FEDERAL TRADE COMMISSION et al v. SYSCO CORPORATION et al

Filing 190

REDACTED MEMORANDUM OPINION. Signed by Judge Amit P. Mehta on 06/26/2015. (lcapm3)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

)

Federal Trade Commission, et al.,
Plaintiffs,

)
)
)

Sysco Corporation, et al.,

)
)
)
)

Defendants.

)
)

v.

~~~~~~~~~~~~~~~~

Civil No. 1:15-cv-00256 (APM)

)

MEMORANDUM OPINION

TABLE OF CONTENTS
INTRODUCTION ......................................................................................................................... 1
BACKGROUND ........................................................................................................................... 3
I.

The Foodservice Distribution Industry ............................................................................... 3
A.
Overview ................................................................................................................. 3
B.
Channels of Foodservice Distribution .................................................................... 4
I.
Broadfine Distriln1tors ................................................................................ 4
2.
.s:vstems Distributors ................................................................................... 6

3.
4.

Specialty Distributors ................................................................................. 7
Caslz~aml~Can:r and Cl11h S'torcs .............................................................. 7

C.

II.

Foodservice Distribution Customers ...................................................................... 8
Group Purchasing Orga11i::atio11s ............................................................... 8
I.
Foodsen'ice Managemcnt Companies ........................................................ 9
Hospitality Chains ...................................................................................... 9
3.
Restaurant Chains ..................................................................................... I 0
4.
Govermnem Agencies ............................................................................... I 0
5.
''Street" C'usto1ners ................................................................................... 10
6.
Case History ...................................................................................................................... 11
A.
Sysco and USF ...................................................................................................... 11
B.
History of the Merger. ........................................................................................... 11
C.
History of these Proceedings ................................................................................ 12

LEGAL STANDARD ................................................................................................................. 14
I.
II.
III.

Section 7 of the Clayton Act ............................................................................................. 14
Section 13(b) Standard for Preliminary Injunctions ......................................................... 14
Baker Hughes Burden-Shifting Framework ..................................................................... 16

DISCUSSION .............................................................................................................................. 17
I.

The Relevant Market. ........................................................................................................ 17
A.
Broadline Distribution as a Relevant Product Market .......................................... 19

.,

Legal Principles A:lf'ecting the Definition r~f the
Relevant Product Market .......................................................................... 19
The Brown Shoe "Practical Indicia" ....................................................... 23

3.

E'lq>erl

4.

Conclusion as to the Broadline Product Market ...................................... 41

1.

B.

Testfn101~v ...................................................................................... 33

National Broadline Distribution as a Relevant Product Market ........................... 41

1.
2.

Legal Basis for De.fining Relevant Product Market
Based on Custo1ner Type .......................................................................... 42
Evidence Supporting a National Broadline Product Market .................... 44

C.
D.

Product Market Summary ..................................................................................... 60
Relevant Geographic Market ................................................................................ 60

l.
2.
II.

iVational 1'v.larker ........................................................................................ 62
Local lt4arkets ....... ,, ...................... ,, ........................ ,, ...... ,, ..................... ., .. 62

The Probable Effects on Competition ............................................................................... 66
A
Concentration in the National Broadline Customer Market ................................. 67
/.

Dr. lsme! 's National Broadline Customer

2.
3.

Market Shares Calcu/at;ons ...................................................................... 67
Defimdants 'Arguments ............................................................................. 69'
711e ('ourt 's Finding as to Nmfonal Broadline Customer

i\1arket 5J1ares ........................................................................................... 72
B.
Concentration in the Local Markets ...................................................................... 72
/.
Dr. Israel's Locc1! Broadline Customer
lv!arket 5Juires Calculations ...................................................................... 72
2.
DeJi!mlants ·A rgumenrs .... ......................................................................... 74
.).
The Court's F'inding as to Local Broarlline Customer
lvfarket Shares ........................................................................................... 81
c.
Additional Evidence of Competitive Harm .......................................................... 81
1.
Unilateral E!Jects i\fationaf Cus1omer Market .......................... ,_ ........... 81
2.
Merger Simulation Modef. . . . . Natio11al Cuswmer Marker .......................... 89'
3.
Unilateral lijfects-Local lvfarkets .,,, ....................................................... 92
4.
Local Event Studies ........................ ,, ...... ,. ................................................. 97
• . ., ............ ,, ... ,. ................................................. ,. ............................. c19
5.
,S
lt1111na1J
::1
Defendants' Rebuttal Arguments .................................................................................... 100
A.
PFG Divestiture .................................................................................................. 100
!.
Competitive Pressure E'xerted hy Post-Divestiture PFG ........................ 102
2.
Addi1fonal Disadvantages Faced hy Post-Merger PFG .................... ,..,. 107
3.
Posr-A1erger PFG as an independent Competitor .................................. l 09
B.
Existing Competition .......................................................................................... 110
')

III.

1.

3.
C.

Regionalization ....................................................................................... l lO
Conclusion as to Existing Competition,,,.,, ......................................... ,, .. 114

Entry of New Firms and Expansion of Existing Competitors ............................ 114

D.

IV.

Efficiencies ......................................................................................................... 117
!.
Requirememfor Merger-Specffic and Verifiable E,Yficiencies ................ t 17
2.
!nsttfJiciemy of Estimated lvferger-Specific Savings ............................... 123
E.
Conclusion .......................................................................................................... 124
The Equities .................................................................................................................... 125

CONCLUSION ......................................................................................................................... 127
11

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 US 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

sm billion and USF's were over sm 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

1

Michelle Jamrisko, Americans ' Spending on Dining Out Just Overtook Grocery Sales for the First Time Ever,
Bloomberg Business (Apr. 14, 2015), http://www.bloomberg.com/news/articles/2015-04-14/americans-spending-ondining-out-just-overtook-grocery-sales-for-the-first-time-ever.

1

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 ifthe 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 l 3(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.

2

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, (ii) systems distributors, (iii) specialty distributors, and (iv) cash-andcarry and club stores. Customers commonly purchase from foodservice distributors in one or more
of these different categories, or "channels," mixing and matching to suit their needs. For example,
customers may purchase products directly from a broadline distributor; they may contract with a
brand-named food manufacturer (e.g., Tyson Foods for chicken or Kellogg's for cereal) and use a
broadline or systems distributor for warehousing and delivery; they may use specialty distributors
for select items such as produce or seafood; or they may make their purchases at a cash-and-carry
or club store (e.g., Restaurant Depot or Costco).

3

Understanding these different channels of distribution and the different customers they
serve is central to the antitrust analysis that this case demands. The court, therefore, describes
below the sellers and buyers of foodservice distribution in the United States.
B.

Channels of Foodservice Distribution

1.

Broadbne Distributors

Broadline distribution is characterized by several key features, including: (i) product
breadth and depth; (ii) availability of private-label products; (iii) frequent and flexible delivery,
including next-day service; and (iv) "value-added" services, such as menu and nutrition planning.
Broadline distributors offer thousands of distinct items for sale-known as "stock keeping
units" ("SKUs") for inventory management purposes-in a wide array of product categories,
including canned and dry goods, dairy, meat, poultry, produce, seafood, frozen foods, beverages,
and even janitorial supplies such as chemicals, cleaning equipment, and paper goods. Broadliners
also sell "private label" goods, which are akin to "Trader Joe's" or "Safeway" brand products
found in those grocery stores. "Private label" products are often comparable in quality to their
name-brand counterparts, but are cheaper in price. Because they are able to offer such a diverse
array of products, broadline distributors market themselves to customers as a "one-stop shop," by
virtue of their ability to supply most-if not all-food and related products needed by their
customers. Customers value the breadth of product offerings and the opportunity to aggregate a
substantial portion of their purchases with one distributor, allowing them to save costs. They also
appreciate broadliners' high level of customer service, which usually includes next-day and
emergency deliveries. Focusing heavily on individualized customer service, broadline distributors
employ much larger salesforces than the other channels.

4

Broadline distributors come in different sizes. The largest, by any measure, are Sysco and
USF. In 2013, Sysco and USF made. billion a n d . billion in broadline sales, respectively.
PX09350-236, Table 44. The next largest broadliner made less than $6 billion. Id Sysco and
USF are also the only two broadliners with true nationwide service capability. Sysco and USF
have 72 and 61 distribution centers, respectively-each with more than twice the number of
distribution centers operated by the next-largest broadliners.

Because of their nationwide

footprint, Sysco and USF are often referred to as "national" broadliners. Combined, Defendants
employ over 14,000 sales representatives.

No other broadliner employs more than 1,600.

Defendants together operate over 13,000 trucks. The next largest broadliners have just over 1,600.
The next tier of companies are "regional broadliners," so called because their distribution
capabilities are concentrated in discrete regions of the United States.

The largest regional

broadliner, Performance Food Group ("PFG"), is the country's third-largest broadliner in terms of
sales. PFG operates 24 broadline distribution facilities, mainly in the eastern and southern parts
of the country and, in 2013, earned $6 billion in broadline revenue. The next five largest regional
broadline distributors, in order of 2013 revenues, are:

(i) Gordon Food Service, which has

I 0 distribution centers mainly in the Midwest, Florida, and Texas; (ii) Reinhart Foodservice, which
has 24 distribution centers, primarily in the East and Midwest; (iii) Ben E. Keith Company, which
has seven distribution centers in Texas and bordering states; (iv) Food Services of America, which
has I 0 distribution centers, concentrated in the Northwest; and (v) Shamrock Foods, which has
four distribution centers in the Southwest and southern California. These regional broadliners had
2013 revenues ranging from approximately

4111 billion to 4111 billion.

5

The last tier of broadliners have five or fewer distribution centers and 2013 revenues of
less than $1.1 billion.

Many of these operate in a single locality or region, like Shetakis

Wholesalers, which has one distribution center in Las Vegas, Nevada.
Regional broadline distributors have formed consortiums to compete for customers with
multi-regional distribution needs.

The largest consortium is Distribution Market Advantage

("DMA"). DMA is a supply chain sales and marketing cooperative owned by nine independent
regional distributors, which are also its members, including Gordon Food Service, Ben E. Keith,
and Reinhart Foodservice. DMA does not own any trucks or distribution facilities; rather, its
purpose is to coordinate the bidding, contracting, and operational processes of its members to meet
the needs of large customers that require a distributor with extensive geographic coverage.
Another consortium is Multi-Unit Group ("MUG''), an alliance of 19 broadline distributors who
are part of UniPro Foodservice, a larger consortium that includes distributors in different channels.
As explained later, these regional consortia have had mixed results in competing for large,
geographically dispersed customers.

2.

Systems Distributors

Systems distributors, also referred to as "custom" or "customized" distributors, primarily
serve fast food, quick service, fast casual, and casual chain restaurants (e.g., Burger King,
Wendy's, and Applebee's), which have fixed or limited menus. Unlike broadliners, systems
distributors do not carry a large, diverse number of SKUs. Rather, their inventory profile is a small
number of proprietary SKUs, which are manufactured specifically for the customer. For instance,
the systems distributor for Wendy's carries and delivers the food products needed for Wendy's'
menu and does not make those products available to others. As a result, systems distributors
typically provide only warehousing and transport services. They do not offer private label products

6

or value-added services such as menu planning, and they have very small salesforces, if any.
Systems distributors make large, limited-SKU deliveries on a fixed, limited schedule, and typically
do not offer next-day or emergency deliveries.
Some foodservice distribution companies operate both systems and broadline divisions.
For instance, Sysco operates SYGMA, a systems distribution division. SYGMA is run by a
different set of executives and, for the most part, operated out of separate distribution centers. PFG
offers systems distribution through PFG Customized, which is run separately from its broadline
division.

3.

Specialty Distributors

Specialty distributors offer a limited and focused grouping of products within one or more
product categories-typically fresh produce, meat, seafood, dairy or baked goods. Other specialty
distributors focus on a specific type of cuisine, such as Italian fare. Many customers, especially
independent restaurants, use specialty distributors to supplement their purchases from broadline
distributors because the specialty distributor offers higher quality or fresher products than the
broadline distributor or provides unique products that the broadline distributor does not carry, such
as products from local farmers. Both in terms of number of SKUs and geographic coverage,
specialty distributors are typically smaller than broadline distributors.
To compete with specialty distributors, some broadliners operate specialty divisions.
Sysco, for instance, operates several specialty divisions separately from its broadline division. So,
too, does PFG, which operates Roma, a specialty division for Italian food products.

4.

Cash-and-Carry and Club Stores

Cash-and-carry stores offer a "self-service" model of food distribution, in which customers
make purchases at the store and transport the purchased goods themselves. Club stores like Costco

7

and Sam's Club also fall within this distribution channel. With limited exceptions, cash-and-carry
stores do not deliver. They also offer fewer products than broadline distributors. For example,
the largest cash-and-carry store, Restaurant Depot, only carries up t o . SKUs. Additionally,
cash-and-carry stores do not have sales personnel dedicated to individual customers. Because of
these features, the prices offered by cash-and-carry stores are significantly lower than those offered
by broadliners. The typical cash-and-carry customer is an independent restaurant that either does
not meet broadline distributors' minimum purchase requirements or needs to supplement its
broadline deliveries.
C.

Foodsenrice Distribution Customers

Foodservice distribution customers are a heterogeneous group. The largest customers, such
as group purchasing organizations and foodservice management companies, buy hundreds of
millions of dollars of product a year, whereas a single independent restaurant buys a small fraction
of that amount. Some customers choose to buy from a single line of distribution; others mix
distribution channels. Some customers demand fixed pricing, whereas others buy based on daily
market rates. Generally speaking, however, customers can be grouped into several categories.
/,

Group Purchasing Organizations

Group purchasing organizations, or GPOs, are entities that, through the collective buying
power of their members, obtain lower prices for foodservice products. GPOs negotiate direct
contracts with food manufacturers and thereby secure lower prices than a member could
individually.
GPOs do not have their own distribution capabilities. Rather, they contract with broadline
distributors for warehousing, delivery, and operational services. When a member purchases a
GPO-contracted good, the member pays the broadliner on a "cost-plus" basis: it pays for the "cost"

8

of the product based on the GPO' s contract with the manufacturer, "plus" the distributor's markup,
which is negotiated between the GPO and distributor. GPOs also contract with broadliners to
allow their members to purchase products from breadline distributors (rather than from
manufacturers), in which case they pay the breadline distributor both the distribution margin
(markup) and the cost for the product set by the distributor. GPO members also buy from specialty
distributors.
GPOs are prominent in the healthcare and hospitality industries. The largest healthcare
GPOs include Premier, Novation, and Navigator. One of the largest hospitality GPOs is Avendra.
These companies annually spend hundreds of millions of dollars on breadline distribution.

2.

Foodservice Management Companies

Foodservice management companies operate cafeterias or other dining facilities at
educational institutions, sports venues, and workplaces. Like GPOs, foodservice management
companies negotiate contracts with food manufacturers and rely on broadliners for storage and
delivery; they also purchase directly from broadliners and specialty distributors. Sodexo, Compass
Group, and Aramark are among the country's largest foodservice management companies. Those
three companies each spend approximately

3.

ti billion annually on breadline distribution.

Hospitality Chains

Hospitality chains are also large purchasers. Hilton Hotels, for example, uses a system
similar to a GPO. It has a subsidiary, Hilton Supply Management LLC, which negotiates contracts
on behalf of over 4,000 members to obtain food and related items at a discounted price. Other
hospitality companies, such as Hyatt Hotels, purchase most of their foodservice products through
Avendra, the largest hospitality GPO. Starwood Hotels and Interstate Hotels & Resorts, on the
other hand, directly manage food procurement and distribution contracts for their properties.

9

Regardless of the food purchasing model, hospitality chains also buy food directly from
broadliners and rely on them for their storage and delivery needs.

These companies spend

hundreds of millions of dollars annually on broadline distribution. Individual hotels and resorts
also buy directly from specialty distributors, as needed.

4.

Restaurant Chains

Restaurant chains come in many sizes with a wide variety of characteristics. This customer
category includes nationwide fast food or quick service restaurants such as Burger King and
Subway, each with thousands of locations in all regions of the country. It also includes regional
fast casual restaurant chains such as Culver's (primarily in the Midwest) and Zaxby's (primarily
in the Southeast), as well as nationwide sit-down restaurant chains, such as Applebee's and
Cheesecake Factory. The channel of distribution a chain restaurant uses depends, in part, on the
number of locations and menu variety. The greater the number of locations and the fewer the
menu items, the more amenable the chain restaurant is to systems distribution.

5.

Government Agencies

Some government agencies, notably the Defense Logistics Agency and the U.S.
Department of Veterans Affairs, are large buyers of broadline distribution services.

Those

agencies, for instance, spend hundreds of millions of dollars each year on broadline foodservice.

6.

"Street" Customers

Customers with only one location, or a handful of locations, are referred to in the industry
as "street," "local," or "independent" customers. Examples of this type of customer include
independent restaurants and resorts.

Unlike the types of customers identified above, street

customers usually do not have written contracts with broadliners; instead, they negotiate prices on
a weekly or other short term basis. They also tend to diversify their purchases among multiple

10

distribution channels. Indeed, according to a study conducted by an industry trade group, the
International Foodservice Distributors Association, the typical independent customer uses up to
twelve different supply sources. DX-00293 at 29.

II.

CASE HISTORY
A.

Sysco and USF

Defendant Sysco is a publicly-traded corporation headquartered in Houston, Texas. As the
largest North American foodservice distributor, Sysco distributes food to approximately 425,000
customers in the United States, generating sales of about $46. 5 billion in fiscal year 2014. CompI.
for TRO and Prelim. lnj. Pursuant to Section 13(b) of the FTC Act, ECF No. 3 at if 24 [hereinafter
Compl.]. Sysco's business is divided into three divisions: (i) Broadline (81 percent of revenue);
(ii) SYGMA, which provides systems distribution (13 percent ofrevenue); and (iii) "Other," which
provides, among other things, specialty produce distribution (6 percent of revenue). Id.

if

25.

Sysco's broadline division operates out of 72 distribution centers located across the United States.

Id
Defendant US Foods, Inc., is a privately-held corporation based in Rosemont, Illinois, and
is a wholly owned subsidiary of Defendant USF Holding Corp.

USF is controlled by the

investment funds of Clayton, Dubilier & Rice, Inc., and KKR & Co., L.P. The second-largest
foodservice distributor in the United States, USF operates 61 broadline distribution centers across
the country and serves over 200,000 customers nationwide. Id.

if 27.

In fiscal year 2013, USF

generated approximately $22 billion in revenue. Id

B.

History of the Merger

On December 8, 2013, Sysco and USF signed a definitive merger agreement, whereby
Sysco agreed to acquire all shares ofUSF for $500 million in cash and $3 billion in newly issued

11

Sysco equity.

Sysco also agreed to assume $4.7 billion in USF's existing debt, for a total

transaction value of $8.2 billion. The merger agreement expires on September 8, 2015.
After announcing the merger, Defendants filed a notification regarding the merger as
required by the Hart-Scott-Rodino Antitrust Improvements Act, 15 U.S.C. § 18a. As a result of
this filing, the FTC commenced an investigation to determine the effects of the proposed
combination. The FTC is an administrative agency of the United States federal government that
derives its authority from the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 41 et seq.
Among other duties, the FTC is vested with authority and responsibility for enforcing Section 7 of
the Clayton Act, 15 U.S.C. § 18, and Section 5 of the FTC Act, 15 U.S.C. § 45.
During the FTC's investigation, and with the hope of gaining regulatory approval, on
February 2, 2015, Sysco and USF announced an asset purchase agreement with regional broadline
distributor Performance Food Group, Inc. ("PFG"), to sell 11 of USF's 61 distribution centers to
PFG, contingent upon the successful completion of the merger. The 11 USF distribution centersintended to increase PFG' s geographic footprint-are, for the most part, located within the western
half of the country, where PFG at present has only one distribution center.

Currently, the

11 distribution centers account for approximately $4.5 billion in broadline sales. PX09250-0l l.
The parties also executed a Transition Services Agreement. Under the two agreements, PFG
would acquire all assets and employees at the 11 distribution centers, all customers under those
contracts (assuming the customers consent), and the right to use USF private label products at
those facilities for up to three years.
C.

