition ... 78

1. Regionalization ... 78

2. DMA ... 79

3. Conclusion as to Existing Competition ... 80

C. Entry of New Firms and Expansion of Existing Competitors ... 80

D. Efficiencies ... 81

1. Requirement for Merger–Specific and Verifiable Efficiencies ... 81

2. Insufficiency of Estimated Merger–Specific Savings ... 85

E. Conclusion ... 86

IV. The Equities ... 86

CONCLUSION ... 87

INTRODUCTION

Americans eat outside of their homes with incredible frequency. The U.S. Department of Commerce, for instance, recently reported, for the first time since it began tracking such data, that Americans spent more money per month at restaurants and bars than in grocery stores.¹ Of course, Americans eat out at many other places, too—sports arenas, school and workplace cafeterias, hotels and resorts, hospitals, and nursing homes, just to name a few. The foodservice distribution industry supplies food and related products to all of these locations. Foodservice distribution is big business. In 2013, the market grew to $231 billion. By some estimates, there are over 16,000 companies that compete in the foodservice distribution marketplace.

The two largest foodservice distribution companies in the country are Defendants Sysco Corporation ("Sysco") and U.S. Foods, Inc. ("USF"). Both are primarily "broadline" foodservice distributors. As the name implies, a broadline foodservice distributor sells and delivers a "broad" array of food and related products to just about anywhere food is consumed outside the home. In 2013, Sysco's broadline sales were over $[Redacted] billion and USF's were over $[Redacted] billion.

In December 2013, Sysco and USF announced that they had entered into an agreement to merge the companies. Fourteen months later, in February 2015, Sysco and USF announced that they intended to divest 11 USF distribution facilities to the third largest broadline foodservice distributor, Performance Food Group, Inc., if the merger received regulatory approval.

On February 20, 2015, the Federal Trade Commission ("FTC") and a group of states filed suit in this court seeking an injunction to prevent the proposed merger. Specifically, under Section 13(b) of the Federal Trade Commission Act, the FTC asked this court to halt the proposed merger until the FTC completes an administrative hearing—scheduled to begin on July 21, 2015—to determine whether the proposed combination would violate Section 7 of the Clayton Act.

The precise question presented by this case is whether the court should enjoin Sysco and USF from merging until the proposed combination is reviewed by an FTC Administrative Law Judge. The real-world impact of the case, however, is more consequential. Sysco and USF have announced that they will not proceed with the merger if the court grants the requested injunction.

The proceedings in this case have been extraordinary. The FTC investigated the proposed merger for more than a year before filing suit. Then, within a two-month period, the parties worked tirelessly to exchange millions of documents, depose dozens of witnesses, and secure over a hundred declarations. The court heard live testimony for eight days in early May 2015. Counsel for the parties have done all of this work while exhibiting the highest degree of skill and professionalism.

Congress passed the Clayton Act to enable the federal government to halt mergers in their incipiency that likely would result in high market concentrations. Congress was especially concerned with large combinations that would impact everyday consumers across the country. The court has considered all of the evidence in this case and has reached the following conclusion: The proposed merger of the country's first and second largest broadline foodservice distributors is likely to cause the type of industry concentration that Congress sought to curb at the outset before it harmed competition. The court finds that the FTC has met its burden under Section 13(b) of the Federal Trade Commission Act of showing that the requested injunction is in the public interest. The court, therefore, grants the FTC's motion for preliminary injunctive relief.

BACKGROUND

I. THE FOODSERVICE DISTRIBUTION INDUSTRY

A. Overview

Defendants operate in a $231 billion foodservice distribution industry, where over 16,000 companies battle daily to sell food and related products to restaurants, resorts, hotels, hospitals, schools, company cafeterias, and so on—everywhere food is served outside the home. Hr'g Tr. 1324; DX–00329 at 17. The types of customers served by the foodservice distribution industry come in all shapes and sizes. They range from independent restaurants, to well-known quick-service and casual dining chains (e.g., Five Guys, Subway, and Applebee's), to hospitality procurement companies and hotel chains (e.g., Avendra, Hilton Supply Management, and Starwood Hotels and Resorts), to government agencies (e.g., the U.S. Department of Veterans Affairs), to foodservice management companies (e.g., Aramark, Sodexo, and Compass Group), to healthcare group purchasing organizations (e.g., Premier, Novation, and Navigator).

The industry recognizes four general categories of foodservice distribution companies: (i) broadline distributors, (...