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Case 1:15-Cv-00256-APM Document 192 Filed 06/29/15 Page 1 of 131 Case 1:15-cv-00256-APM Document 192 Filed 06/29/15 Page 1 of 131 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ) Federal Trade Commission, et al., ) ) Plaintiffs, ) ) v. ) Civil No. 1:15-cv-00256 (APM) ) Sysco Corporation, et al., ) ) Defendants. ) ---------------) MEMORANDUM OPINION Case 1:15-cv-00256-APM Document 192 Filed 06/29/15 Page 2 of 131 TABLE OF CONTENTS INTRODUCTION ....... ......... ................ ........................................ .. ............................... ............. .. 1 BACKGROUND ................... .. ........ .. ... .. ........ .. ............................................. .... ... ...... ... .. .. ...... .. ... 3 I. The Foodservice Distribution Industry ............................................................................... 3 A. Overview ................................................................................................................. 3 B. Channels ofFoodservice Distribution ................................... ................................. 4 1. Broadline Distributors ................................................................................ 4 2. Systen1s Distributors ................................................................................... 6 3. Specialty Distributors ................................................................................. 7 4. Cash-and-Cany and Club Stores ............................................................... 7 C. Foodservice Distribution Customers ........ ......... .. ............... .. ............................. ..... 8 I. Group Purchasing Organizations .. .......................... .. ................................. 8 2. Foodservice Management Companies ........................................................ 9 3. Hospiralir_v Chains ...................................................................... ................ 9 4. Restaurant Chains ........................................ ...................... .. ..................... 10 5. Govenunent Agencies .... .. .. .................................................................. .... 10 6. "Street" Custo1ners ...................................................... ............................. I 0 II. Case History ...................................................................................................................... 11 A. Sysco and USF .. ................... .... .. .. .. .............................................. ......................... 11 B. History ofthe Merger .................................................................... ........................ 11 C. History of these Proceedings ............................................... ..... ........... ....... .......... 12 LEGAL STANDARD ..................... ..................... ...................... .. ..... ............ .. ......... .. ....... .......... 14 I. Section 7 of the Clayton Act ............................................................................................ 14 II. Section 13(b) Standard for Preliminary Injunctions ............................. .. ..... .. ... ................ 14 III. Baker Hughes Burden-Shifting Framework .......................................... ........................... 16 DISCUSSION ..................................................... ... ... .. ... ..... .. ...... .. .... .... .... ..... .. .. ... .. ... .... .. ............ 17 I. The Relevant Market............ .. .................................................................................. ........ 17 A. Broadline Distribution as a Relevant Product Market .......................................... 19 1. Legal Principles A.Uecting the Definition ofthe Relevant Product Market ........................................... .. ................... .. ........ 19 2. The Brown Shoe "Practh:al Indicia" ....................................................... 23 3. Expert Testinzony ... ................................................................................... 33 4. Conclusion as to the Broadline Product Market ...................................... 41 B. National Broadline Distribution as a Relevant Product Market ........................... 41 1. Legal Basis for Defining Relevant Product Market Based on Custonzer Type .. ......... ................................. ... ........................... 42 2. Evidence Supporting a National Broad!ine Product Market .................... 44 Case 1:15-cv-00256-APM Document 192 Filed 06/29/15 Page 3 of 131 C. Product Market Summary ................................ .. ................ ... .. .............................. 60 D. Relevant Geographic Market ................................................................................ 60 1. National Market ................................................. , .................... .................. 62 2. Local Markets ................................................................. .. ........... ..... ........ 62 II. The Probable Effects on Competition ............................................................................... 66 A. Concentration in the National Broadline Customer Market ................................. 67 1. Dr. Israel's National Broadline Customer Market Shares Calculations ... .. ............................................................... .. 67 2. De,f'endants' Arguments ......................................................... .. .................. 69 3. The Court's Finding as to National Broadline Customer Market Shares .. ............ ... .... .. ......... .... .. .. .. ............................. ...... .... .. .... .. .. 72 B. Concentration in the Local Markets ...................................................................... 72 1. Dr. Israel's Local Broadline Customer Market Shares Calculations .. .... .. ..... .. .. .......... .... .. ..................................... 72 2. De.f'endants 'Argun1ents ................................................................... .... .. .... 74 3. The Court's Finding as to Local Broadline Customer Market Shares ... ................................. .. .. .. ... .... ... .. ... .......................... ........ 8 .I C. Additional Evidence of Competitive Harm .......................................................... 81 I . Unilateral E;fl'ects-National Customer Market ................................. .. .. .. XI 2. Merger Simulation Model-National Customer Market............ ......... ..... l) 3. Unilateral Effects-Local Markets ............................... ............................ 9- 4. Local Event Studies ................................................................................... 97 5. Sutntnary ... .. .... .. .. .. .... .. .............................................................................. 99 III. Defendants' Rebuttal Arguments ................................................................ ... ................. 100 A. PFG Divestiture ................................. .. .. ... .. .............. .......................................... I 00 1. Competitive Pressure Exerted by Post-Divestiture PFG ........................ I 02 2. Additional Dhwdvantages Faced by Post-Merger PFG ......................... I 07 3. Post-Merger PFG as an Independent Competitor .................................. I 09 B. Existing Competition .......................................................................................... 110 1. Regionalization .............................................. .... ..................................... I I ( 2. DMA .. ........ .. .................................... ................... .. ................................... I 12 3. Conclusion as to Existing Competition ............................... .. ... ............... II C. Entry of New Firms and Expansion of Existing Competitors ............................ l J4 D. Efficiencies ......................................................................................................... 117 I. Requirementfor Merger-Spec(fic and Ver(fiable E;fficiencies ................ 11 7 2. lnsujficienc:v l?f Estimated Merger-Spec(fic Savings ................... ............ 123 E. Conclusion .... .... ............................. .. .. .. ... .................................... .. ........ .... .... ...... 124 IV. The Equities ................................................... ..... ............................................................ 125 CONCLUSION ................ ........................................................................................... .. .. .... ..... 127 11 Case 1:15-cv-00256-APM Document 192 Filed 06/29/15 Page 4 of 131 INTRODUCTION Americans eat outside oftheir 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 US Foods, Inc. ("USF"). Both are primarily "broadline" foodservice distributors. As the
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