History of these Proceedings

On February 19, 2015, the Commissioners of the FTC voted 3-2 to authorize the filing of
an administrative complaint in the FTC's Article I court to block the proposed merger, based on a

12

finding that there was reason to believe that the merger would violate Section 7 of the Clayton Act,
15 U.S.C. § 18, and Section 5 of the FTC Act, 15 U.S.C. § 45. Trial before an Administrative Law
Judge is scheduled to begin on July 21, 2015.
Also, on February 19, 2015, the Commission authorized the FTC staff to seek a preliminary
injunction in federal court under Section 13(b) of the FTC Act in order to prevent Defendants from
completing the merger. The FTC filed this action on February 20, 2015, seeking a temporary
restraining order ("TRO") and preliminary injunction to maintain the status quo until the
conclusion of the administrative trial. The FTC is joined in this action by the District of Columbia
and the following states:

California, Illinois, Iowa, Maryland, Minnesota, Nebraska, North

Carolina, Ohio, Tennessee, Pennsylvania, and Virginia (collectively, the "Plaintiff States"). By
and through their respective Attorneys General, the Plaintiff States have joined with the FTC in
this action pursuant to Section 16 of the Clayton Act, 15 U.S.C. § 26, in their sovereign or quasisovereign capacities as parens patriae on behalf of the citizens, general welfare, and economy of
each of their states.
On February 24, 2015, Defendants stipulated to a TRO, agreeing not to merge until three
calendar days after this court rules on the FTC's Motion for Preliminary Injunction. The court
entered the stipulated TRO on February 27, 2015. Defendants have since represented that they
will abandon the transaction if this court grants the preliminary injunction.
On March 4, 2015, the court scheduled a preliminary injunction hearing to start on May 5,
2015. The parties' counsel accomplished an extraordinary amount of work in the two months
leading up to the evidentiary hearing. They exchanged approximately 14.8 million documents and
took 72 depositions. Moreover, in addition to the more than 90 industry participant declarations
that accompanied the FTC's motion for preliminary injunction, Defendants obtained 65 new

13

declarations or counter declarations, while the FTC obtained an additional 25 new or counter
declarations.

During the eight-day evidentiary hearing, the court heard testimony from 20

witnesses, either live or via video deposition. The parties submitted a total of 185 declarations
into evidence, as well as over 3,500 exhibits and excerpts of over 70 depositions. The court heard
closing arguments on May 28, 2015.
LEGAL STANDARD
I.

SECTION 7 OF THE CLAYTON ACT
Section 7 of the Clayton Act prohibits mergers or acquisitions "the effect of [which] may

be substantially to lessen competition, or to tend to create a monopoly" in "any line of commerce
or in any activity affecting commerce in any section of the country." 15 U.S.C. § 18. When the
FTC has "reason to believe that a corporation is violating, or is about to violate, Section 7 of the
Clayton Act," it may seek a preliminary injunction under Section 13 (b) of the FTC Act to "prevent
a merger pending the Commission's administrative adjudication of the merger's legality." FTC v.
Staples, Inc., 970 F. Supp. 1066, 1070 (D.D.C. 1997) (citing 15 U.S.C. § 53(b)). "Section 13(b)

provides for the grant of a preliminary injunction where such action would be in the public
interest-as determined by a weighing of the equities and a consideration of the Commission's
likelihood of success on the merits." FTC v. HJ Heinz Co., 246 F.3d 708, 714 (D.C. Cir. 2001)
(citing 15 U.S.C. § 53(b)).
II.

SECTION 13(B) STANDARD FOR PRELIMINARY INJUNCTIONS
The Section 13(b) standard for preliminary injunctions differs from the familiar equity

standard applied in other contexts.

As the Court of Appeals explained in Heinz: "Congress

intended this standard to depart from what it regarded as the then-traditional equity standard, which
it characterized as requiring the plaintiff to show: (1) irreparable damage, (2) probability of

14

success on the merits and (3) a balance of equities favoring the plaintiff." 246 F.3d at 714 (internal
citation omitted). The court continued: "Congress determined that the traditional standard was
not 'appropriate for the implementation of a Federal statute by an independent regulatory agency
where the standards of the public interest measure the propriety and the need for injunctive relief.'"

Id. (quoting HR. Rep. No. 93-624 at 31 (1971)); see also FTC v. Exxon Corp., 636 F.2d 1336,
1343 (D.C. Cir. 1980) ("In enacting [Section 13(b)], Congress further demonstrated its concern
that injunctive relief be broadly available to the FTC by incorporating a unique 'public interest'
standard in 15 U.S.C. [§] 53(b), rather than the more stringent, traditional 'equity' standard for
injunctive relief.").
Under Section 13(b)'s "public interest" standard, "[t]he FTC is not required to establish
that the proposed merger would in fact violate section 7 of the Clayton Act." Heinz, 246 F.3d at
714. Rather, to demonstrate the likelihood of success on the merits, "the government need only
show that there is a reasonable probability that the challenged transaction will substantially impair
competition." Staples, 970 F. Supp. at 1072 (citation omitted) (internal quotation marks omitted).
A trial court evaluating a demand for injunctive relief therefore must "measure the
probability that, after an administrative hearing on the merits, the Commission will succeed in
proving that the effect of the [proposed] merger 'may be substantially to lessen competition, or to
tend to create a monopoly' in violation of section 7 of the Clayton Act."' Heinz, 246 F.3d at 714
(quoting 15 U.S. C. § 18). The FTC satisfies this standard if it "has raised questions going to the
merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough
investigation, study, deliberation and determination by the FTC in the first instance and ultimately
by the Court of Appeals." Id. at 714-15 (citations omitted) (internal quotation marks omitted).
This standard reflects Congress' use of the words "may be substantially to lessen competition" in

15

Section 7, as Congress' concern "was with probabilities, not certainties" of decreased competition.

Id at 713 (citing Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962)) (other citations
omitted).
Though more relaxed than the traditional equity injunction standard, Section 13(b)' s public
interest standard nevertheless demands rigorous proof to block a proposed merger or acquisition.
"[T]he issuance of a preliminary injunction prior to a full trial on the merits is an extraordinary
and drastic remedy." Exxon, 636 F.2d at 1343 (citations omitted) (internal quotation marks
omitted). That is because "the issuance of a preliminary injunction blocking an acquisition or
merger may prevent the transaction from ever being consummated." Id

"Given the stakes, the

FTC's burden is not insubstantial .... " FTC v. Arch Coal, 329 F. Supp. 2d 109, 123 (D.D.C.
2004), case dismissed, No. 04-5291, 2004 WL 2066879 (D.C. Cir. Sept. 15, 2004). "[A] showing
of a fair or tenable chance of success on the merits will not suffice for injunctive relief." Id
(citation omitted) (internal quotation marks omitted).

III.

BAKER HUGHES BURDEN-SHIFTING FRAMEWORK
In United States v. Baker Hughes, Inc., 908 F.2d 981, 982-83 (D.C. Cir. 1990), the Court

of Appeals established a burden-shifting framework for evaluating the FTC's likelihood of success
on the merits. See Heinz, 246 F.3d at 715 (applying Baker Hughes "to the preliminary injunctive
relief stage"). Under the Baker Hughes framework, the FTC bears the initial burden of showing
that the merger would lead to "undue concentration in the market for a particular product in a
particular geographic area." Baker Hughes, 908 F.2d at 982; see also Heinz, 246 F.3d at 715
(quoting United States v. Phi/a. Nat'! Bank, 374 U.S. 321, 363 (1963)) ("[T]he government must
show that the merger would produce 'a firm controlling an undue percentage share of the relevant
market, and [would] result[ ] in a significant increase in the concentration of firms in that

16

market.'"). Such a showing establishes a "presumption" that the merger will substantially lessen
competition. Baker Hughes, 908 F.2d at 982.
The burden then shifts to the defendant to rebut the presumption by offering proof that "the
market-share statistics [give] an inaccurate account of the [merger's] probable effects on
competition in the relevant market." Heinz, 246 F.3d at 715 (quoting United States v. Citizens &
S Nat 'l Bank, 422 U.S. 86, 120 (1975)) (internal quotation marks omitted); see also Baker Hughes,

908 F.2d at 991 ("[A] defendant seeking to rebut a presumption of anticompetitive effect must
show that the prima facie case inaccurately predicts the relevant transaction's probable effect on
future competition.").

"The more compelling the prima facie case, the more evidence the

defendant must present to rebut it successfully." Baker Hughes, 908 F.2d at 991. "A defendant
can make the required showing by affirmatively showing why a given transaction is unlikely to
substantially lessen competition, or by discrediting the data underlying the initial presumption in
the government's favor." Id.

"If the defendant successfully rebuts the presumption, the burden of producing additional
evidence of anticompetitive effect shifts to the government, and merges with the ultimate burden
of persuasion, which remains with the government at all times." Id. at 983. "[A] failure of proof
in any respect will mean the transaction should not be enjoined." Arch Coal, 329 F. Supp. 2d at
116. The court must also weigh the equities, but if the FTC is unable to demonstrate a likelihood
of success, the equities alone cannot justify an injunction. Id.

DISCUSSION
I.

THE RELEVANT MARKET
Merger analysis starts with defining the relevant market. United States v. Marine Bancorp.,

418 U.S. 602, 618 (1974) (Market definition is "'a necessary predicate' to deciding whether a

17

merger contravenes the Clayton Act.") (quoting United States v. E.J. Du Pont De Nemours & Co.,
353 U.S. 586, 593 (1957)); see also FTC v. Swedish Match, 131 F. Supp. 2d 151, 156 (D.D.C.
2000). The relevant market has two component parts. "First, the 'relevant product market'
identifies the product and services with which the defendants' products compete. Second, the
'relevant geographic market' identifies the geographic area in which the defendant competes in
marketing its products or service." Arch Coal, Inc., 329 F. Supp. 2d at 119; see also FTC v. CCC
Holdings Inc., 605 F. Supp. 2d 26, 37 (D.D.C. 2009) (same). "Defining the relevant market is
critical in an antitrust case because the legality of the proposed merger[] in question almost always
depends upon the market power of the parties involved."

FTC v. Cardinal Health, Inc.,

12 F. Supp. 2d 34, 45 (D.D.C. 1998).
Market definition has been the parties' primary battlefield in this case. According to the
FTC, the relevant product market is broadline foodservice distribution. Compl.

~

40. Because

broadline distribution is defined by a number of distinct attributes-such as a vast array of product
offerings, private label offerings, next-day delivery, and value-added services-the FTC contends
that the other modes of distribution are not reasonable substitutes for broadline distribution and
thus must be excluded from the product market.
The FTC further contends that, within the product market for broadline distribution, there
is another product market for foodservice distribution sold to "national" customers. Id

~ 44.

These

customers, the FTC asserts, are distinct from "local" or "street" customers in multiple respects.
National customers have a nationwide or multi-regional footprint and, because of that footprint,
typically contract with a broadliner that has geographically dispersed distribution centers; they
usually make purchases under a single contract that offers price, product, and service consistency
across all facilities; and they award contracts through a request for proposal or bilateral

18

negotiations.

National customers include, among others, GPOs, foodservice management

companies, hospitality chains, and national chain restaurants. By contrast, the FTC says, the
typical "local" or "street" customer is an independent restaurant, which does not require multiple,
geographically dispersed distribution centers; purchases in smaller quantities; and ordinarily does
not have a contract with its foodservice distributor(s) as it negotiates purchases on a weekly or
other short-term basis.

The FTC contends that for national customers the geographic market is

nationwide. For local customers, it argues that the geographic market is localized near Defendants'
distribution centers.
Defendants counter that the foodservice distribution market cannot be sliced and diced as
advocated by the FTC. According to Defendants, the relevant market is the entire $231 billion
foodservice distribution industry, consisting not only of broadline food distributors, but also
specialty distributors, systems distributors, and cash-and-carry stores. All of these modes of
distribution, Defendants argue, compete for foodservice distribution customer spending. Based on
this market definition, Defendants assert that together, they make up approximately 25 percent of
total foodservice distribution sales. They also dispute that there is a product market for "national
customers," asserting that such a market has been created by the FTC out of whole cloth to
artificially inflate Defendants' market shares. According to the FTC, Defendants combined have,
at least, a 59 percent share of the national customer product market.
A.

Broadline Distribution as a Relevant Product Market

1.

Legal Principles Affecting the Definition of the Relevant Product Market

The Supreme Court in Brown Shoe set forth the general rule for defining a product market:
"The outer boundaries of a product market are determined by the reasonable interchangeability of
use or the cross-elasticity of demand between the product itself and substitutes for it." Brown

19

Shoe, 370 U.S. at 325. Stated another way, a product market includes all goods that are reasonable
substitutes, even though the products themselves are not entirely the same. Cardinal Health,
12 F. Supp. 2d at 46; Staples, Inc., 970 F. Supp. at 1074 (stating the question as "whether two
products can be used for the same purpose, and if so, whether and to what extent purchasers are
willing to substitute one for the other").
Whether goods are "reasonable substitutes" depends on two factors:
interchangeability and cross-elasticity of demand.

functional

"Functional interchangeability" refers to

whether buyers view similar products as substitutes. See id ("Whether there are other products
available to consumers which are similar in character or use to the products in question may be
termed 'functional interchangeability.'"). "If consumers can substitute the use of one for the other,
then the products in question will be deemed 'functionally interchangeable.'" Arch Coal, 329

F. Supp. 2d at 119; see also United States v. E.l du Pont de Nemours & Co., 351 U.S. 377, 393
(1956)) ("Determination of the competitive market for commodities depends on how different
from one another are the offered commodities in character or use, how far buyers will go to
substitute one commodity for another.").

"Courts will generally include functionally

interchangeable products in the same product market unless factors other than use indicate that
they are not actually part of the same market." Arch Coal, 329 F. Supp. 2d at 119.
As for cross-elasticity of demand, there the question turns in part on price. E.l Du Pont
De Nemours, 351 U.S. at 400 ("An element for consideration as to cross-elasticity of demand
between products is the responsiveness of the sales of one product to price changes of the other.").
If an increase in the price for product A causes a substantial number of customers to switch to

product B, the products compete in the same market. See id ("If a slight decrease in the price of
cellophane causes a considerable number of customers of other flexible wrappings to switch to

20

cellophane, it would be an indication ... that the products compete in the same market."); Arch

Coal, 329 F. Supp. 2d at 120. Price is not, however, the only variable in determining the crosselasticity of demand between products. Cross-elasticity of demand also depends on the "ease and
speed with which customers can substitute [the product] and the desirability of doing so." FTC v.

Whole Foods Market, Inc., 548 F.3d 1028, 1037 (D.C. Cir. 2008) (Brown, J.). Thus, substitution
based on a reduction in price will not correlate to a high cross-elasticity of demand unless the
switch can be accomplished without the consumer incurring undue expense or inconvenience.

See Phila. Nat'l Bank, 374 U.S. at 358 (observing that "[t]he factor of inconvenience localizes
banking competition as effectively as high transportation costs in other industries").
Three other established principles are critical to defining the relevant product market in
this case. The first is that the "product" that comprises the market need not be a discrete good for
sale. As the Supreme Court has made clear: "We see no barrier to combining in a single market
a number of different products or services where that combination reflects commercial realities."

United States v. Grinnell Corp., 384 U.S. 563, 572 (1966); Phila. Nat'l Bank, 374 U.S. at 356
(citation omitted) (finding that "the cluster of products ... and services ... denoted by the term
'commercial banking' ... composes a distinct line of commerce"). Thus, what is relevant for
consideration here is not any particular food item sold or delivered by Defendants, but the full
panoply of products and services offered by them that customers recognize as "breadline
distribution."
Second, "the mere fact that a firm may be termed a competitor in the overall marketplace
does not necessarily require that it be included in the relevant product market for antitrust
purposes." Staples, 970 F. Supp. at 1075; Cardinal Health, 12 F. Supp. 2d at 47 (same). That is
because market definition hinges on whether consumers view the products as "reasonable

21

substitutes." Cardinal Health, 12 F. Supp. 2d at 46. So, for example, fruit can be bought from
both a grocery store and a fruit stand, but no one would reasonably assert that buying all of one's
groceries from a fruit stand is a reasonable substitute for buying from a grocery store. See Whole
Foods, 548 F.3d at 1040 (Brown, J.) ("The fact that a customer might buy a stick of gum at a
supermarket or at a convenience store does not mean there is no definable groceries market.").
Thus, as applicable here, the fact that buyers may cross-shop between modes of food distribution
does not necessarily make them part of the same market for the purpose of merger analysis.
Third, market definition is guided by the "narrowest market" principle. Arch Coal, 329
F. Supp. 2d at 120. That is, "a relevant market cannot meaningfully encompass [an] infinite range

[of products]. The circle must be drawn narrowly to exclude any other product to which, within
reasonable variations in price, only a limited number of buyers will tum." Times-Picayune Puhl g
Co. v. United States, 345 U.S. 594, 612 n.31 (1953). Judge Bates inArch Coal succinctly described
the "narrowest market" principle in practice as follows:
The analysis begins by examining the most narrowly-defined product or group of
products sold by the merging firms to ascertain ifthe evidence and data support the
conclusion that this product or group of products constitutes a relevant market. If
not, the analysis shifts to the next broadest product grouping to test whether that is
a relevant market. This process continues until a relevant market is identified.
Arch Coal, 329 F. Supp. 2d at 120; see also United States v. H&R Block, Inc., 833 F. Supp. 2d 36,
58-60 (D.D.C. 2011) (explaining "the principle that the relevant product market should ordinarily
be defined as the smallest product market that will satisfy the hypothetical monopolist test").
The critical question here, therefore, is whether broadline food distribution qualifies as the
relevant product market, or whether the product market should be expanded to include other modes
of distribution.

22

2.

The Brown Shoe "Practical Indicia"

Courts look to two main types of evidence in defining the relevant product market: the
"practical indicia" set forth by the Supreme Court in Brown Shoe and testimony from experts in
the field of economics. The court turns first to the Brown Shoe factors.
According to Brown Shoe, "[t]he boundaries of [a product market] may be determined by
examining such practical indicia as industry or public recognition ... , the product's peculiar
characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity
to price changes, and specialized vendors." Brown Shoe, 370 U.S. at 325. "These indicia seem to
be evidentiary proxies for direct proof of substitutability." Rothery Storage & Van Co. v. Atlas

Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986); H&R Block, 833 F. Supp. 2d at 51. Courts
have relied on the Brown Shoe factors in a number of cases to define the relevant product market. 2

See, e.g., Staples, 970 F. Supp. at 1075-80; Cardinal Health, 12 F. Supp. 2d at 46-48; Swedish
Match, 131 F. Supp. 2d at 159-64; CCC Holdings, 605 F. Supp. 2d at 39-44; H&R Block,
833 F. Supp. 2d at 51-60.
The court finds that the Brown Shoe factors support the FTC's position that broadline
foodservice distribution is the relevant product market for evaluating the proposed merger.
As discussed below, an analysis of those factors demonstrates that other modes of foodservice
distribution are not functionally interchangeable with broadline foodservice distribution.
a.

Product breadth and diversity

The most distinguishing feature of broadline distribution is its product breadth and
diversity. Broadliners stock thousands of SKUs across every major food and food-related category

2

The Brown Shoe practical indicia may indeed be "old school," as Sysco's counsel asserted at oral argument, Closing
Arg. Hr'g Tr. 44, and its analytical framework relegated "to the jurisprudential sidelines," see Whole Foods, 548 F.3d
at 1059 (Kavanaugh, J., dissenting). But Brown Shoe remains the law, and this court cannot ignore its dictates.

23

in their distribution centers. See Staples, 970 F. Supp. at 1078 (comparing SKU selections among
different sales outlets). The average Sysco or USF distribution center carries o v e r - SKUs.
Regional broadliners cany fewer SKUs than Defendants, but still maintain between 6,000 to
19,000 SKUs in their distribution centers. PX09350-215, Table 22. Broadliners also offer "private
label" products, which are a broadliner's branded products. Sysco has o v e r - private-label
SKUs, and USF has over • . PX09350-219, Table 32. This product breadth and diversity
enables broadliners to serve a wide variety of customers and to be a one-stop shop, if the customer
wishes. As USF's Executive Vice President of Strategy David Schreibman testified at the FTC's
Investigational Hearing: "[W]e have such a broad selection of SKUs because that is a key
consideration of our customer base, you have to have what they want." Investig'I Hr'g Tr.,
PX00590-006 at 24.
The other distribution channels pale in comparison to broadline in terms of product breadth
and diversity.

