Today I spoke to a group of antitrust practitioners and business people at a GCR Live event in New York, where I discussed the court’s decision in FTC v. Sysco Corp.
Every merger decision contains lessons, and the Sysco decision is no exception. The litigation was hard-fought on both sides. Every facet of the competitive analysis was contested. Adding to the complexity was the parties’ proposed agreement to divest assets to Performance Food Group, which required that we litigate the likely effects of not only the original transaction but also the parties’ proposed “fix.” The defendants also claimed significant efficiencies from the merger. As a result, the court’s decision reads like novella textbook case study, one that details the real-time competitive dynamics of this nation’s $231 billion foodservice distribution industry.
But in many ways, the decision represents no great leap forward on any particular point of law or economic analysis. Rather, it is another example of applying time-tested standards for market definition set out more than 50 years ago in Brown Shoe to a particular set of facts to determine whether the proposed merger was likely harm competition. Despite arguments by some that Brown Shoe should be relegated to the history books, sometimes, old-school tools like Brown Shoe practical indicia still help get the job done. Yet merger analysis continues to evolve, mainly through the development of modern economic tools that can provide additional information bearing on the ultimate question of whether a merger is likely to substantially lessen competition. And the court relied extensively on the work of our economic expert, who performed a SSNIP test using an aggregate diversion analysis.
As for “litigating the fix,” the parties argued that they had fixed any potential problems created by the merger by entering into a separate agreement to sell eleven of US Foods’ 61 distribution centers to PFG, a regional broadline competitor with 24 distribution centers of its own. The agreement with PFG was signed during the Commission’s investigation in an effort to avoid litigation, but the Commission determined that, even with the divestitures to PFG, Sysco’s acquisition of US Foods would likely result in anticompetitive harm. The court agreed, and here, too, the court’s approach mirrors that of the Commission: the judge addressed the impact of the proposed divestitures as a rebuttal argument and only after he had determined that the original deal created a presumption of anticompetitive effects. This two-step approach is familiar to those who have mergers reviewed by the Commission.
Finally, on the issue of efficiencies, the court concluded that even if all of the cost savings were passed on to consumers, the savings were unlikely to outweigh the competitive harm to customers. Of course, studying only litigated cases for guidance on efficiencies presents a skewed sample set, given the very high levels of concentration involved in most litigated cases, and lingering doubts by some courts about the legal basis for an “efficiencies defense.” To understand how we analyze efficiencies, it is important to look to Section 10 of the Merger Guidelines for guidance, realizing that just as the elements of a merger claim must be proven by reference to information from a variety of sources, so too must efficiency claims be put to the test.