Systems distributors cany a limited number of SKUs-usually only a few

thousand-in their distribution centers. PX09350-215, Table 22. These SKUs are ordinarily
proprietary in nature and used only by the customers for which they were developed, meaning that
systems products are not readily sellable to other customers. Specialty distributors also carry a
limited number of SKUs, usually for niche products-such as fresh produce, meat, seafood, dairy,
or bakery items-which tend to complement broadline offerings.

As Sysco's CEO William

DeLaney explained: "We own [specialty] to create great traction with our customers, ... we felt
we had some gaps in our [broadline] product offerings, whether it was special produce, special cut
steaks .... " Investig'l Hr'g Tr., PX00580-010 at 38. Cash-and-carry stores likewise do not have
the same breadth and diversity of products as broadline distributors. One of the largest cash-andcarry stores, Restaurant Depot, carries. SKUs. USF's CHEF' STORE carries less than 4,000.

24

PX09350-216, Table 26.

A number of customer declarants stated that cash-and-carry store

products tended to be less uniform and inferior in quality to products carried by broadliners.
b,

Distinct facilities and operations

No one entering a systems, specialty, or cash-and-carry outlet would mistake it for a
broadline distribution facility. See Staples, 970 F. Supp. at 1079 ("No one entering a Wal-Mart
would mistake it for an office superstore .... You certainly know an office superstore when you
see one."). Broadline distribution centers are massive. The average size of a Sysco distribution
center is over 380,000 square feet; for USF, it is over 270,000 square feet.

Some regional

distributors also have distribution centers ranging from 200,000 to 400,000 square feet. PX09350215, Table 25.

Non-broadline facilities are generally smaller in size and cannot readily be

converted into a broadline facility or accommodate broadline customers.
Broadline facilities also have large salesforces attached to them.

Broadline facilities

typically have dozens of sales representatives, while systems distributors have few sales
representatives at their facilities. PX09350-215, Table 23. Cash-and-carry stores generally do not
have dedicated account representatives at all. Because the model of distribution is self-service,
cash-and-carry sales representatives do not learn the individualized needs of their customers in a
systematic manner.
Additional proof that broadline foodservice distribution is a separate product market comes
from the corporate structure oflarge foodservice distributors. Major foodservice distributors offer
distribution in other channels besides broadline, but they run those businesses separately from their
broadline businesses. See, e.g., H&R Block, 833 F. Supp. 2d at 56 (observing that digital do-ityourself tax preparation was a distinct product market from assisted tax preparation because H&R
Block ran them as "separate business units").

25

Sysco runs its systems distribution business,

SYGMA, as a separate division. So, too, does PFG, which runs a systems business known as PFG
Customized. Sysco also runs separate specialty divisions, such as Fresh Point, a fresh produce
supplier. So, too, does PFG, which has its own specialty division, Roma, which supplies Italian
restaurants and pizza parlors. And USF runs a separate cash-and-carry operation, CHEF' STORE.
This type of corporate structuring shows that those who run and manage foodservice companies
view broadline as distinct from other modes of distribution.
c.

Delivery

Timely and reliable delivery is critical in the food distribution industry. Unless customers
can get the food they want when they need it, their businesses are at risk of losing clients and
money. Broadliners have the capacity-due in large part to their extensive fleet of service
vehicles, PX09350-217, Table 29-to offer frequent and flexible delivery schedules to meet
customer needs, including next-day delivery. Ample evidence shows that, for a wide array of
broadline customers-from large GPOs to individually-owned restaurants-next-day delivery is
crucial to meeting their needs.
Neither systems distributors nor cash-and-carry stores offer the same degree of frequency
and flexibility of delivery as broadliners. 3 Systems distributors tend to make large, limited-SKU
deliveries on a fixed schedule. Also, systems fleets, on average, travel longer distances than
broadline fleets to make deliveries. Carry-and-carry stores, for the most part, do not deliver.
Rather, their primary model is self-service-that is, the customer transports the merchandise on
her own. Some cash-and-carry outlets do offer delivery options. Costco, for example, offers
limited-mileage delivery from some of its stores, and Restaurant Depot leases refrigerated trucks

3
There was little evidence presented about the delivery capabilities of specialty distributors, aside from the fact that
they have a limited geographic range of delivery. See PX00427-002 (Sodexo declarant indicating that specialty
distributors covered a limited geographic range); PX00594-012 at 45 (MedAssets stating the same); PX00407-002
(Amerinet stating the same).

26

to its best customers.

But those programs are quite limited and cannot substitute for the

comprehensive and flexible delivery networks offered by broadliners to all of their customers.
d.

Customer service and value-added services

Another distinguishing feature of broadline distributors is their high degree of customer
service and value-added service offerings. For example, broadliners offer menu and nutritionalmeal planning services to, among others, healthcare, hospitality, and restaurant customers. They
also offer value-added services at their distribution facilities, such as food safety training and new
product updates. Other modes of delivery do not generally offer comparable value-added services.
e.

Distinct customers

Due in large part to the breadth of their product and service offerings, broadliners are
capable of serving a wide range of customers, including classes of customers that the other
channels cannot reach. Systems is a more efficient and cost-effective mode of distribution for fast
food and quick service restaurants. Specialty distributors can provide higher quality and fresher
products in certain categories, but have limited product offerings and charge higher prices than
broadliners. Cash-and-carry stores are less expensive and more accessible for buyers such as
independent restaurants, but their lack of delivery service makes them unsuitable for the large
majority of foodservice customers.
These other channels, therefore, simply cannot and do not serve as wide an array of
customers as broadliners do.

The largest broadline customers, such as GPOs, foodservice

management companies, and hospitality providers, cannot use systems or cash-and-carry for their
needs. They purchase only modest quantities of product from specialty distributors. Even most
independent restaurants cannot use cash-and-carry stores as a reasonable substitute for their
broadliner, even though such stores offer lower prices.

27

f

Distinct pricing

Broadliners generally compete only against other broadliners on pricing. PFG's President
and CEO, George Holm, who has over 37 years of industry experience, testified that systems and
specialty distributors do not significantly affect the pricing and services that PFG offers to its
customers. Hr' g Tr. 575-76, 643. And, although broadliners recognize that cash-and-carry stores
provide lower prices, the record does not show broadliners benchmarking their prices against cashand-carry stores or lowering prices to compete with them. To the contrary, as USF's Executive
Vice President of Strategy David Schreibman succinctly stated in an email comparing pricing
between USF as a broadliner and its own cash-and-carry division, CHEF' STORE: "In the store,
we will be competitive with

on a similar cost model. On the truck, we will be

competitive with broadline distributors on a similar cost model." PX03l14-003.
g.

Industry or public recognition

Overwhelmingly, the evidence shows that players m the foodservice distribution
industry-both its suppliers and customers-recognize broadline, systems, specialty, and cashand-carry to be distinct modes of distribution. See Rothery Storage, 792 F.2d at 219 n.4 ("The
'industry or public recognition of the submarket as a separate economic' unit matters because we
assume that economic actors usually have accurate perceptions of economic realities."). The court
received both live and out-of-court sworn testimony from Defendants' executives; executives from
other broadline distributors; officers of non-broadline companies; and customers, large and small.
They uniformly observed that these modes of distribution are distinct in the variety of ways
described above. In short, the industry widely recognizes that broadline distributors offer a unique
cluster of products and services that is not functionally interchangeable with other modes of
distribution.

28

h,

Defendants' response to Brown Shoe "practical indicia"

Defendants do not, for the most part, contest the above-described distinctions between
broadline and other channels of distribution.

Instead, Defendants contend that defining the

relevant market to include only broadliners "misunderstands consumer behavior." Memo ofDefs.
Sysco Corp., USP Holding Corp. and US Foods, Inc., in Opp'n to Pis.' Mot. for A Prehm Inj.,
ECF No. 130 at 19 [hereinafter Defs.' Opp'n Br.]. They argue "customers simultaneously can,
and routinely do, choose to patronize competitors of all stripes offering fungible goods through
different but overlapping distribution channels." Id. What matters, Defendants claim, is that nonbroadliners are able to constrain a broadliner's pricing by competing for customers who are able
to move their entire purchasing, or portions of their purchasing, between channels. Id. at 19
("Whether a substitute channel is a 'comprehensive' substitute is irrelevant to that question.").
Defendants offer as one compelling example the burger chain Five Guys, which recently reallocated over $300 million in annual business from USP to a collection of regional broadliners
and systems distributors.
Defendants are indisputably correct that customers buy across channels, especially
independent restaurants. They are also unquestionably correct that some customers, particularly
quick service and fast food restaurant chains, are capable of moving large segments of business
from broadline to systems. But the fact that Defendants sometimes compete against other channels
of distribution in the larger marketplace does not mean that those alternative channels belong in
the relevant product market for purposes of merger analysis. See Staples, 970 F. Supp. at 1075
("[T]he mere fact that a firm may be termed a competitor in the overall marketplace does not
necessarily require that it be included in the relevant product market for antitrust purposes."); see
also Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis ofAntitrust Principles

29

and Their Application~ 565b (4th ed. 2014) ("[I]t would be improper to group complementary
goods into the same relevant market just because they occasionally substitute for one another.
Substitution must be effective to hold the primary good to a price near its costs[.]").
Two key decisions from this jurisdiction, Whole Foods and Staples, support this
conclusion. In Whole Foods, the question was whether there existed a product market for premium
natural and organic supermarkets ("PNOS") separate from ordinary supermarkets. The Court of
Appeals' ultimate decision was fractured-each judge issued a separate opinion, leaving no
controlling opinion from the Court. Two judges, however, concluded that PNOS is a separate
product market from ordinary supermarkets, even though there was evidence that customers
"cross-shopp[ed]" between the two. 548 F.3d at 1040 (Brown, J.); id. ("But the fact that PNOS
and ordinary supermarkets 'are direct competitors in some submarkets ... is not the end of the
inquiry."') (quoting United States v. Conn. Nat. Bank, 418 U.S. 656, 664 n.3 (1974)); id. at 1048
(Tatel, J.) ("That Whole Foods and Wild Oats have attracted many customers away from
conventional grocery stores by offering extensive selections of natural and organic products thus
tells us nothing about whether [they] should be treated as operating in the same market as
conventional grocery stores."). Both judges agreed that just because customers were able to buy
some categories of grocery products from both outlets-similar to how broadline customers are
able to purchase some products from other modes of distribution-did not mean that PNOS was
in the same product market as grocery stores. See id. at 1040 (Brown, J.) (citing testimony that
"Whole Foods competes actively with conventional supermarkets for dry groceries sales, even
though it ignores their prices for high-quality perishables"); id. at 1049 (Tatel, J.) ("As Judge
Brown's opinion explains, this suggests that any competition between Whole Foods and

30

conventional retailers may be limited to a narrow range of products that play a minor role in Whole
Food's profitability.").
The court in Staples held much the same. There, the question was whether consumable
office supplies sold by office superstores constituted a separate product market from office
supplies sold elsewhere. See Staples, Inc., 970 F. Supp. at 1073. The court acknowledged that no
matter who sells them, office supply products-to some extent, like food products-are
"undeniably the same." Id at 1075. The court nevertheless held that the sale of office supplies
through superstores constituted the relevant product market. "[T]he unique combination of size,
selection, depth and breadth of inventory offered by the superstores distinguishes them from other
retailers." Id at 1079. Those words apply with equal force to broadline distributors relative to
other food distribution channels. See also Cardinal Health, 12 F. Supp. 2d at 47 (concluding that
the wholesale drug industry "provide[s] customers with an efficient way to obtain prescription
drugs through centralized warehousing, delivery, and billing services that enable the customers to
avoid carrying large inventories, dealing with large number of vendors, and negotiating numerous
transactions").
Defendants have not convincingly distinguished Whole Foods or Staples. 4 Instead, they
urge the court to look to United States v. Sungard Data Sys., Inc., 172 F. Supp. 2d 172 (D.D.C.

4

In neither their opposition to the FTC's motion for preliminary injunction nor their proposed findings of fact and
conclusions of law do Defendants attempt to distinguish Whole Foods or Staples. At oral argument, Defendants
distinguished Staples based on the fact that in Staples the FTC had pricing data to show that prices were lower in
markets where both merging firms were present. Closing Arg. Hr' g Tr. at 38-40. Defendants also sought to distinguish
Whole Foods on the facts, arguing that in Whole Foods the defendants could not show that in the event of a price
increase consumers of PNOS could go to a standard grocery store. Id. at 40-41. But the court finds these efforts to
distinguish Staples and Whole Foods unconvincing. It is true that there was stronger pricing data in Staples, but
pricing data alone did not lead to the court's conclusion. The factual similarities between this case and Staples,
particularly the Brown Shoe practical indicia, are otherwise strong. As for Whole Foods, it is even more factually
analogous to this case than is Staples. If anything, the proof that other channels of distribution are not reasonable
substitutes for broadline is more compelling in this case than the evidence in Whole Foods that ordinary grocery stores
are not a reasonable substitute for PNOS.

31

2001), as an analogous case. There, the question was whether different types of disaster recovery
services for computer data comprised the same product market. Id. at 183. The court rejected the
government's product market definition as limited only to shared hotsite services because "the
government's market contains an extremely heterogeneous group of customers," id. at 182, who
"are simply too varied and too dissimilar to support any generalizations," id. at 193. Here, it is
unquestionably true that foodservice distribution customers are incredibly varied in their needs,
buying habits, and price sensitivities. But Sungard differs in one critical respect. The court there
observed that "the striking heterogeneity of the market, particularly as reflected by the conflicting

evidence relating to customer perceptions and practices," undercut the government's market
definition. Id. at 182-83 (emphasis added). Here, that simply is not the case. Though the
customers may be varied, the court has little doubt that the industry, from the perspective of both
sellers and buyers, perceives broadline to be a separate mode of food distribution. Witnesses of
all stripes had little trouble distinguishing among the different channels of distribution, and
Defendants offered no evidence of any industry confusion among them. Those facts make this
case fundamentally different from Sungard. See id. at 183 ("Customer responses were also often
vague and confused" and product definitions were "consistently unclear.").
Defendants also argue that the FTC's definition of broadline as the relevant market
improperly excludes other modes based on "a small number of customers' subjective preferences
for broadline distribution." Defs.' Opp'n Br. at 17 (footnote omitted). But the evidence, as it
relates to broadline versus other distribution channels, is hardly selective. Defendants' own
executives acknowledged the fundamental differences between broadline and other modes of

32

distribution. 5 So, too, did executives of regional broadliners, such as PFG, 6 Sharnrock,7 Reinhart
Foodservice, 8 and Shetakis9 ; consortiums, such as UniPro 10 ; systems distributors, such as
Maines 11 ; and cash-and-carry stores, such as Restaurant Depot. 12 Likewise, customers of every
size recognized the differences between broadline and the other food distribution modes. In short,
this is not the kind of case in which the testimonial evidence failed to demonstrate a consensus
among the industry's players regarding the boundaries of the product market.

3.

Expert Testimony

Having concluded that the Brown Shoe "practical indicia" support a product market for
broadline foodservice distribution, the court turns next to the second type of evidence that courts
consider in product market definition: expert testimony in the field of economics. One of the
primary methods used by economists to determine a product market is called the "hypothetical
monopolist test." This test asks whether a hypothetical monopolist who has control over a set of
substitutable products could profitably raise prices on those products. If so, the products may
comprise the relevant product market. See H&R Block, 833 F. Supp. 2d at 51-52. The theory
behind the test is straightforward. If enough consumers are able to substitute away from the

5

See, e.g., DX-00319 at 32-36 (Sysco's CEO, William DeLaney, explained that systems is a "tailored, customized
approach to certain types of customers" and the "model is not to serve GPO customers"); Hr' g Tr. 1369-70 (DeLaney
stated that, compared to cash-and-carry, broadline is a "value package" that includes delivery services and menu
consulting); Hr'g Tr. 1452 (David Schreibman ofUSF stated that "specialty distributors compete by having a broader
array of products within their expertise" that "broadliner[s] may not have in [their] portfolio"); Investigat'l Hr'g Tr.,
PX00580-008-010 at 32-39 (DeLaney explained that broadline and specialty are "two different businesses," whereas
broadline distribution includes "a full range of products"); Investigat' l Hr' g Tr., PX00584-060 at 239-40 (Louis Nasir,
the Pacific Market President for Sysco, maintained that cash-and-carry stores "don't have the same selection" of
products and "also don't have consistent inventory" compared with broadliners); Investigat'l Hr'g Tr., PX00590-0l l
at 42 (Schreibman stated that he was not aware of a cash-and-carry store that delivers).
6
See PX00429-002-007; Hr'g Tr. 571-73.
7
DX-00285 at 115-16, 164-66.
8
DX-00295 at 16-17, 22.
9
PX004l4-001.
10
DX-00260 at 139.
11
DX-00264 at 64, 141; PX00424-001 (Maines is predominantly systems, butl percent of2013 revenues were from
broadline sales).
12
DX-00314 at 146-47.

33

hypothetical monopolist's product to another product and thereby make a pnce mcrease
unprofitable, then the relevant market cannot include only the monopolist's product and must also
include the substitute goods. On the other hand, if the hypothetical monopolist could profitably
raise price by a small amount, even with the loss of some customers, then economists consider the
monopolist's product to constitute the relevant market.
The hypothetical monopolist test, which courts have applied, is set forth in the
U.S. Department of Justice and FTC's Horizontal Merger Guidelines. See U.S. Dep't of Justice &
FTC Horizontal Merger Guidelines § 4.1.1 (2010) [hereinafter Merger Guidelines]; H&R Block,
833 F. Supp. 2d at 51-52; CCC Holdings, 605 F. Supp. 2d at 40; Arch Coal, 329 F. Supp. 2d at 120
& n. 7. As stated in the Merger Guidelines:

[T]he test requires that a hypothetical profit-maximizing firm, not subject to price
regulation, that was the only present and future seller of those products ... likely
would impose at least a small but significant and non-transitory increase in price
("SSNIP") on at least one product in the market, including at least one product sold
by one of the merging firms.
Merger Guidelines§ 4.1.1. The SSNIP "is intended to represent a 'small but significant' increase
in the prices charged by firms in the candidate market" and is typically assumed to be "five percent
of the price paid by customers for the products or services to which the merging firms contribute
value." Merger Guidelines§ 4.1.2.
As applied to this case, the hypothetical monopolist test asks: If there was only one
broadline food distributor, could it profitably raise price by five percent, or would that price increase
result in a substantial number of customers moving enough of their spend to other modes of
distribution-systems, specialty, or cash-and-carry-such that the price increase would be
unprofitable? If the price increase would be profitable, then the relevant product market is broadline
distribution; if unprofitable, it means that the relevant market must include at least one other channel

34

of distribution.

Each side presented expert testimony from economists who performed the

hypothetical monopolist test but who came to different results.
a.

Dr. Mark Israel

For its expert economic evidence, the FTC presented the testimony of Dr. Mark Israel, who
received a doctorate in economics from Stanford University and now serves as Executive Vice
President at Compass Lexecon, a consulting firm. Dr. Israel's testimony served two primary
functions. First, he acted as a de facto summary witness, synthesizing the mass of testimonial and
documentary evidence gathered by the FTC. Dr. Israel's summary of that evidence parallels the
discussion in the above sub-sections, so the court does not revisit it here. Second, Dr. Israel
conducted a SSNIP test, using what is known as an "aggregate diversion analysis." Its purpose is
to determine the amount of sales that a hypothetical monopolist of broadline distribution could
lose before a price increase becomes unprofitable. See Swedish Match, 131 F. Supp. 2d at 160
(describing the related methodology of"critical loss analysis"); H&R Block, 833 F. Supp. 2d at 63
(same). A detailed recitation of Dr. Israel's aggregate diversion analysis is necessary because
Defendants challenge the basic elements of his work.
Aggregate diversion analysis has three basic steps. The first is to determine the threshold
aggregate diversion ratio, which is the percentage of customers that would need to stay within the
broadline market to make a price increase profitable. See H&R Block, 833 F. Supp. 2d at 63. This
is strictly a mathematical step, with the aggregate diversion ratio a function of the subject product's
gross margin. The gross margin is defined as the price of selling one additional product minus the
cost of selling the additional product. 13 The second step is to determine the actual aggregate
diversion-that is, the actual percentage of customers of a single broadliner that would switch to

13

Gross margin is calculated as follows: (Revenue-Cost of Goods Sold)/Revenue.

35

another broadliner after a price increase. "Since these lost sales are recaptured within the proposed
market, they are not lost to the hypothetical monopolist." Id. As will be seen, this step involved
an analysis of Defendants' actual sales data. The final step is to compare the two: if the actual
aggregate diversion is greater than the threshold ratio, then the hypothetical monopolist could
profitably raise prices and the candidate market is the relevant product market. See id. In other
words, as applied here, if the percentage of customers of a single broadliner who would switch to
another broadliner (as opposed to another mode of distribution) in response to a price increase is
greater than the percentage of customers needed to stay within the market to make a price increase
profitable, then the relevant product market is properly defined as broadline distribution.
At step one of his aggregate diversion analysis, Dr. Israel assumed a gross margin of
10 percent, a figure lower than the gross margin contained in the parties' financial reporting. 14
A 10 percent gross margin, according to Dr. Israel, yields a 50 percent threshold aggregate
diversion ratio based on a formula devised by two economists, Michael Katz and Carl Shapiro. 15
Next, Dr. Israel calculated the actual aggregate diversion based on three different data sets.
He constructed the first two data sets from national and regional requests for proposals ("RFPs")
and "bidding" summary information and documents produced by each Defendant to the FTC.
Based on this information, Dr. Israel built a database for each company that tracked, for each
bidding opportunity, the incumbent distributor, the winning distributor, and the competing bidders.
PX09350-104.

Based on Sysco's RFP/bidding data, he found that, when Sysco lost a bid,

14
Dr. Israel testified that the parties' reported gross margins are between 15 and 20 percent, but to be conservative he
used a 10 percent margin. Hr'g Tr. 1004-05.
15
The Katz-Shapiro formula that Dr. Israel used is L =XI(){+ M), where L is the aggregate diversion ratio, or "critical
loss," X is the price increase, and M is the margin. PX09350-055 at n.134. For his aggregate diversion analysis,
Dr. Israel used a 10 percent price increase and a 10 percent margin, for a resulting critical loss of 50 percent, i.e., .50
= .10/(.10 + .10). Hr'g Tr. 1004-07.

36

broad.liner; the remaining losses were to another mode of distribution. PX09350-056. Based on
USF's RFP/bidding data, the percentage was even higher-USF lost to other broadliner-

Htffl of the time.

Id.

Dr. Israel constructed his third data set from USF's "Linc" database. Linc is a customer
relations management tool that USF local sales representatives used until recently to track sales
opportunities. The Linc database contains fields that sales representatives can complete to describe
a sales opportunity, including a "main competition" field. Dr. Israel assumed that, if USF did not
win an opportunity, it was won by the identified "main competitor." The Linc database contained
hundreds of thousands of observations, about a third of which included information on the "main
competitor."
opportunities lost by USF (again, based on potential revenue of those sales opportunities) were
lost to other broadliners. PX09350-056.
At the third step, Dr. Israel compared the aggregate diversion ratio of 50 percent to the
actual diversion percentages derived from the three data sets. He concluded that, because each of
the three actual diversion percentages was higher than the 50 percent threshold aggregate diversion
ratio, broadline distribution was the relevant product market. In other words, Dr. Israel found that
only 50 percent of broadline customers would need to remain within the broadline market to make
a price increase profitable, while according to three different data sets, the actual percentage of
customers who would remain within the broadline market (by switching to another broadliner) was
greater than 50 percent. Therefore, Dr. Israel's calculations indicated that broadline distribution
was the relevant product market.

37

b,

Defendants' experts

Defendants mounted an aggressive challenge to Dr. Israel's work through their own expert
witnesses.

Defendants first presented Dr. Jerry Hausman, a professor of economics at

Massachusetts Institute of Technology. Dr. Hausman testified, in short, that Dr. Israel's aggregate
diversion analysis was wrong because (i) he used the wrong gross margin and (ii) he used the
wrong mathematical formula to calculate the threshold aggregate diversion ratio. According to
Dr. Hausman, Dr. Israel excluded certain variable costs from his gross margin. The actual gross
margin was not 10 percent, according to Dr. Hausman, but between

II percent and II percent.

Also, Dr. Hausman testified that the aggregate diversion formula Dr. Israel used was incorrect and
led to an overly narrow market definition. 16 Using the proper margins and the correct formula,
Dr. Hausman opined, the aggregate diversion ratio is not 50 percent, but rather over 100 percent,
which is an impossibility (i.e., more than 100 percent of customers cannot switch in response to a
price increase). Thus, he concluded, the relevant product market is not broadline, but all channels
of food distribution.
While Dr. Hausman challenged Dr. Israel's calculation of the threshold aggregate diversion
ratio, Defendants' other expert, Dr. Timothy Bresnahan, a professor of economics at Stanford
University, critiqued Dr. Israel's use of the RFP/bidding and Linc data sets to calculate the actual
aggregate diversion.

Regarding the RFP/bidding data, Dr. Bresnahan described the data as

contrived and unreliable-a point that Defendants consistently articulated to the FTC during the
investigation phase. Dr. Bresnahan explained that the companies do not keep comprehensive RFP

16
According to Dr. Hausman, the correct formula is L = XIM, where L is the aggregate diversion ratio, or "critical
loss," Xis the price increase, and Mis the margin. Dr. Hausman testified that this is the more appropriate formula in
an asymmetric market, like food distribution, which involves suppliers and customers with different costs, different
types of customers, and a different mix of products. Hr'g Tr. 1960-64; DFF at 285-86 (citing to DX-05028 at 11).
The formula used by Dr. Israel, on the other hand, is more appropriate in a symmetric market, that is, a market marked
by homogeneity among suppliers and customers. Hr'g Tr. 1960, 1965-66; DX-05028 at 10-11.

38

or bidding data in the ordinary course of business and that the information Dr. Israel relied upon
was pulled together at the insistence of the FTC, in part based on employees' unreliable notes and
memories. As for the Linc data, it too was flawed, Dr. Bresnahan suggested, because it is a
prospective sales database, not an actual transactions database in which USF sales personnel were
accurately recording wins and losses. Moreover, neither the RFP/bidding data nor the Linc data
describes whether Sysco or USF lost a customer for a price-based reason or some reason having
nothing to do with price.
c.

The court's finding as to the expert testimony

Having weighed the competing expert testimonies and considered them in light of the
evidentiary record as a whole, the court finds Dr. Israel's aggregate diversion analysis and
conclusion to be more persuasive than that advanced by Defendants' expert, Dr. Hausman. 17
Dr. Israel's reliance on the RFP/bidding and Linc data sets for calculating the aggregate diversion
is problematic for the reasons Defendants have identified and, for those reasons, the court hesitates
to rely on Dr. Israel's precise aggregate diversion percentages. But, when evaluated against the
record as a whole, Dr. Israel's conclusions are more consistent with the business realities of the
food distribution market than Dr. Hausman's. See Cardinal Health, 12 F. Supp. 2d at 46 (stating
that "the determination of the relevant market in the end is 'a matter of business reality-[ ] of
how the market is perceived by those who strive for profit in it."' (alteration in original) (quoting
FTC v. Coca-Cola Co., 641 F. Supp. 1128, 1132 (D.D.C. 1986), vacated as moot, 829 F.2d 191
(D.C. Cir. 1987)); Arch Coal, 329 F. Supp. 2d at 116 ("[A]ntitrust theory and speculation cannot

17

In finding Dr. Israel's conclusion more persuasive than that advanced by Defendants' expert, the court might be
doing more than it is required to do. As Judge Tatel stated in Whole Foods: "Although courts certainly must evaluate
the evidence in section 13(b) proceedings and may safely reject expert testimony they find unsupported, they trench
on the FTC's role when they choose between plausible, well-supported expert studies." Whole Foods, 548 F.3d at
1048 (Tatel, J.).

39

trump facts[.]"); H&R Block, 833 F. Supp. 2d at 65 (bearing in mind the shortcomings of the
expert's analysis and treating the analysis as "another data point" in determining the relevant
market, rather than as conclusive).
The court finds Dr. Hausman's conclusion-that the actual aggregate diversion ratio is
greater than 100 percent-inconsistent with business reality. On cross-examination, Dr. Hausman
admitted that his conclusion meant that a hypothetical monopolist who had control over every
single broadline distributor in the country could not profitably impose a SSNIP on customers,

because enough customers would switch to other channels of distribution. Hr'g Tr. 2003-04. Yet
many industry leaders testified either that other channels of distribution did not constrain the prices
charged by broadliners or that other channels were not substitutes for broadline distribution. For
instance, PFG's President and CEO, George Holm, testified that systems and specialty distributors
do not significantly affect the pricing and services that PFG's broadline division offers to its
customers. Hr' g Tr. 575-76. He also testified that systems and specialty distributors were not
substitutes for broadliners. Hr'g Tr. 573. Such evidence from industry leaders, 18 which the court
credits, contradicts Dr. Hausman's conclusion that a hypothetical monopolist ofbroadline services
would not be able to impose a SSNIP because enough customers would switch to other channels
of distribution.

18
See also PX00429-004-007 (George Holm, President and CEO of PFG, explaining that systems, specialty, and cashand-carry distributors are not substitutes for customers needing broadline distribution); DX-00285 at 125-26 (John
Roussel, COO of Shamrock Foods, stating that it's "not possible" or "practical" for a broadline customer to use a
systems distributor); DX-00260 at 139 (Bob Stewart, interim CEO ofUnipro, explaining that a broadline customer
cannot easily switch to a systems distributor and a broadline customer's needs are different than a systems customer's
needs).

40

4.

Conclusion as to the Broadline Product Market

In conclusion, based on the vast record of evidence the parties have presented, the court
finds that the FTC has carried its burden of demonstrating that broad.line distribution is the relevant
product market.

B.

National Broadline Distribution as a Relevant Product Market

The FTC asserts that, within the broader product market for broad.line distribution, there is
a narrower but distinct product market for "broad.line foodservice distribution services sold to
National Customers." CompI. if 44. According to the FTC, "[ d]ue to [their] geographic dispersion,
National Customers typically contract with a broadline foodservice distributor that has distribution
centers proximate to all (or virtually all) of their locations." Id.

if 42.

National Customers typically contract with a broadliner that can provide--across
all of their locations-product consistency and availability, efficient contract
management and administration (e.g., centralized ordering and reporting, a single
point of contact, and consistent pricing across all locations), volume discounts from
aggregated purchasing, and the ability to expand geographically with the same
broadline foodservice distributor.

Id. National customers include healthcare GPOs; foodservice management companies; and large
hotel and restaurant chains. Id

if 41. The FTC contends that Sysco and USF "are the only two

single-firm broadline distributors with national geographic reach and, as such, are best positioned
to serve National Customers." Id.

if 63.

Defendants vigorously dispute that there is such a thing as a "National Customer." They
contend that a product market built around so-called national customers is "contrived,'' Defs.'
Opp'n Br. at 16, and that the FTC's distinction between national and local customers is "factually
and economically meaningless,'' id at 13. They counter that the national-local distinction is not,
as the FTC claims, built on differentiating customer characteristics, but is improperly based on an
administrative distinction as to whether the customer prefers to be managed at the corporate level
41

(making it a "national" customer) or at the local distribution center (making it a "local" customer).
Id. at 12-15. The so-called national customer category, they also argue, is improperly based on a

"few core customers who say they prefer the merging parties." Id. at 13. In addition, Defendants
assert that Dr. Israel did not perform a SSNIP test to assess the existence of a national customer
market. Id. at 12.

!.

Legal Basis for Defining Relevant Product Market Based on Customer Type

Before turning to the evidence, the court first considers the legal basis for defining a
product market based on a type of customer. Neither side comprehensively addressed this issue.
Admittedly, defining a product market based on a type of customer seems incongruous. After all,
one ordinarily thinks of a customer as purchasing a product in the market, and not as the product
market itself But, in this case, according to the FTC, the national customer and broadline product
converge to define a market for broadline products sold to national customers.

Broadline

distributors must offer a particular kind of "product"-a cluster of goods and services that can be
delivered across a broad geographic area-to compete for national customers. In that sense, the
customer's requirements operate to define the product offering itself
The clearest articulation of this approach to product market definition comes from the
Merger Guidelines. The Merger Guidelines are not binding, but the Court of Appeals and other
courts have looked to them for guidance in previous merger cases. See, e.g., Heinz, 246 F.3d at
716 n.9; H&R Block, 833 F. Supp. 2d at 52 n.10. Section 4.1.4 of the Merger Guidelines provides
that "[i]f a hypothetical monopolist could profitably target a subset of customers for price
increases, the Agencies may identify relevant markets defined around those targeted customers, to
whom a hypothetical monopolist would profitably and separately impose at least a SSNIP."
Merger Guidelines § 4.1.4.

Markets to serve targeted customers are also known as "price

42

discrimination markets." Id. Professors Areeda and Hovenkamp have endorsed market definition
of this kind, as well: "Successful price discrimination means that the disfavored geographic or
product class is insulated from the favored class and, if the discrimination is of sufficient
magnitude, should be counted as a separate relevant market." 2B Phillip E. Areeda & Herbert
Hovenkamp, Antitrust Law: An Analysis ofAnt;trust Prindples and Their Application~ 534d (3d
ed. 2007). The concern underlying price discrimination markets is that certain types of captured
or dedicated customers could be targeted for monopolist pricing even if a price increase for all
customers would not be profitable. See Merger Guidelines § 3; Areeda & Hovenkamp 3d ed.,
supra,~

533d ("[S]ellers may be able to discriminate against buyers who have fewer alternatives

or for whom the product performs a more valuable function[.]").
Defining a market around a targeted customer, as the FTC urges here, is not free from
controversy, as the different opinions in Whole Foods demonstrate. 19 Relying on an earlier version
of the Merger Guidelines that recognized price discrimination against "targeted buyers,"
Judge Brown explained that "core consumers"-in that case, those committed to premium and
natural organic supermarkets-"can, in appropriate circumstances, be worthy of antitrust
protection." Whole Foods, 548 F.3d at 1037 (Brown, J.) (citing DOJ and FTC, 1992 Horizontal
Merger Guidelines§ 1.12, 57 Fed. Reg. 41,552, 41,555 (1992)). Judge Brown went on to say:
In particular, when one or a few firms differentiate themselves by offering a
particular package of goods or services, it is quite possible for there to be a central
group of customers for whom "only [that package] will do." ... Such customers
may be captive to the sole supplier, which can then, by means of price
discrimination, extract monopoly profits from them while competing for the
business of marginal customers.

19
The FTC cites to the "distinct customers" factor in Brown Shoe as support for defining a market around a targeted
customer. However, Brown Shoe only listed "distinct customers" as one of many factors for courts to consider in
defining a market. Brown Shoe, 370 U.S. at 325. It did not endorse defining a market around a group of targeted
customers.

43

Whole Foods, 548 F.3d at 1038 (Brown, J.) (quoting Grinnell, 384 U.S. at 574) (alteration in
original).
Judge Kavanaugh, in dissent, rejected defining a market around a "core customer." Whole

Foods, 548 F.3d at 1062 (Kavanaugh, J., dissenting). According to Judge Kavanaugh, "there is
no support in the law for that singular focus on the core customer. Indeed, if that approach took
root, it would have serious repercussions because virtually every merger involves some core
customers who would stick with the company regardless of a significant price increase. " 20 Id. The
relevant question for market definition, according to Judge Kavanaugh, is not whether a die-hard
group of core customers would be impacted by a substantial price increase, but whether the merged
company "could increase prices by five percent or more without losing so many marginal
customers as to make the price increase unprofitable." Id.

2.

Evidence Supporting a National Broadline Product Market

Ultimately, the court here need not resolve the Whole Foods disagreement over defining a
market around a "core" customer. That is because the ordinary factors that courts consider in
defining a market-the Brown Shoe practical indicia and the Merger Guidelines' SSNIP testsupport a finding that broadline distribution to national customers is a relevant product market.

See, e.g., Areeda & Hovenkamp 3d ed.,

supra,~

533d ("If the defendant can profit by charging

pharmacies a price significantly over its cost, then the pharmacy sales are a relevant market[.]").

20

The Merger Guidelines do not, for instance, set forth how a court is to distinguish a "targeted" group of customers
from customers in general. This gives rise to the question of what limiting principles or factors a court should apply
in defining a price discrimination market. Absent limitations, price discrimination against a single customer might be
used to justify blocking a merger. This is not a mere theoretical possibility. According to the Merger Guidelines, "[i]f
prices are negotiated individually with customers, the hypothetical monopolist test may suggest relevant markets that
are as narrow as individual customers." Merger Guidelines § 4.1.4 (emphasis added).

44

a.

Industry and public recognition

Among the most compelling evidence supporting a product market for national customers
is the fact that regional broadliners have formed cooperatives, such as DMA and MUG, to compete
for customers with a geographically dispersed footprint. Regional distributors, because of their
limited footprints, do not have the capacity to serve customers with multi-regional needs across all
of their locations.

Only Sysco and USF have that capacity. These cooperatives were formed

specifically to compete against Sysco and USF, by enabling regional competitors to combine to
provide nationwide or multi-regional delivery and, importantly, to offer a single point of contact
for the customer. Dan Cox, the President and CEO ofDMA, explained that DMA was formed in
1988 as a competitive response to Sysco' s merger with another company, Continental. See
PX00565-051 at 202. He explained that "[w]hen that industry event took place, it was the first
time that there was truly a national platform for foodservice distribution." Id. Put simply, business
ventures like DMA would not exist if there were not a separate market for customers who have
national or multi-regional distribution needs. See Rothery Storage, 792 F.2d at 218 n.4 (stating
that courts must "assume that economic actors usually have accurate perceptions of economic
realities").
Equally compelling evidence of the national-local distinction comes from a report done by
the management consulting firm, McK.insey & Co., whom Sysco hired to assist with merger
integration.

After closely analyzing the two companies' operations, McKinsey prepared a

presentation in July 2014, titled "National, Intermediate, and Field Coverage Models." The
presentation observed that "Sysco and US Foods have different approaches to grouping customers
and determining service models .... Both companies effectively operate two service models with
distinct capabilities to serve two types of customers." PX09010-002 (emphasis added). The

45

presentation described "National Customers" as those who "use complex contracts with margin
schedules, make online purchases of proprietary products, require auditing support, and coordinate
across multiple markets." Id. By contrast, "Field Customers" were those who "make weekly
purchases through in-person consultations, receive specialist support tailored to independent
restaurants, require minimal auditing support, and operate in I or few markets." Id. McKinsey
further observed that national customers' "requirements" included "[ s]et margin schedule
contract[s]"; "[e]fficient ordering across multiple locations"; "[l]arge number[s] of deviated,
proprietary and close-coded products"; "[r]egulatory and audit support"; "[i]n-depth reporting";
and "[c]onsistency of service, pricing and products across multiple [m]arkets." PX09010-004.
Field customers' "requirements," on the other hand, included the "[a]bility to make decisions each
week along with consultation"; "[a]ccess to national, commodity, and some proprietary products";
"[f]ull business, culinary, and product support for independent businesses"; and "minimal"
"[c]oordination across geographies." Id. McKinsey ultimately recommended that the companies
recognize and build a new service model around a third kind of customer-an "Intermediate"
customer-who would be identifiable based on five variables: (i) national contract/no contract;
(ii) nature of industry; (iii) number of markets; (iv) number of regions; and (v) size of annual sales.
PX09010-007. The McKinsey presentation identified as "conclusively" national those customers
who operate in three or more markets or two or more regions. Id.
McKinsey is not the only industry analyst or expert to acknowledge that national customers
form a market distinct from local buyers. Cleveland Research Company, an investment research
firm, produced an analyst report on Sysco after the merger's announcement and recognized that
Sysco and USF serve a distinct group of national customers. One of the report's conclusions was
that "Sysco/USP will [be] able to keep most of their larger contracted and national account

46

customers for the near- and medium-term due to national scale and existing contracts .... Based

on our research, most national operators prefer to deal with one distributor because it is more
efficient and less expensive than dealing with several regional players." PX09332-006 (emphasis
added).
The industry's trade group, the International Food Distributors Association ("IFDA"), also
recognizes a distinction between national and local customers.

IFDA produces a Quarterly

Operations survey that reports separate sales figures for "national" and "street" accounts.
PX00570-004 at 78. IFDA's President, Mark Allen, explained that IFDA distinguishes between
the two because "the dynamics between the two [types of] businesses might be a little bit different.
The operating metrics might be a little bit different." Id. at 80.
Defendants' ordinary course documents also recognize the national-local distinction and
tout their strategic advantage as to the former. See H&R Block, 833 F. Supp. 2d at 52 ("When
determining the relevant product market, courts often pay close attention to the defendants'
ordinary course of business documents.").

A Sysco "Investor Day" presentation from 2010

distinguishes the company's "Contract Sales (Broadline)" from "Street Sales," PX03101-010, and
separates its "Key Competitors - National," from regional competitors, PX03101-020. Similarly,
a presentation entitled "Board of Directors Strategy Sessions," dated July 2010, distinguishes
between Sysco's market size for "corporate contracts"-defined to include "major foodservice
management (FSM) sales, major group purchasing organization (GPO) sales, and major chain
sales (non FSM or GPO)"-and "Street" business. PX01008-006.
USF has similar documents. An internal USF presentation, titled "Business Overview,"
describes "[USF's] Customers" as falling into three categories: (i) "Street: Independent restaurants
or small local chains"; (ii) "National Accounts: Contracted customers located across the country,"

47

including acute and long-term healthcare facilities, hotels and the hospitality industry, schools, and
US. military and government agencies; and (iii) "National Chain Restaurants: Fast food and
quick-serve establishments." PX03122-004. See also PX03034-006 (similarly categorizing the
company's customers). A USF "Investor Presentation" from November 2012 describes USF as
the "2nd largest national broadline distributor," PX03000-006, and touts its "[a]bility to leverage
our national scale to cost effectively service customers nationally," PX03000-014. Further, it
distinguishes between "National Scale," where "US Foods is the second-largest broadline
foodservice distributor in the US.," and "Local Scale," where "US Foods is estimated #1 or #2
position in

II of served markets," PX03000-014.

See also PX03007-007 (internal document in

which KKR & Co., one of USF's private equity owners, distinguishes between "Street and
National Account customer segments").
Other key players in the industry also recognize that national customers are different.
For instance, the President and CEO of PFG, George Holm, agreed that "Sysco and US Foods are
the only two distributors for broadline with the capability to serve national broadline customers
with locations dispersed throughout the United States," including foodservice management
companies, GPOs, large healthcare systems, and certain restaurant chains.

Hr'g Tr. 596.

Representatives of DMA and Reinhart likewise referred to national customers as those that are
geographically dispersed and need a single point of contact. See PX00412-002-003; PX00415004.
b.

Distinct customer needs

There is ample record evidence that national customers' needs differ from those of local
customers. The McKinsey analysis described above concisely summarized those distinctions.
PX09010-004.

48

For starters, national customers, because of their dispersed geographic presence, often
require a broadliner to meet their foodservice needs in more than one region. As a result, the
number of distribution centers in a broadliner's network is often an important factor for such
customers. In sharp contrast, according to Sysco, "all, or almost all," of its "local contract
customers" are served by only one distribution center. PX01400-001.
The Defendants' ordinary course documents highlighted their comprehensive distribution
networks as a competitive advantage for serving national customers. See, e.g., PX03000-014 (USF
presentation touting its "[a]bility to leverage our national scale to cost effectively service
customers nationally"); PX00247-001-002 (USF email communication t o - describing
the "US Foods Value Proposition" as including "Privately held National Distribution footprint
company"; "Single IT operating platform nationally"; and a "Single Point of Contact"); PXO 1062005 (Sysco presentation to Aramark highlighting that Sysco' s "national footprint, strong service
approach and our breadth of product offerings is what differentiates us from our competition").
As USF's David Schreibman acknowledged during the evidentiary hearing, "US Foods['] leading
national market position is due to US Foods['] geographic presence that includes 62 distribution
centers across the United States." Hr'g Tr. 1520-21. He also acknowledged that Sysco was the
only company with greater scale than USF. Id. at 1522.
In addition to multi-regional distribution capabilities, national customers generally demand

a set margin contract that applies across multiple locations. As PFG' s George Holm testified, a
single contract enables customers to simplify contract administration and to reduce administrative
costs. Id. at 600-02. Additionally, national customers often use RFPs and/or bilateral negotiations
to award broadline foodservice distribution contracts. Id. at 1595-97. In sharp contrast, pricing
for local or "street" customers, according to Sysco, "[is] ultimately the result of individual

49

negotiations between the customer and [broad.liner]" and "can vary on a weekly and even daily
basis." PX06057-032.
National customers also seek a single technology platform for handling their purchases.
Consolidating purchasing through a single ordering platform creates efficiencies and cost savings,
particularly as it relates to managing direct contracts with manufacturers and administering price
changes. The importance of this feature is evidenced by DMA's development of a single ordering
platform that enables customers to purchase from its members.

Indeed, DMA promotes its

technology platform as superior to Sysco's and USF's. PX00565-006 at 23-24. If national
customers had not demanded such a feature, DMA would not have developed it.
Finally, product consistency is a factor for some national customers, particularly for those
who wish-to-purchase private label products. See PX09010-004 (McKinsey report identifying as
a "Customer requirement[]" for "National" customers "consistency of service, pricing, and
products across multiple Markets"). Large customers can achieve a high degree of product
consistency through direct contracting with product manufacturers or by purchasing proprietary
brands stocked by Defendants. DX-01359 at 73 (Dr. Bresnahan report observing that "one way
customers that value consistency achieve it is through direct negotiation with manufacturers to
create propriety products" and that "[c]ustomers can also rely on national brands to ensure
consistency"). However, because private label goods offer a strong value benefit, if a national
customer wishes to purchase such goods and have them available across all of its locations, it can
do so most efficiently through a broad.liner with national geographic scope. See Hr'g Tr. 600
(George Holm of PFG stating that one reason national customers prefer to contract with Sysco or
USF is that "[w]here they have a preference for a private brand, []it is the same product [across]
their system").

50

c,

Defendants' Operations

Both Sysco and USF operate dedicated sales groups from their national headquarters that
are responsible for negotiating and managing contracts with customers who use multiple
distribution centers. See Grinnell, 384 U.S. at 572-74 (holding that centralized station security
services operated on a national level is a relevant product market). Sysco refers to these customers
as "corporate multi-unit customers," or CMUs. USF refers to them as "national sales customers."
According to USF's Senior Vice President for National Sales, Tom Lynch, each national customer
in his group has a single USF representative who is responsible for that customer. The largest
customers are assigned a full-time dedicated employee to manage the account. PX00517-014-015
at 56-58.

d.

SSNIP Test

Contraiy to what Defendants contend, Dr. Israel did perform a SSNIP test to determine
whether there is a separate product market for national customers. That SSNIP test was performed
as an element of the SSNIP test that Dr. Israel used to assess whether broadline distribution was a
relevant product market.

As Dr. Israel testified, he applied to national customers the same

10 percent gross margin that he used to calculate the aggregate diversion ratio for all customers.
Hr'g Tr. 1005 (stating that he used a 10 percent gross margin "to both local and national
customers"). He derived the actual diversion for national customers based on the RFP/bidding
data provided by the defendant companies. Id. at 1009 (describing the "RFP/bidding data" as
"really national [customer] data"). Using the same methods discussed above, Dr. Israel calculated

USF' s national customers to be !pf§iltfJ:'I. In other words, o v e r - of the time (based
on potential revenue from sales opportunities), when Sysco or USF lost a bid opportunity for a

51

national customer, it was to another broadliner. Because these percentages were greater than the
aggregate diversion ratio of 50 percent, Dr. Israel concluded that broadline service to national
customers was a relevant market. In other words, Dr. Israel found that only 50 percent of national
broadline customers would need to remain within the broadline market to make a price increase
profitable, while the actual percentage of national customers who would remain within the
broadline market (by switching to another broadliner) was greater than 50 percent. Dr. Israel's
calculations, therefore, indicated that broadline distribution to national customers was the relevant
product market.
The court already has expressed its reservations about relying on the RFP/bidding data to
precisely calculate the aggregate diversion ratio. But, as before, the court finds that the ultimate
conclusion of the SSNIP test-that broadline foodservice to national customers is a relevant
product market-is supported by the weight of the evidence.

Numerous national customer

witnesses testified that other channels of distribution were not adequate substitutes for broadline
distribution. 21 Although Defendants have shown that some national customers who were served
by broadliners are now served by systems or systems-like distributors-most notably, Subway and
Five Guys-those are the exceptions. Subway and Five Guys, because of their limited menus, are
more amenable to substituting to a systems model. The same simply cannot be said of other large
national customers, like GPOs, foodservice management companies, and hospitality chains, which
rely heavily on broadliners.

21

See Hr'g Tr. 143-145 (Christine Szrom, fact witness for U.S. Department of Veteran Affairs, explaining that she is
not familiar with systems distribution and could "absolutely not" use a cash-and-carry distributors); Hr' g Tr. 214-17
(James Thompson, Head of Procurement for Interstate Hotels and Resorts, stating that "it would be very difficult if
not impossible" to operate Interstate's foodservice distribution without a broadliner and that specialty is not a
substitute for broadline distribution); PJ<llll-002 (Joan Ralph, Group Vice President at Premier, Inc., saying that
" [e] ven if we choose one day to contract with systems distributors, specialty distributors, or cash and carry stores,
each would be as an additional, distinct service for our members who may ne_e~ck, last-minute item or two; none
~ce or serve as a substitute for broadline distribution services"); P~-002 ~
- - , noting t h a t - cannot contract with a systems distributor or use other f~

52

e,

Defendants' arguments against a national customer market

Asserting that there is no separate product market for national broadline customers,
Defendants first argue that the national-local distinction is "arbitrary" because it is based on
nothing more than customer preference about account management.

Defendants' executives

testified that Sysco's CMU customers and USF's national customers are so designated, not because
of any particular characteristic or group of characteristics, but purely because the customer prefers
to have its account managed by the headquarters sales team, instead of by its local distribution
center.

The FTC's and Dr. Israel's reliance on the companies' administrative designation,

Defendants argue, leads to arbitrary classifications. For example, some of Defendants' customers
who use a small number of distribution centers are counted by the FTC as "national" customers.
As Dr. Hausman demonstrated, 37 percent of Sysco's CMU customers use five or fewer
distribution centers and 55 percent use ten or fewer. And, for USF, 51 percent of their national
customers use five or fewer distribution centers and 67 percent use ten or fewer. Hr' g Tr. 1976.
Additionally, similarly situated customers-in terms of size, number of distribution centers,
revenues, etc.-are sometimes treated differently. One customer may be identified as national and
another as local, simply because one prefers to be managed from headquarters and the other from
the local distribution center.
Defendants are correct that their "national" customer lists are over-inclusive-not every
customer on those lists has multi-regional distribution needs. And they are also correct that the
FTC could have more accurately defined a class of "national" customers by testing each candidate
national customer against specific "national" criteria, such as the number of distribution centers
used. But, ultimately, for the purpose of defining a product market, the court finds that the parties'

53

"national" customer designation is a useful proxy for customers requiring geographically dispersed
distribution and attendant services.
As the graphic below prepared by Dr. Israel shows, if the merger were to occur, a
significant proportion of the combined company's national customer revenues would come from
customers who use a large number of distribution centers. PX09375-077, Figure 3. National
customers using more than 3 5 distribution centers would account

forl percent of a merged Sysco-

USF' s revenue; national customers using more than 24 distribution centers would account for

I

percent of revenue; and national customers using at least 10 distribution centers would account for

IIpercent of revenue. Those figures demonstrate that Defendants' national-customer designations
capture those key customers (based on revenues) who use a large number of distribution centers.
The "national" designation includes, among others, the largest GPOs, like Premier, Novation, and
MedAssets, each of whom uses over

I

distribution centers; the largest foodservice management

companies, like Sodexo, Aramark, and Compass, each of whom uses more than
centers; the largest hotel management company, Hilton, which uses

I

I

distribution

distribution centers; and

the second largest government customer, the U.S. Department of Veterans Affairs, which uses
distribution centers (the largest is the U.S. Department of Defense, which uses

I

I

distribution

centers). PX09375-076, Table 5. Thus, for these customers, the label "national" is not merely
administrative; it accurately reflects this high revenue-generating group's actual needs. The fact

54

that some smaller customers are included among the Defendants' ·'national'' designations does not
mean that the desig;1atio11 lacks evidentia1y value for defining a market for national customers.
Figure 3
SyM:o and l'SF 2013 Re\eUUt'S

IJ,v l'\uml>er ufDistriuution Centen rwd

Next, Defendants assert that defining a pnce discrimination market around national
customers is untenable because the FTC failed to show that so-called national customers shared
any objectively observable characteristics that would enable t11e combined company to price
discriminate against that group. See Merger Guidelines § 3 (stating that "differential pricing" is
an essential element of price discrimination, which "may involve" offering different pricing to
different types of customers "based on observable characteristics"), In other worcls, they argue
that this grouping of customers is so heterogeneous that there is no collllllon, identifiable

55

characteristic that could serve as a proxy for determining which customers in the broadline market
have inelastic demand.
Defendants are undoubtedly correct that, even among their largest customers, there is great
variety in the customers' servicing needs and requirements. But price discrimination can occur
even when customers do not have common observable characteristics. As the Merger Guidelines
state, markets for targeted customers may exist "when prices are individually negotiated and
suppliers have information about customers that would allow a hypothetical monopolist to identify
customers that are likely to pay ahigher price forthe relevant product." Merger Guidelines§ 4.1.4;

see also Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty
Years, 77 Antitrust L.J. 49, 93 (2010) (observing that, in markets for intermediate goods and
services, "prices typically are negotiated and price discrimination is common").
Here, the evidence is clear that Defendants engage in individual negotiations with their
national customers and possess substantial information about them.

Indeed, the fact that

Defendants employ substantially more sales representatives than other broadliners, PX093 50-218,
Table 30, and assign full-time dedicated employees to some of their largest customers is indicative
of the "know-your-customer" philosophies of both firms. Defendants, therefore, already have
substantial customer information that would allow them to predict which of their customers have
inelastic demand and which do not. Price discrimination can occur in such a marketplace, even if
the targeted customers do not share specific identifiable traits.
Finally, Defendants contend that a product market of targeted national customers does not
comport with business realities. This argument has two main elements. First, they assert that,
contrary to what the FTC contends, Compl.

iii! 5, 42, national customers do not require a broadline

foodservice distributor that is national in scope. Rather, they argue, even at current prices, many

56

large customers spread their distribution needs over multiple regional suppliers. For instance,
Defendants cite GPOs, l i k e - · - ' Amerinet and large government agencies. like
the Defonse Logistics Agency, as using a regional contracting approach. Defs.' Opp'n Br. at 15.
They also refer to one of the largest foodservice management companies, Sodexo. which splits its
distribution into

I

regions. Id. A. nd. then there is Subway and Five Guys. two large chain

restaurants that have regionalized and purchase from multiple suppliers. Id. at 15-16. Because
these tyves of customers can regionalize or credibly threaten to regionalize. Defendants argue, the
merged company would not be able to discriminate against them on price.
But Defendants' argument founders when faced with the actual purchasing habits of the
industry's largest customers. The evidence shows that the bulk of the broadline purchasing done
by most geographically dispersed breadline customers is still done through Sysco and USF.
Of Avendra's members' breadline spend,

I

percent is witl1 Sysco and USF. PL 's CoITected

Proposed Findings of Fact and Conclusions of Law. ECF No. 173 at 114 [hereinafter PFF].
Members of other GPOs similarly purchase a large percentage of their goods from Sysco and USF.
The total breadline spend of Premier,22 Novation, MedAssets, and HPSI members with Sysco and
USF is, respectively,

I

percent,

II percent I

percent, and

I

percent Id. at 113-15: FTC

Closing Arg. Slides at 35. Large foodservice management companies similarly make the bulk of
their broadline purchases from Sysco and USF. Sodexo, Aramark, Compass, and Centerplate,
respectively, spend

I

percent,

I

percent,

I

percent, and

I

percent of their broa<lline

foodservice distribution dollars with Sysco and USF. PFF at 113-16: FTC Closing Arg. Slides at
35. The story is similar for large hospitality customers. Two of tl1e largest, Hilton and Interstate,

57

allocate

I

percent and

I

percent of their broadline spend, respectively, to the two companies.

PFF at 114, 116; FTC Closing Arg. Slides at 35. Even the Defense Logistics Agency, which
contracts regionally, dedicates

I

percent of its broadline spend to Sysco and USF. PFF at 116;

FTC Closing Arg. Slides at 35.
The court infers from this evidence that geographically dispersed customers view Sysco
and USF as having significant comparative advantages over regional distributors, particularly
because of their far-reaching distribution networks. Though some customers have spread their
business over multiple broadliners, a significant portion (as measured by total revenues) have not.
Indeed, PFG's George Holm observed that the "clear trend amongst national broadline customers
is to move toward a single nationwide provider." Hr'g Tr. 598 (emphasis added); PX09081-002
(letter from PFG's counsel to FTC, dated November 14, 2014, stating the same). See Brown Shoe,
370 U.S. at 332 (footnote omitted) ("Another important factor to consider is the trend toward
concentration in the industry."). Mr. Holm further admitted that either Sysco or USF essentially
wins every RFP issued by a national customer. Hr' g Tr. 598-99. And PFG acknowledged by letter
to the FTC that, even as the country's third-largest broadliner, "PFG has difficulty competing for
national broadline accounts because it does not have a nationwide footprint of broadline
distribution centers." PX09081-001. Other large regional broadliners have said the same about
their own businesses models. 23 Defendants' contention-that a product market defined around
national customers does not comport with business reality because such customers have
regionalized or can regionalize-is thus belied by the record evidence.

23

See, e.g., PX00415-004 (Reinhart); PX00416-003 (Merchants); PX00434-003-004 (Labatt); PX00438-002-003
(Cash-Wa); PX00443-005 (Ben E. Keith); PX00449-003 (Jacmar); PX00451-005 (Services Group of America);
PX00458-004 (Nicholas & Co.); PX00460-002-003 (Shamrock); PX00529-047-048 at 188-89 (Gordon).

58

Second, Defendants argue that margin data shows that, as a merged entity, they would not
be able to price discriminate against national customers.

Dr. Hausman demonstrated that

Defendants' margin on sales to customers who use fewer distribution centers is actually higher
than their margin on sales to those who use more. DX-01355 at 58-61. Defendants contend that
under the FTC's theory, they presently have a duopoly as to national customers, yet they do not
earn duopoly profits on that customer class. Defendants thus maintain that, just as they cannot
today price discriminate to earn duopoly profits, they would not be able to price discriminate after
the merger to earn monopoly profits.
Defendants' argument, however, is unconvincing. Defendants' present inability to earn
duopoly profits on national customers is probably because large customers can keep prices down
by leveraging the defendant companies against one another. As the Cleveland Research Company
observed: "Based on our research, we believe both Sysco and US Foods have priced each other
down competing for larger national/regional contract accounts over the last several years."
PX09332-004. The ability of large buyers to keep prices down, functioning as what is known in
antitrust literature as "power buyers,'' see Cardinal Health, 12 F. Supp. 2d at 58-59; Merger
Guidelines § 8, depends on the alternatives these large buyers have available to them, see Shapiro,

supra, at 95; Areeda & Hovenkamp 3d ed.,

supra,~

943a. If a merger reduces alternatives, the

power buyers' ability to constrain price and avoid price discrimination can be correspondingly
diminished. See Merger Guidelines § 8 ("Normally, a merger that eliminates a supplier whose
presence contributed significantly to a buyer's negotiating leverage will harm that buyer."). Thus,
the fact that Defendants are currently unable to price discriminate against national customers does
not mean that they would be unable to do so as a merged firm.

59

C.

Product Market Summary

Having considered and weighed the parties' arguments and evidence, the court concludes
that the FTC has carried its burden of showing that, for purposes of merger analysis, (i) broadline
foodservice distribution is a relevant product market, and (ii) broadline foodservice distribution to
national customers is also a relevant product market.
D.

Relevant Geographic Market

The court now turns to the second part of defining the relevant market, which involves
determining the relevant geographic market. The Supreme Court has stated that, for Section 7 of
the Clayton Act, the relevant geographic market is "the area in which the goods or services at issue
are marketed to a significant degree by the acquired firm." Marine Bancorp., 418 U.S. at 620-21.
Stated differently, "[t]he proper question to be asked ... [is] where, within the area of competitive
overlap, the effect of the merger on competition will be direct and immediate." Phi/a. Nat. Bank,
374 U.S. at 357; see also Cardinal Health, 12 F. Supp. 2d at 49 (citation omitted) (internal
quotation marks omitted) (stating that the relevant geographic market is "the area to which
consumers can practically turn for alternative sources of the product and in which the antitrust
defendants face competition"). Like the product market, the geographic market must "correspond
to the commercial realities of the industry and be economically significant." Brown Shoe, 370
U.S. at 336-37 (footnote omitted) (internal quotation marks omitted). The Supreme Court has
recognized that an "element of 'fuzziness would seem inherent in any attempt to delineate the
relevant geographical market,"' and therefore "such markets need not-indeed cannot-be defined
with scientific precision." Conn. Nat. Bank, 418 U.S. at 669 (quoting Phi/a. Nat 'l Bank, 374 U.S.
at 360 n.37). That said, the relevant geographic market "must be sufficiently defined so that the

60

[c]ourt understands in which part of the country competition is threatened." Cardinal Health,
12 F. Supp. 2d at 49.
The FTC contends that there are two relevant geographic markets in this case. For national
broadline customers, the relevant geographic market is nationwide. For local broadline customers,
the relevant geographic markets are localized around Defendants' distribution centers.
With regard to national customers, for essentially the same reasons that the FTC asserts
that there is a product market for broadline distribution to national customers, the FTC asserts that
the geographic market for those customers is nationwide.

The FTC relies on the fact that

Defendants plan on a national level and have "national account" teams dedicated to national
customers; their contractual pricing and service terms with national customers apply across
regions; and their competition for national customers is largely other broadliners with nationwide
coverage.
As for local customers, as discussed in more detail below, the FTC's local geographic
markets were constructed by Dr. Israel and are premised on customers' proximity to Defendants'
distribution centers. The basic idea is that, for local customers, distance to a distribution center is
a key service factor and, for Defendants, distance traveled from a distribution center to make
deliveries is a critical cost component.

The FTC alleges that the merger threatens to harm

competition in 32 local geographic markets where Sysco and USF together currently have
dominant market shares. Compl.

~

60.

Defendants dispute that there is a nationwide geographic market for the same reasons that
they contend that there is no national customer product market. As for the local geographic
markets, Defendants aggressively challenge the methodology that Dr. Israel used in defining local
markets. Their primary criticism is that the geographic areas are drawn so narrowly that they

61

exclude actual competition from the relevant market. This results, they contend, in local market
concentrations that artificially inflate Defendants' market shares.

l.

National Market

Although the physical act of delivering food products occurs locally, for national customers
the relevant geographic area for competitive alternatives is nationwide, primarily because of their
geographically dispersed footprint.

Defendants compete within this market by touting their

nationwide distribution capabilities to these customers; bidding against other broadliners with
multi-regional capabilities (which is to say, against each other and the regional cooperatives);
coordinating the marketing, negotiating, and managing of these customers through their "national
account" teams; and entering with these customers into a single contract whose terms, including
pricing, apply across regions. For these reasons, the court finds that the relevant geographic market
for broadline foodservice to national customers is nationwide. See Grinnell, 384 U.S. at 575-76
(finding a national geographic market where central station services "operated on a national level,''
and there was "national planning," a nationwide schedule of prices, and nationwide contracting
for multi-state businesses); Cardinal Health, 12 F. Supp. 2d at 50 (finding a national geographic
market where evidence showed that "GPOs negotiate contracts with several wholesalers, making
the same prices available throughout the country to all of their members-local, regional, or
national").

2.

Local Markets

Defining the local geographic market presents a far greater challenge. Not surprisingly,
there is no industry standard for delineating the area that makes up a local geographic market for
broadline distribution. Each local market has its own unique attributes. Customer composition
and concentration differs across markets; so does the demand for products, with SKU variations

62

reflecting local tastes and palettes. Average driving distances for foodservice distributors vary
depending on the density of the area, with longer hauls more common in rural parts of the country
and shorter trips more prevalent in urban areas. And, of course, the competitors vary from market
to market.
The FTC tasked Dr. Israel with defining the local geographic markets. He constructed
them as follows. In his first step, Dr. Israel drew circles around the location of each Sysco and
USF distribution center. To determine the size of each circle, Dr. Israel used a radius, referred to
as the "draw distance," that, on average, captured 75 percent of the distribution center's sales to
local customers. The length of each distribution center's 75 percent draw radius differed. For
example, the 75 percent draw distance around Sysco's Billings, Montana, facility was 262 miles,
whereas the 75 percent draw distance around Sysco's Jersey City, New Jersey, facility was only
24 miles. PX09350-221-224, Table 38. What that means is Sysco drives over 200 miles further
to capture 75 percent of its local sales in Billings than it does in Jersey City. That disparity makes
sense, as more populated areas correspond to higher customer concentrations and shorter delivery
distances.
In his second step, Dr. Israel identified each company's local customers that fell within an

area of intersection between the draw circle around the Sysco distribution center and the draw
circle around the USF distribution center. This area of intersection was termed the "overlap area."
These "overlap customers," according to Dr. Israel, were the customers most likely to suffer harm
from the merger, because these were the customers who would be left with one less alternative
supplier after the merger. Exhibit 40 from Dr. Bresnahan's report, which is reproduced below,
shows Dr. Israel's methodology in the Omaha, Nebraska, area. The blue-dotted circle corresponds

63

to Sysco's 75 percent draw area, and the green-dotted circle corresponds to USF's. The dark gray
area corresponds to the "overlap customers." DX-01359, Ex. 40.
EXHIBIT 40
OISTRlBUTION CENTERS LOCATED NEAR THE FTC'S CONTESTED LOCAL AREAS
OMAHA, NE/COUNCIL BLUFFS, IA

@

{fl' US Fc~?j-s BrnadlF1e
'W>W

MaJO~

tkuad\r.e.r

0

MaJf..i[

6ruadlaHJ~' w~~i; Sa~es

f}a:a

l5% USF Draw l\r~a \'DQ);t rrnt~ radiu!>J

In his third step, Dr. Israel identified the broadline distributors who could compete for the
customers in the overlap area. To do this, Dr. Israel drew circles around each overlap customer
using the 75 percent draw radius. This created a larger circle that moved the outer boundaries of
the overlap area by the same radius as the 75 percent draw area, which is represented by the light
gray area in Exhibit 40 above. According to Dr. Israel's analysis, the light gray area is the area to
which customers can practically tum for alternative sources of broadline distribution. All of the

64

competitors located within the light gray area were factored into Dr. Israel's local market share
computations.
Defendants attack Dr. Israel's "circle drawing exercise" as "arbitrary" and not reflective of
industry realities. Defs.' Opp'n Br. at 27. Specifically, they assert that Dr. Israel's methodology
is flawed because it assumes that competitors will drive no greater distance than Sysco's or USF's
75 percent draw radius to serve customers. Defendants point to competitor declarations and
testimony showing that in many of the 32 local markets in which the FTC claims Defendants have
a dominant market share, competitors are willing to, and do, drive distances greater than the
75 percent draw radius to compete for and deliver to customers.
Notwithstanding this criticism, the court finds that there is nothing inherently "arbitrary"
about Dr. Israel's methodology in defining the local markets. To the contrary, given the absence
of an industry standard for defining a local market, Dr. Israel's methodology provides a practical
approach and solution to an otherwise thorny problem. Dr. Israel's premise in defining these
markets-that driving distance matters-is amply supported by the record and common sense.
Customers who are farther away from a distribution center cost more to service. Longer distances
correspond to, among other things, higher gas usage, more labor hours, and increased wear and
tear on trucks. Given that the geographic market need not be defined by "metes and bounds,"

Conn. Nat 'l Bank, 418 U.S. at 669 (citation omitted) (internal quotation marks omitted),
Dr. Israel's 75 percent draw methodology identifies "the area of competitive overlap, [where] the
effect of the merger on competition will be direct and immediate," Phila. Nat'l Bank, 374 U.S. at
357. See also Conn. Nat'l Bank, 418 U.S. at 670 n.9 (remanding to the district court to define the
local market and observing that the "federal bank regulatory agencies define a bank's service area
as the geographic area from which the bank derives 75% of its deposits"). The court therefore

65

concludes that the relevant local geographic markets are the areas of overlap resulting from
Dr. Israel's 75 percent draw methodology.
Ultimately, what really troubles Defendants about Dr. Israel's "circle drawing exercise" is
not the resulting geographic areas, but what those areas mean for calculating Defendants' local
market shares. The court considers those arguments in the next section.

II.

THE PROBABLE EFFECTS ON COMPETITION
Having concluded that the FTC has carried its burden of establishing a relevant market-

both a nationwide market for broadline foodservice to national customers and various local
markets for broadline foodservice to local customers-the court turns next to "the likely effects of
the proposed [merger] on competition within [those] market[s]." SwedishMatch, 131 F. Supp. 2d
at 166. As the Court of Appeals explained in Heinz, the government "must show that the merger
would produce 'a firm controlling an undue percentage share of the relevant market, and [would]
result[ ] in a significant increase in the concentration of firms in that market."' 246 F.3d at 715
(quoting Phi/a. Nat'/ Bank, 374 U.S. at 363). "Such a showing establishes a 'presumption' that
the merger will substantially lessen competition." Id. (citation omitted).
The Court of Appeals has held that the FTC can establish its prima facie case by showing
that the merger will result in an increase in market concentration above certain levels. Id. "Market
concentration is a function of the number of firms in a market and their respective market shares."
Arch Coal, 329 F. Supp. 2d at 123.

A common tool used to measure changes in market

concentration is the Herfindahl-Hirschmann Index (HHI). Heinz, 246 F.3d at 716; see also Merger
Guidelines § 5.3. HHI figures are "calculated by summing the squares of the individual firms'
market shares," a calculation that "gives proportionately greater weight to the larger market
shares." Merger Guidelines§ 5.3. "Sufficiently large HHI figures establish the FTC's prima facie

66

case that a merger is anti-competitive." Heinz, 246 F.3d at 716. The Merger Guidelines, which
provide "a useful illustration of the application ofHHI," FTC v. PPG Indus., Inc., 798 F.2d 1500,
1503 n.4 (D.C. Cir. 1986), state that a market with an HHI above 2,500 is considered "highly
concentrated"; a market with an HHI between 1,500 and 2,500 is considered "moderately
concentrated"; and a market with an HHI below 1,500 is considered "unconcentrated," Merger
Guidelines§ 5.3. Furthermore, a merger that results in "highly concentrated markets that involve
an increase in the HHI of more than 200 points will be presumed to be likely to enhance market
power." Id. In Heinz, the Court of Appeals recognized that an increase in HHI by 510 points
"creates, by a wide margin, a presumption that the merger will lessen competition." 246 F.3d at
716.
A.

Concentration in the National Broadline Customer Market
1.

Dr. Israel's National Broadline Customer Market Shares Calculations

In some cases the merging parties' market shares and post-merger HHis are seemingly
uncontroversial. See, e.g., Staples, 970 F. Supp. at 1081-82; H&R Block, 833 F. Supp. 2d at 7172. Not so here. Because there are no industl)'-recognized market shares for national broadline
customers, the FTC tasked Dr. Israel with calculating the market shares and the HHis.

Not

surprisingly, Defendants vigorously contested his methodology and conclusions.
Dr. Israel calculated Defendants' national customer shares as follows. As his first step, he
identified Defendants' individual sales to national broadline customers, i.e., the numerator for the
market share calculation. Those sales figures came directly from the parties' "national" customer
designations: for Sysco, its sales to CMU customers, and for USF, its sales to national customers.
Next, Dr. Israel determined the total sales by all broadline distributors to national
customers, i.e., the denominator for the national share calculation. Again, because there is no

67

industry-recognized figure for such sales, Dr. Israel estimated them. He did so in two ways. First,
he aggregated the national sales of the three principal competitors for national customers-Sysco,
USF, and DMA-and added in another share equal to DMA's.

This total comprised the

denominator for his "baseline" shares calculation. PX09350-074. The addition of another DMAsized share to the denominator was premised on his observation from the RFP/bidding data that
the size of sales to national customers by all broadliners other than Sysco, USF, and DMA was
about the same as DMA's.
Dr. Israel also used a second method to calculate the total sales to national customers. He
aggregated the national sales reported by the largest 16 broadliners, including DMA and MUG, in
response to the FTC's civil investigative demands. This data is referred to as CID data. Dr. Israel
ran several "sensitivities" on this sum, adding in sales to account for variations in CID responses
(e.g., some distributors did not segregate "national" from total sales). Dr. Israel also aggregated

the national sales of Sysco, USF, DMA, and MUG, plus an estimate of national sales for all other
responding distributors based on the assumption that each distributor's national-local sales ratio
was the same as Defendants' ratio.

Dr. Israel's various approaches yielded a total national

broadline sales estimate of $28 to $30 billion. Hr'g Tr. 1177-78; see also PX09060-006 (PFG
business plan estimating the size of the national customer market to be approximately $20 billion).
As his last step, Dr. Israel adjusted his market shares to account for the divestiture to PFG.
The chart below reflects Dr. Israel's post-merger, post-divestiture market share and HHI
calculations. For his "baseline" calculation, Dr. Israel determined that the parties' post-merger
national broadline customer market share would be 71 percent with an HHI increase of nearly
2,000 points. His CID data-based calculations, shown as (i) through (vi) in the chart, also yielded
high post-merger shares and significantly increased HHis.

68

Dr. Israel's most conservative

approach, in which he assumed that the top 16 broadliners had national to local sales ratios that
were equal to Defendants' ratio of such shares-( iv) in the chart below-resulted in a post-merger
market share of 59 percent and an Hill increase of 1,500 points. PX09350-186, Table 18.
Table 18

Shares of Sales to ::Xational Broadline Cu.<;tomer1;, After Accounting for the Proposed
Diwstiture
Poo;t-Di.vestiture Shares

Post-Div.:'Stitme HJ-Il's
l-Eil

·n °o

Ba'ieline
(i) N mional

0

6S o

!ii) National~ Imputed National
{iii) National - Regional

(i\"} ?\mional-;-

66%

sy~tenb

Partie~·

+ System<;
Raiil> of:National

2.

1.966

l.953
1.799
1.822
1.643

4.oii7
3.809

1590
1500

~

(v) Nmional + Reg1om1l

{vi)

2 H'r'.J

)Jl9
4.935
4.549
4.614
4,_l,...,
i

61°0
59°0

Defendants' Arguments

Defendants raise a host of objections to the reliability of Dr. Israel's methodology and
calculations. They contend that his use of their "national" sales in the numerator was arbitrary
because, as discussed above, not all of Defendants' "national" sales are to customers with a multiregional footprint. The inclusion of those sales, they contend, overstated Defendants' national
market share. They also argue that Dr. Israel's numerator included some sales to systems-like
customers, such as to Five Guys, but his denominator excluded competitors' systems sales. This
asymmetry, they assert, also resulted in an overstatement of Defendants' share. They further
contend that the denominator used in Dr. Israel's "baseline" calculation is unreliable because it
relies on the flawed RFP/bidding data set. And, finally, they argue that the denominator in the
CID data calculation excludes over $30 billion in sales-though the source of this number is

69

unclear. 24 They contend that these errors in developing the numerator resulted in biased market
share calculations.
None of these arguments ultimately persuade the court that Dr. Israel's methodology or his
market shares and HHI calculations are unreliable. The FTC need not present market shares and
HHI estimates with the precision of a NASA scientist. The "closest available approximation"
often will do. PPG, 798 F.2d at 1505 (citation omitted); see also H&R Block, 833 F. Supp. 2d at
72 (stating that a "reliable, reasonable, close approximation of relevant market share data is
sufficient"). Indeed, in PPG, the FTC presented, and the Court of Appeals accepted, share
calculations for "every market the evidence suggests is remotely possible," which "yield[ ed]
results of similar magnitudes in market concentration." 798 F.2d at 1506. Similarly, Dr. Israel
ran multiple variants of his market shares and concentration analysis, using two different data sets
and modifying one of these data sets, the CID data, in six different ways. Most convincing to the
court was Dr. Israel's final method of calculating shares using the CID data, which assumed that
all 16 of the top broadliners had the same national-local sales ratio as Defendants did. That
approach yielded a low-end market share of 59 percent and an HHI increase of 1,500 pointsalmost three times the 510 points that the Court of Appeals in Heinz found created a presumption
of harm by a "wide margin." 246 F.3d at 716. This variation almost certainly underestimated
Defendants' market shares, as smaller broadliners are unlikely to have a ratio of national-local
sales comparable to Defendants' ratio.
Another reason Defendants' arguments do not sway the court is that other evidence in the
record supports Dr. Israel's calculations. As discussed above, the largest customers for broadline

24

"Dr. Israel acknowledged that he left out $30 billion in systems distribution in the "sensitivity analysis purporting
to account for systems sales." Defs.' Proposed Findings of Fact and Conclusions of Law, ECF No. 171at263 (citing
Hr'g Tr. 1259-60).

70

distribution in the country-healthcare GPOs, foodservice management companies, hospitality
companies, and large government agencies-make the vast majority of their broadline purchases
from Defendants. These customers individually spend hundreds of millions of dollars (or more)
on broadline distribution-totaling approximately half of the national broadline market (based on
Dr. Israel's calculation of a total market of $28 to $30 billion). See FTC Closing Arg. Slides at
3 5. If the largest customers are presently spending between 60 to 100 percent of their total food
budget with Defendants, id., then Dr. Israel's low-bound, post-merger combined market share of
59 percent is consistent with market realities.

In addition, the only independent market share analysis of the broadline industry identified
by the parties corroborates Dr. Israel's conclusions. The foodservice industry research firm
Technomic collected 2014 sales data from the country's 43 largest broadliners. DX02016. Taken
together, Technomic estimated total broadline sales to be $125 billion.

Of that total, Sysco

accounted for $35.7 billion and USF $23 billion, for a combined sum of $58.7 billion-nearly
47 percent of U.S. sales. See id.; see also PX09045-015 (PFG presentation to FTC stating that
"[t]he two largest broadliners (Sysco and US Foods) accounted for 51 % of all broadline sales in
2010," based on a study by Hale Group, "Focus on Foodservice Distribution," dated April 11,
2013); PX09045-014 (PFG presentation to FTC highlighting a 2011 Technomic study showing
that Sysco and USF had a combined market share of 58 percent among the top 10 broadline food
distributors).
Technomic's 47 percent combined market share estimate for total broadline sales is
consistent with Dr. Israel's low-end, post-divestiture estimate of 59 percent for national broadline
sales. The Technomic data did not segregate national and local broadline customers. However,
because the largest customers buy disproportionately from Sysco and USF, it stands to reason that

71

the companies' combined market share for national customers would be greater than 47 percent,
as Dr. Israel found. Even a combined market share of 47 percent (admittedly, a pre-divestiture
number) can give rise to a presumption of harm. See Phila. Nat 'l Bank, 374 U.S. at 364 ("Without
attempting to specify the smallest market share which would still be considered to threaten undue
concentration, we are clear that 30% presents that threat.").

3.

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

The court thus finds that the FTC has shown, through Dr. Israel's testimony and other
evidence, that a merger of Sysco and USF will result in a significant increase in market
concentration in the market for national broadline customers. The FTC therefore has established
a rebuttable presumption that the merger will substantially lessen competition in the market for
national broadline distribution.

B.

Concentration in the Local Markets
!.

Dr. Israel's Local Broadline Customer Market Shares Calculations

In addition to the market for national customers, the FTC also contends that the merged
firm would create highly concentrated local markets for broadline foodservice distribution. To be
precise, the FTC asserts that, in 32 different local markets, the merger between Sysco and USF
would result in dramatic increases in IIlils, thereby substantially lessening the competition in those
markets. Compl.

~

60, App. A. The FTC also maintains that the divestiture to PFG will not resolve

Defendants' post-merger local market dominance.
As with the market for national customers, there is no industry study oflocal market shares.

See PX09045-019 ("PFG is not aware of any systematic industry market share data"). The FTC
again relied on Dr. Israel for those numbers.

His starting point for calculating local share

percentages was his 75 percent draw area methodology for defining the local geographic markets.

72

See PX09350-058. As already discussed, Dr. Israel first identified the 75 percent overlap area in
each local market and then identified the competitors that could serve those customers by drawing
a circle with a radius equal to the 75 percent draw distance around each overlap customer. Next,
to calculate the overall local market shares, Dr. Israel calculated a customer-specific market share.
That is, for each customer in the overlap area, he calculated the market shares for the competitors
who were located within the customer's 75 percent draw distance radius.

Dr. Israel then

aggregated each of these customer-specific shares to the local level, using weighted averages
across all overlap customers. The consequence of this methodology was that, the greater the
competitor's distance from the center of the overlap area, the less weight that competitor would
receive in the overall local market share calculations. Stated differently, because these distant
competitors' market shares would only come into the calculation due to customers on the borders
of the overlap area, those competitors' shares would be smaller than the shares of competitors
whose distribution centers were closer to the middle of the overlap area-namely, Sysco and USF.
When calculating market shares, Dr. Israel used three different metrics: (i) square footage
of distribution centers; (ii) local broadline sales; and (iii) number of sales representatives.
Dr. Israel used the first and third variables as proxies for revenues and as a way to confirm the
market share calculations that were based on the second variable, sales revenues. To calculate
shares based on revenues, Dr. Israel used the Defendants' sales data for the numerator. For the
denominator, he used the sales numbers, where available, for local broadliners. For those local
competitors for whom he did not have actual sales data, he estimated the sales revenue based on
the size of the distribution center. PX09350-134 at n.410. Based on those metrics, in local markets
with the 20 highest increases in pre-divestiture HHis, Defendants' combined market shares ranged

73

from 100 percent in San Diego, California, to over 65 percent in multiple markets. The HHI
increases in each of top 20 markets were over 2,000 points. PX09350-135-137.
Dr. Israel also calculated post-divestiture market concentrations and HHI mcreases.
According to the table below, in Memphis, Tennessee; Omaha, Nebraska; Sacramento, California;
and Charleston, South Carolina, the post-divestiture combined markets shares remain above 80
percent with HHI increases in excess of 4,100, 1,400, 2,900, and 2,900 points, respectively.
PX09350-213, Table 21. In seven other local markets, Dr. Israel calculated the post-divestiture
combined market shares to be between 57 percent and 76 percent, with HHI increases in each case
in excess of 1,500 points. Id.

Table 21
Examples of Areas with Large Change in HHI despite Divestitures
Post-\Ierger

CBSA

Combined S barf
90.3'%
88.6%i
75.4%

Omaha-Council Bluffs. l:\17E-Lt\.
Sacramento--Roseville--Arden-Arcade. CA
Durham-C11apel Hill. NC
Charksto11-No1th Charleston. SC
Bi:nningham-Hoover. AL

80.2~0
57.5~o

Jackson, MS

66.0'%
93.S'!·o
72.8%

Memphis. TN-:tvfS-AR
CohmJ.bia. SC
Raleigh. NC
Lynchburg, VA..
Rochester, NY

2.

7uq·o
63.3'%
63.7%

DeltaHHI
1.410
2.974
2.807
2.947
L542
2.155
-U23
2.315
2.188
1.588
1.574

Defendants' Arguments

Defendants attack Dr. Israel's local market share calculations in much the same way they
did his national market share calculations-by contesting his methodology and inputs. Defendants
assert that Dr. Israel's methodology was premised on the unreliable assumption that no competitor
74

would drive a greater distance than Sysco or USF currently does to provide broadline services. In
other words, they criticize Dr. Israel's use of the same draw radius to identify the relevant local
competition as he did to identify the overlap area. As a result, they argue, Dr. Israel's local market
share calculations excluded sales from broadliners who travel greater distances and thereby
overstated Defendants' combined market shares.
To demonstrate this point, Dr. Bresnahan presented an analysis of the Omaha, Nebraska
market. He testified that, according to Dr. Israel's analysis, Defendants had combined sales in
Omaha of $95 million and a combined market share of 90 percent. According to Dr. Bresnahan,
Dr. Israel's methodology did not factor in at least -

million in sales by another local distributor,

Cash-Wa, whose distribution facility is 129 miles west of Omaha-farther out than the 91-mile
75 percent draw radius that Dr. Israel had used for the area. Dr. Bresnahan based his conclusion
on sales data per zip code produced by Cash-Wa, which Dr. Israel had not considered in his
analysis. According to Dr. Bresnahan, the zip code data showed that in 2013, Cash-Wa made sales
to customers in zip codes within the 75 percent overlap area-at least -

million worth-which

Dr. Israel did not account for because of his driving distance assumption. Had these Cash-Wa
sales been taken into account, Defendants' combined market shares and increase in HHis would
have been lower. As illustrated by his Omaha study, Dr. Bresnahan concluded that Dr. Israel's
local market share methodology produced unreliable results.
Dr. Bresnahan' s Omaha study convincingly demonstrated that Dr. Israel's 7 5 percent draw
area methodology resulted in underreported competitor sales in the Omaha market. But what it
did not show convincingly was by how much. Dr. Bresnahan's initial expert report stated that
Cash-Wa's sales in the overlap area were over -

million. DX01359-139. At the evidentiary

hearing, however, he said that Cash-Wa's sales into that area were "at least -

75

million," DX-

05029 at 42, and he did not explain why that number differed from his report. 25
fundamentally, Dr. Bresnahan's reliance on zip code data had its limits.

More

As Dr. Bresnahan

conceded, the zip code data did not differentiate between local and national customers or broadline
and systems customers. Hr'g Tr. 2186. Dr. Israel explained that he did not use the zip code data
for that very reason, as well as the additional reason that he did not have zip code data for all local
market competitors. In addition, Cash-Wa does substantial business selling tobacco products;
however, the zip code data does not segregate those sales. Id. As a result, although the court
agrees with Defendants that Dr. Israel's methodology excluded some local broadline sales in
Omaha, the court cannot reliably determine the extent of the underestimation. And, notably, even

ti million figure consisted entirely of local broadline sales, Defendants would
still have a high combined local market share of I percent ($95 million/(tl million + $95
if Dr. Bresnahan's

million)

=I percent).

Ultimately, the court finds that Dr. Israel's specific local market calculations is informative,
but not conclusive evidence, of the merger's potential harm to local broadline customers. As the
Omaha study showed, because Dr. Israel's 75 percent draw methodology excluded some
competitor sales and because each local market has nuances that cannot be captured by his
methodology, the court cannot rely conclusively on Dr. Israel's precise local share calculations as
a measure of competitive harm.
The court, however, finds variations on Dr. Israel's 75 percent draw methodology to
provide persuasive evidence of the merger's impact on local markets. Dr. Israel did more than

25

The court infers that the sales figure was reduced, in part, to estimate only Cash-Wa's broadline sales, as opposed
to all sales. But that reason, if correct, was not made clear on the record. Additionally, in his report, Dr. Bresnahan
reported over
million in sales by another broadliner, Reinhart. However, he made no mention ofReinhart's sales
~That may be because Reinhart reported that
~· PX09034-019.

ti

76

calculate local share percentages based on 75 percent draw areas. He also used a 90 percent draw
area and a weighted 95 percent draw area. Those increased draw areas captured some of the
competitor sales that the 75 percent draw area excluded. 26 Dr. Israel then aggregated the local
market share figures across all overlap customers in all markets, using distribution center square
footage, adjusted revenues, and number of sales representatives to estimate market share.
PX09350-137-139. As shown in the table below, 27 these alternative approaches-designated as
variations (i) and (ii)-demonstrate that for half of the customers in overlap areas, Defendants
would have a post-merger combined local market share of more than 50 percent and the HHI would
increase at least 1,300 points. PX09350-139, Table 7. A quarter of the overlap customers would
face even greater market concentrations: Defendants post-merger would have at least 68 percent
in combined local market share and the HHI would increase by at least 2,000 points. And, 10
percent of the overlap customers would face a combined market share north of 74 percent and an
HHI increase of greater than 2,500 points. The picture that clearly emerges from these numbers
is that, in many areas across the country, USF and Sysco already control a substantial share of the
market for local broadline distribution. A merger between the two would lead to a significant
increase in market concentration in many areas.

26
In a third variant, Dr. Israel went beyond the overlap areas and performed market calculations that took into account
all local broadline customers, regardless of whether they fell into the overlap area. Dr. Israel also used a fourth
variant-though not entirely clear from his report-in which he appears to have re-run his 75 percent draw
methodology using all of Defendants' broadline customers in the overlap area, not just local broadline customers.
PX09350-137-138.
27
These figures are pre-divestiture share calculations. But the local market share percentages and HHI increases are
so high that, even taking into account the divestiture, when aggregated across numerous markets, these figures are
unlikely to decrease enough to change the overall picture. See PX09375-103-104.

77

Table 7
Summary Statistics for Lonll l\Iarket Shares under AJternatin :\Ietboclologies
c·oml:~uerl Shan'

:\.kdiau
Sqn;n-~

:\Iediau

'.'.'5th Pctilt' 90th Pdile

J.HHI
'.'5th Pctile 9\hh Pcti!€

fontaie -; h:trt?-s

&scfu1e
(i·; 9(P ~ di, tnbutio11 <l.i;tauce
(i;; Cmti.m1ous ctiu.ribuuon disrnnce
(fil) AU lo.:nl CB:;A cmromers

55.7~9

71.S':-o
68.3°-.,
6S.3%

:;s.~.

704~.

59.S"o
58.,31".)

1.76.3
1.557
1.369
1.603

81.5'°o
75.3c';)

:&.2_6°G
SO.S0 c
Y#

62.&'·o

57.2°•0
54.6°-o
59 S"o

74. i"•o
71.6%
70.6•-o
74.6""o

S6.00 o
79.Po

33.3"'•)
85 --;-r:io

2.. 765
3.081

2,364

'"" .£-~~2.~ll,_2}~~£l~e,,;;~?~.S.~l~J.2£~~~J1:. "°·"'~,,,. ,,_ __ ~""~"''"'·~~.2£'.~,~~ ~-·w~,..,~.,.,.,, ..!2~~~2--v_.,.. .,x= *'Z~-::~?,- w-.----= ~,~ ,x;~L:~21.,..~. ~mw•~,;~~~,£ >«~--~
Acljnsterlnwnue sh~res-•
Bnscliuc
(i) 9(f·o di•t1:ilmt10n di~tancc
(i.z) Continuous di>trilnmon d1>tance
(iii) All local CBSA customers

3.16'1
2.621

2.375
2.149
2.013

l.:''4

2.778

1.471
L20S
1.327

2.3-ll

LS49
2.614

_.,

~··'"'~'".
3.094
2.S86
3.()(Y)

2.974

......(ic::.l.:~.~. ?.~:~!l.:P...~13.?.A. s~1.~~9.~~!.~..~--· ..···..............................!SQ.!.:::..............JQ,;~:?................ ?..~:.!.~? .................... ...... L?.?L ............... J~.~?................. J.2.~?.. ..
Salt< nunsentath-e shares
Basehne
(i) 90% di.stnbution. disian~e
fui Co1ltumou> di>trihut1011 dL>tance
(in) All local <."13$A customers
(iv\ All ov~dap CBSA rnstomers *

625%
58.0%

70.S%
6S.0'-';,

SO.S%

52.7°--r;

70_5~-.J

S65°o

61.1"·

70.4~-;,

61.6%

69.8%

30.3°·.
79.4%

].:1,.§?b

1854
1594

134.5
1.595
1.777

2.-'106

2.217
2.039
.2.308

2.306

3..152
2.~31

2.655
3.099
2.749

*

Iiidude~ all Clhtomer.
.;,.
**For n1riarion (iY). miadjusted reYenues fife used.

Defendants' combined strength in local markets is corroborated by documents compiled
during the Defendants' ordinary course of business. For example, in an Investor Presentation,
dated November 2012, USF represented that it "estimated [having the] #1 or #2 position in- of
served markets." PX03000-014. Mr. Schreibman's investigational hearing testimony confirmed
the present-day accuracy of that statement Investigat'l Hr'g Tr., PX00515-017 at 65. He also
confirmed that, in many of those markets, Sysco occupied the number one or two market position.

Id
Another USF document, a strategy document created in 2011, shows USF and Sysco with
sizeable "market penetrations" in many local markets.

PX03073-023-030. Mr. Schreibman

testified that "market penetration" was different from "market share," as the former reflected the
percentage of customers that purchased even $1 of product, whereas the latter reflected
78

percentages of overall sales volumes. Hr'g Tr. 1508-09. But even if "market penetration" and
"market share" have different definitions, both concepts are a measure of market strength, and the
"market penetration" percentages show USF and Sysco to be first and second in numerous markets.
Indeed, the very same strategy document lists 54 separate markets and identifies Sysco as a
competitor in each of them. Of those 54 markets, USF estimated that Sysco had the number one
position in

I

markets and that, within those

estimated that it was number one
markets. And, in
the

I

I

markets, USF was number two in

I·

USF also

inll markets, with Sysco ranked number two in those samell

II markets, USF viewed itself as tied for number one with Sysco.

Thus, of

local markets, USF viewed Sysco or USF as the leading broadliner inland as the number

two broadliner (or tied for first)

inl. This internal assessment clearly supports Dr. Israel's local

market share calculations.
Defendants offer a different ordinary course document to rebut Dr. Israel's market share
calculations. In 2013, relying on a sizeable third-party sales database of 335,000 independent
restaurants, USF calculated its share of sales to independent restaurants in 53 local markets. That
study showed USF with market shares much lower than that shown by Dr. Israel's calculations,
ranging from a high

ofl percent in Columbia, South Carolina, to a low ofll percent in the

"Northwest." DX-00397-002.
But Defendants' reliance on the independent restaurant study as an indicator of local
market shares is problematic for several reasons. First, there is no evidence that the underlying
database differentiated between purchases from broadline distributors and purchases from other
channels of distribution. The evidence has shown that, among foodservice customers, independent
restaurants are among the most likely to buy from other channels, such as specialty and cash-andcarry. In other words, unless broadline sales are segregated from the rest-which the restaurant

79

study appears not to have done-the resulting market share estimate will underestimate USF' s
actual share of only broadline purchases. A market share calculation that uses at its numerator
purchases from all channels cannot be relied upon to determine USF's broadline market shares.
Second, no evidence was presented showing that the buying habits of independent
restaurants is representative of other local broadline customers.

Thus, by focusing only on

independent restaurant purchasing, the data set does not provide an accurate picture oflocal market
shares.
Third, the independent restaurant study's results conflict with other documents.
instance, USF's 2011 strategy document describes the company as having a "[s]olid

For

4" position

in "Reno/Sacramento,'' PX03073-019, but the restaurant study finds a less than 10 percent share
in Reno, DX-00397-002. Similarly, the strategy document describes USF as having the

"4

position" in St. Louis, PX03073-018, but the restaurant study reported only a 13.3 percent share
in the "Missouri Group," DX-00397-002.
Finally, Dr. Israel's conclusions are corroborated by PFG's analysis of the local markets.
In January 2014, PFG made a presentation to the FTC in which it addressed the state of competition
in various local markets. PFG, at the time, was represented by antitrust counsel, Kirkland & Ellis.
Because there was no comprehensive industry data for local market shares, PFG "estimated local
broadline market shares based upon [distribution center] square footage, which PFGuses to gauge
competitor strength in the ordinary course of business"--one of the very methods that Dr. Israel
used for calculating market shares. PX09045-019. PFG observed that, "[w]hile not perfect, we
believe this approach produces directionally correct results and can be useful in flagging areas
that merit closer consideration." Id (emphasis added). PFG's analysis showed that in six major
markets-New York, Philadelphia, Detroit, Denver, Las Vegas, and Los Angeles-a combined

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Sysco-USP, based on distribution center square footage, would control between 45 percent (New
York City) to 80 percent (Las Vegas) of those local broadline markets. PX09045-020. PFG also
calculated that a merger in those markets would result in IIlil increases ranging from 1,000 points
(New York City) to 3, 100 points (Las Vegas). Id Consistent with Dr. Israel's market shares and
IIlil calculations, PFG concluded that the "[p ]reliminary findings indicate significant

concentration in many local markets." Id

3.

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

The court thus finds, based on Dr. Israel's testimony and other evidence, that the FTC has
shown that a merged Sysco-USP will significantly increase concentrations in local markets for
broadline distribution.

The FTC therefore has made its prima facie case and established a

rebuttable presumption that the merger will lessen competition in the local markets.
C.

Additional Evidence of Competitive Harm

The FTC did not rely solely on increased IIllls to establish that Defendants' proposed
merger would cause competitive harm. See Baker Hughes, 908 F.2d at 992 ("The HerfindahlHirschman Index cannot guarantee litigation victories.").

It offered additional evidence to

strengthen its prima facie case, to which the court now turns.

I.

Unilateral Effects-National Customer Market

The FTC advanced a "unilateral effects" theory to argue that the merger would harm
competition in both the national and local broadline distribution markets. In this section, the court
considers the evidence of unilateral effects in the national customer market and subsequently turns
to the evidence regarding local customer markets.
Courts have recognized that a merger that eliminates head-to-head competition between
close competitors can result in a substantial lessening of competition. See Heinz, 246 F.3d at 717-

81

19 (holding that elimination of competition between second- and third-largest jarred baby food
manufacturers would weaken competition); Swedish Match, 131 F. Supp. 2d at 169 (finding a
likelihood of unilateral price increase where merger would eliminate one of Swedish Match's
"primary direct competitors"); Staples, 970 F. Supp. at 1083 (finding anticompetitive effects where
the "merger would eliminate significant head-to-head competition between the two lowest cost
and lowest priced firms in the ... market."); see also Merger Guidelines § 6 ("The elimination of
competition between two firms that results from their merger may alone constitute a substantial
lessening of competition.").

In such circumstances, a merger "is likely to have unilateral

anticompetitive effect if the acquiring firm will have the incentive to raise prices or reduce quality
after the acquisition, independent of competitive responses from other firms." H&R Block, 833 F.
Supp. 2d at 81.
Unilateral anticompetitive effects can arise in a host of different settings. See generally
Merger Guidelines § 6. Here, the FTC's case for unilateral effects rests on the fact that the
broadline distribution industry is marked by negotiations between buyers and sellers. In such a
market, "buyers commonly negotiate with more than one seller, and may play sellers off against
one another." Id § 6.2. If two competitors merge, buyers will be prevented from playing the
sellers off one another in negotiations. See id This elimination of competition "can significantly
enhance the ability and incentive of the merged entity to obtain a result more favorable to it, and
less favorable to the buyer, than the merging firms would have offered separately absent the
merger." Id
On the other hand, even if the merging parties had large market shares, if they were not
particularly close competitors, then the market shares might overstate the extent to which the
merger would harm competition. Although the merging parties need not be the top two firms to

82

cause unilateral effects, see, e.g., Heinz, 246 F.3d at 717-19; H&R Block, 833 F. Supp. 2d at 8384, the FTC argues that the potential for unilateral effects here is magnified because Defendants
are particularly close competitors and many national customers consider them the top two choices
for broadline distribution. See Merger Guidelines § 6.2 ("Anticompetitive unilateral effects ...
are likely in proportion to the frequency or probability with which, prior to the merger, one of the
merging sellers had been the runner-up when the other won the business.").
The FTC offered various sources of evidence to show that the proposed merger will result
in unilateral anticompetitive effects. The evidence includes empirical data collected and analyzed
by Dr. Israel, Defendants' ordinary course documents, and testimonial evidence from other market
actors.
a.

Dr. Israel's RFP/bidding study

To show that Defendants were frequent head-to-head competitors-indeed, each other's
closest rivals-Dr. Israel analyzed each company's bidding opportunities for national customers
based on the RFP/bidding database that he compiled from the companies' records.

The

RFP/bidding records that Dr. Israel collected spanned a seven-year period, from 2007 to 2014.
PX09375-088. He formed the database not only from the parties' reconstructed RFP data, but also
from a host of ordinary course records reflecting bidding opportunities, PX09375-089-091. From
this evidence, Dr. Israel concluded: "[I]n competitions for National Broadline Customer business,
both USF and Sysco compete with and lose to one another much more than they compete with or
lose to any other distributor and, indeed, more than all other distributors combined." PX09375088. More specifically, based on Sysco's RFP/bidding records, Dr. Israel observed that USF
appeared as a competitor for national broadline business twice as often as the next competitor and
that, when Sysco lost, it lost to USF two and a half times more often than it lost to the next

83

competitor.

Similarly, based on USF's RFP/bidding records, Dr. Israel observed that Sysco

appeared as a competitor for national broadline business four times as often as the next competitor
and that, when USF lost, it lost to Sysco three and a half times more often than it lost to the next
competitor. PX09350-105-109.
Defendants disputed the reliability of Dr. Israel's RFP/bidding data study in two primary
ways. First, as already discussed, they forcefully challenged the underlying data set, arguing that
neither company keeps ordinary course RFP and bidding records and that Dr. Israel's reliance on
these artificially created data sets to calculate an empirical "win-loss" analysis is inherently flawed.
As previously explained, the court has found that drawing precise conclusions based on the
RFP/bidding data is problematic because of the data's limitations.
Second, to demonstrate that the merger would not create unilateral anticompetitive effects,
Defendants offered a "switching study" conducted by Dr. Bresnahan. A switching study, as the
name implies, analyzes customers' decision to "switch" their business to other competitors. For
his study, Dr. Bresnahan acquired from a company called Aggdata the location information of tens
of thousands of restaurant and hotel chain customers that are on either Sysco's or USF's "national
customer" roster. He then analyzed Defendants' transaction records by quarter from the first
quarter of 2011 to the third quarter of 2013 to determine if either company provided broadline
distribution to a specific restaurant or hotel location. If either Defendant provided broadline
distribution, he tracked the company's sales to the location and noted if it lost sales to the location
during the period. If the company lost sales in a particular quarter, he checked the other defendant
company's transaction records to see if it picked up the customer. If it did not, Dr. Bresnahan
assumed that some other competitor did.

84

So, for example, if USF's records showed that a particular Sonic franchise did not purchase
from USF in a particular quarter, he would tum to Sysco's records to see if Sysco had picked up
the customer; if it did, he counted it as a switch to Sysco; if not, he assumed that the customer
purchased from another distributor and counted it as a switch to a competitor other than Sysco.
Based on this analysis, Dr. Bresnahan concluded that Sysco and USF are not uniquely close
competitors. He found that USF lost business to Sysco 15 percent of the time based on both
revenue and number oflocations, and that Sysco lost business to USF 57 percent of the time based
on revenue and 39 percent of the time based on number of locations. These percentages of
switches, Dr. Bresnahan testified, were much lower than what one would have expected to see if
Dr. Israel's national market shares were accurate.
For a variety ofreasons, the court cannot agree with Dr. Bresnahan's ultimate conclusionthat USF and Sysco are not uniquely close competitors-based on his switching study. First,
though the number of observations in Dr. Bresnahan's study were significant, they were limited
almost exclusively to restaurant and hotel locations (including, it appears, restaurants served by
Sysco's systems division, SYGMA). 28 The observations did not include other types of large
national customers, such as GPOs, foodservice management companies, and large government
agencies, which, as the evidence showed, spend large percentages of their foodservice distribution
budget on Defendants. As Dr. Bresnahan admitted, he does not claim that his switching analysis
reflects the buying habits of these national customers. Hr'g Tr. 2180-82.
Second, the time period of Dr. Bresnahan' s study-two-and-a-half years-is shorter than
the seven-year time period covered by Dr. Israel's RFP/bidding analysis. Significant switches that

28

The study did include one health care organization, Kaiser Permanente, and one GPO, Amerinet.

85

might have occurred between Defendants outside the two-and-a-half year period, therefore, were
not counted.
Third, the switching analysis does not capture the full extent of competition between
Defendants (or between other competitors, for that matter), because it only tracks switches, not
instances where a customer might have played one broadliner off the other to get better pricing.
That kind of situation reflects actual competition at least as much as a switch, but such competition
is not reflected in the data.
Fourth, unlike an RFP or bid situation, a switch does not necessarily equate to actual
competition. A switch might have occurred for any number of reasons having nothing to do with
pricing or service (e.g., the customer's sister-in-law went to work for a competitor), but the study
treats every switch as a loss for competitive reasons.
Fifth, Dr. Israel's rebuttal report pointed out a number of limitations in Dr. Bresnahan's
switching analysis, including the exclusion of certain switches between Defendants and the
treatment of actual switches, such as timed phase outs from one Defendant to the other, as nonswitches.

PX09375-08 l-084.

Although Dr. Bresnahan testified that he corrected for these

criticisms and that the adjustments did not materially alter his results or conclusion, the need for
those adjustments reflects the limitations of drawing firm conclusions from such undifferentiated
data.
Finally, Dr. Bresnahan's conclusion that USF and Sysco are not close competitors brings
him into conflict with Defendants' other expert, Dr. Hausman. Dr. Bresnahan testified that,
although he agrees that Sysco and USF are competitors, he did not think that one was a
"particularly strong price constraint" on the other. Hr'g Tr. 2183. Dr. Hausman, on the other
hand, unequivocally agreed that "USF is a strong price constraint on Sysco." Id. at 2005. He

86

testified Sysco and USF "compete and they compete hard. I'd be the first to agree." Id. at 1986;
see id. at 2037 ("I am not arguing with you that-or disagreeing with you that Sysco and US Foods
are important competitive constraints on each other.").

Defendants do not explain how

Dr. Bresnahan's switching study can be reconciled with Dr. Hausman's unqualified opinion that
Defendants mutually constrain each other's prices, which can only mean that they are close
competitors; if they were not, the pricing of one would not matter to the other.
In the end, the court finds that Dr. Israel's RFP/bidding analysis is more persuasive than
Dr. Bresnahan's switching study. Both empirical studies are imperfect for the reasons already
discussed. But Dr. Israel's analysis better captures instances of actual competition across a more
representative cross-section of national customers over a longer period of time.

Additionally,

Dr. Israel's conclusions are corroborated by other evidence in the record, which, as discussed
below, indicate that Sysco and USF are close competitors, particularly for large national
customers.
b.

The parties' ordinary course documents

The FTC presented ordinary course documents, from both Defendants and third parties,
which support Dr. Israel's conclusion that Sysco and USF are particularly close competitors. For
example, a 2012 USF presentation, titled "Strategy Refresh," explains that one reason for strategic
rethinking is that "[c]ustomers perceive little difference between us and our main competitor,"
identified as Sysco. PX0303 l-003 (emphasis added). The same presentation devotes a section to
"Performance v. Sysco" and describes the companies as "[i]ndustry leaders." PX0303 l-010-0l l.
Another USF document describes Sysco as USF's "major rival." PX03032-043.
Similarly, a Sysco presentation to its Board of Directors describes USF as its "next largest
competitor" and puts forth "recent intelligence" about USF and two other competitors. PX01007-

87

018; PX01007-023. Another Sysco strategy document focusing on the healthcare sector states that
"US Foodservice is our strongest competitor for Healthcare GPO dollars." PX01388-004.

In

addition, there are many specific instances in the record demonstrating fierce competition between
Sysco and USF for national customer accounts. 29 These documents indicate that Sysco and USF
compete aggressively against one another on price; non-price incentives, such as signing bonuses;
service; and other value-added offerings.
Industry analysts also have recognized the close competition between Defendants.
For instance, the Cleveland Research Group's January 2014 market report on Sysco noted the
Cleveland Research Group's assessment that "both Sysco and US Foods have priced each other
down competing for larger national/regional contract accounts over the last several years" and that
"the acquisition removes a key price competitor (particularly with larger contract accounts)."
PX09332-004.
c.

Testimonial evidence

A number of industry actors testified that they view Sysco and USF to be close competitors
for national customers. Particularly compelling testimony came from Mark Allen, the head of the
foodservice distributors' trade group, IFDA. In his deposition, Mr. Allen agreed that Sysco and
USF were "closest competitors" for national accounts, such as GPOs, hospitality, and foodservice
management companies. PX00570-012; PX00570-014. He further described Sysco and USF as
"powerful competitors" for independent customers, PX00570-l 13, and testified that, in his
experience, GPOs, foodservice management companies, and hospitality chains use Sysco and USF
to keep each other honest on price and service, PX00570-019. The testimony of the PFG's
President and CEO, George Holm, was to the same effect. He testified that in his experience

29

See, e.g., PX01066-001-002; PX03064-001; PX01061-001-006.

88

"foodservice management companies, GPOs[,] and certain restaurant groups" have "obtained
lower prices by bidding Sysco and US Foods against each other." Hr' g Tr. 651.
d.

Conclusion on unilateral effects in the national customer market

The court's finding that Sysco and USF are close competitors in the national customer
market is no surprise, given the uncontested facts of this case. Sysco and USF are the country's
two largest broadliners by any measure. They have far more distribution centers, SKUs, private
label products, sales representatives, and delivery trucks than any other broadline distributor. That
they rely on these competitive advantages to compete, and compete aggressively against one
another in the market for national customers, is amply born out on this record.
Based on all of the evidence presented, the court finds that, because the proposed merger
would eliminate head-to-head competition between the number one and number two competitors
in the market for national customers, the merger is likely to lead to unilateral anticompetitive
effects in that market. Evidence of probable unilateral effects strengthens the FTC's primafacie
case that the merger will lessen competition in the national customer market. See Heinz, 246 F.3d
at 717 (footnote omitted) (finding that "the FTC's market concentration statistics are bolstered by
the indisputable fact that the merger will eliminate competition between the two merging parties");

Whole Foods, 548 F.3d at 1043 (Tatel, J.) (citation omitted) (internal quotation marks omitted)
(stating 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").

2.

Merger Simulation Model-National Customer Market

To further show that the merger would harm national customers, Dr. Israel ran a merger
simulation model to predict the merger's effect. Dr. Israel used an "auction model" to estimate the
harm to national customers based on his real-world observation that national customers used RFP

89

processes that "typically involve[ d] competitive bids and bilateral negotiations between distributors
and foodservice operators" to award business. PX09350-l 10. Under an auction model, the terms
offered by the winning bidder are determined (or at least heavily influenced) by the second-best
bidder, because the winning bidder will offer price and service terms that are just good enough to
win the business. In theory, if the top two bidders merge, price and service terms will be determined
(or at least heavily influenced) by the previously third-best bidder, who in a post-merger world
would move into the number two spot. An auction model predicts harm to customers if, as here,
the top two bidders merge and the next best bidder is a distant third. The magnitude of the harm is
defined as the difference between the values offered by the companies that had been the pre-merger
second- and third-place bidders. PX09350-113-l 14; see CCC Holdings, 605 F. Supp. 2d at 69
(describing a similar auction model for predicting a price increase).
Practically speaking, the premise of Dr. Israel's auction model was that, in the pre-merger
world, Sysco and USF are national customers' top two choices and, therefore, each company sets
the other company's price. But, if they were to merge, the winning bidder's price would only be
subject to competitive pressure by a pre-merger third-place bidder, such as PFG or some other
distant competitor. If the next best bidder is not a major competitor, and therefore does not play a
significant role in affecting prices, national customers will be harmed. An email dated December
12, 2013, summarizing a "USF Senior Teams" webcast addressing the proposed merger, perfectly
captures this core premise of Dr. Israel's model. The email identified as one of the "key messages":
"The 'distance' between the combined company and the next set of regional players is huge. Those
regional players will have an even harder time trying to play catch up going forward because they
simply won't have the resources that the combined company has to transform the industry."

90

PXOO 103-002 (emphasis added). The "huge" distance between the merged entity and the rest of
the field corresponds to the merger harm that Dr. Israel's model predicts.
To quantify the likely harm to national customers, Dr. Israel performed calculations that
used as inputs, among others, his estimates of the parties' national customer market shares and their
price-cost margins. PX09350-118. He concluded that, absent significant efficiencies and other
mitigating factors, the merger would harm national customers on the order of more than $1. 4 billion
annually. PX09350-120; PX09350-220. Factoring in the divestiture to PFG and its increased
market share, Dr. Israel calculated likely merger harm of more than $900 million annually.
PX09350-l 89; PX093 50-237.
Defendants assert that Dr. Israel's model is flawed for the same reason that they criticize his
national market share calculations-both rely on the unreliable RFP/bidding data. Specifically,
Defendants argue that, because the merger simulation model relies on the national market share
calculations as a critical input, and because those market shares depend on the unreliable
RFP/bidding data, Dr. Israel's estimate of likely merger harm is likewise unreliable. As discussed,
the court agrees that the RFP/bidding data set is imperfect and its resulting market share calculations
are imprecise to some degree. Dr. Israel's most conservative market share analysis, however, did
not rely on the RFP/bidding data but rather on the CID data, and provided a reasonable
approximation of the parties' share of the national customer market. Dr. Israel ran his merger
simulation using that lower-bound market share estimate and still reached the conclusion that,
absent significant efficiencies, the merger would likely cause significant harm. PX093 50-121 n.363
("Finally, I tested the robustness of my results to Sysco and USF having lower combined shares. I
found that even when I use the lowest (and almost certainly too low) Sysco and USF shares
presented in Table 1, the required efficiencies predicted by the model still far outweigh the

91

efficiencies claimed by the parties."). The court, therefore, concludes that Dr. Israel's merger
simulation model strengthens the FTC's primafacie case that the merger will substantially lessen
competition in the market for national customers.

3.

Unilateral Effects-Local Markets

As it did for the national customer market, the FTC presented empirical, documentary, and
testimonial evidence to demonstrate the potential for unilateral effects to harm local markets. That
evidence, however, presented a more muddled picture of the potential for unilateral effects than
did the evidence for the national customer market.
a.

Dr. Israel's empirical analysis

As he did with the national customer market, Dr. Israel looked at Defendants' business
records to determine how closely they compete in local markets. The data came from two
sources-USF's Linc database and Sysco's request for incentives (RFI) records.

The Linc

database, as discussed earlier, is a customer relations management tool used by USF sales
personnel to manage and store information on existing and prospective customer accounts. RFis
are internal Sysco records that sales personnel were required to submit to regional presidents to
obtain approval to offer incentives to customers to either switch to Sysco or stay with the company.
Starting with the Linc database, Dr. Israel observed and analyzed nearly 100,000 business
opportunities between January 2011 and June 2014 and divided them into two groups-USP wins
and USF losses. When USF won the business, sales personnel identified Sysco as the main
competitor 43 percent of the time (and 48 percent of the time measured by revenue); when USF
lost the business, USF sales personnel identified Sysco as the main competitor 46 percent of the
time (and 68 percent of the time measured by revenue). PX09350-143, Table 11. Whether USF
won or lost, sales personnel identified Sysco as the main competitor eight times more frequently

92

than the next most mentioned competitors (PFG and Gordon Food Service). Dr. Israel also
segregated the Linc database's mentions of competitors in 20 local markets. That study showed
that sales personnel in every market identified Sysco as USF's main competitor by a wide margin,
especially when measured by revenues. PX09350-145, Table 14.
The RFI data painted a similar picture from the Sysco perspective. Dr. Israel reviewed 224
Sysco RFis, covering a three-year period from 2011 to 2014, when Sysco discontinued the
practice. In more than 66 percent of the RFis, Sysco sales personnel identified USF as the reason
for the incentive request.

No other competitor appeared more than 10 percent of the time.

PX09350-146-147.
Defendants attacked Dr. Israel's reliance on the Linc database, as they did when he used it
in his aggregate diversion analysis. They asserted that Dr. Israel improperly relied on the Linc
database as a win-loss record, when it was never intended as such. USF's Executive Vice President
of Strategy, David Schreibman, testified that sales people did not use the database consistently and
would sometimes enter competitor information simply to fill in the database; ultimately, USF did
not rely on it to identify market competition. Hr'g Tr. 1505-06. Defendants also presented a local
switching study performed by Dr. Bresnahan, which used the same switching methodology as
described above but applied to local customers.

According to Dr. Bresnahan, when local

customers switch away from Sysco, they switch to USF only 11 percent of the time; and when
they switch away from USF, they switch to Sysco only 15 percent of the time. Hr'g Tr. 2163. In
other words, according to Dr. Bresnahan's switching analysis, when local customers switched
away from Sysco it was typically to distributors other than USF. 30

30

Dr. Bresnahan also did another switching study to support his findings. He conducted a study of fresh chicken
purchases by customers in San Diego, from which he concluded that customers "tum off and on buying fresh chicken
from Sysco" and that most of the time when they "tum off' Sysco they buy from someone other than USF. Hr'g Tr.
2162.

93

The court finds that the empirical evidence, on balance, shows that Sysco and USF are
close competitors for local customers. As the court has already observed, relying on the Linc
database to draw firm conclusions is problematic for the reasons raised by Defendants. That said,
even recognizing the data's limitations, it so overwhelmingly demonstrated primary competition
between Sysco and USF based on a sizeable number of observations (nearly 100,000 entries) that
it cannot be wholly disregarded as evidence of close competition. Furthermore, the court found
the RFI analysis especially compelling; indeed, Defendants did little to contest it. Although the
number of observations was low, the RFI data overwhelmingly showed Sysco seeking incentives
to attract or keep local customers in response to USF' s efforts far more often than Sysco attempted
to respond to any other competitor's efforts.
Dr. Bresnahan's switching study provided some counterweight to Dr. Israel's work. Like
his national switching analysis, however, it did not account for competition when customers used
Sysco and USF as leverage against each other, as many local customers said regularly occurred.
The local switching study also relied heavily on chain restaurants and hotels and thus did not factor
in the buying habits of other types of local customers, particularly independent restaurants.
Therefore, notwithstanding the limits of the data sets relied on by Dr. Israel, the court finds that
the empirical evidence supports the conclusion that Sysco and USF are close competitors in local
markets.
b,

The parties' ordinaiy course documents

Two notable ordinary course documents also support the conclusion that Sysco and USF
are close competitors for local customers.

The first is USF's November 2012 "Investor

Presentation," which represented that "US Foods is estimated #1 or #2 position in

II of served

markets." PX03000-014; see also PX03l18-006. As previously noted, USF's David Schreibman

94

confirmed both the present-day accuracy of that statement and the fact that, in many of those
markets, Sysco occupied the number one or two position. DX-00272 at 62, 65. The second is the
July 2011 USF acquisitions strategy document, which estimated USF's position in 54 separate
markets, apparently based on market penetration rather than market share. USF estimated that
either Sysco or USF was the leading broadliner in
broadliner (or tied for first) in

I·

I

of those markets and was the number two

See also PX03002-009 (Clayton, Dubilier & Rice document,

titled "Operating Review," acknowledging that one of Sysco's strengths is "[g]eographic coverage
in all the key markets in the U.S. - #1 or #2 in virtually all the markets in which they operate");
PX03004-001 (Clayton, Dublier & Rice memo stating that USF is a "leader in both national and
local markets" and that "Sysco [is the] closest competitor with similar business mix"). Sysco's
and USF's leading positions in multiple local markets shows that they are close competitors in
those markets.
c.

Testimonial evidence

The testimonial evidence was more equivocal about the closeness of competition between
Defendants. It demonstrated that Sysco and USF are strong competitors for local customers in
several markets, but it also showed that other broadliners are competing effectively in many of
those areas.

The FTC's case featured four local markets:

(i) Columbia/Charleston, South

Carolina; (ii) Omaha, Nebraska; (iii) Raleigh/Durham, North Carolina; and (iv) Southwest
Virginia.

For each of those markets, the FTC presented testimonial evidence supporting

Defendants' leading market positions. For instance, PFG's George Holm agreed that Sysco and
USF were the largest and two most "competitively significant" broadline distributors in
Columbia/Charleston, Raleigh/Durham, and Southwest Virginia. Hr'g Tr. 653-57; DX-00276 at
70-72. Mark Allen, IFDA President, agreed with those assessments, calling Defendants the

95

"dominant" or "strongest" competitors in those three markets (and Las Vegas). DX-00294 at 170;
see also Hr'g Tr. 1800 (testimony from Sysco Mid-Atlantic President Mike Brawner stating that

USF is a "strong competitor" in Columbia, Raleigh/Durham). USF's ordinary course materials
corroborate those observations, at least in terms of market penetration.
(showing USF as a "Strong

PX03 ll 8-007-008

4," based on market penetration, in Raleigh, Columbia, and Roanoke,

with Sysco as number two in those areas, and showing Sysco as the number one broadliner in
Omaha with USF a "Distant

4").

Yet, when customer-level testimony is considered, the evidence of Defendants' leading
market positions and their post-merger ability to increase prices becomes less clear. Both sides
deposed and obtained numerous declarations from various customers in these local markets. The
customer testimony obtained by the FTC invariably decried the merger's impact on local markets,
whereas Defendants' customer witnesses emphasized alternatives in the marketplace and the
ability to switch broadliners if the merged company attempted to impose a price increase. 31

31
Compare PX07020-002 (Champ McGee, owner of Little Pigs Barbeque and FTC-sponsored declarant expressing
"serious concerns" about merger's effect on business in the Columbia market), and Hr'g Tr. 344 (FTC witness, Gary
Hoffman, Vice President and Corporate Executive Chef of Upstream Brewing Company from the Omaha market,
expressing concern that the proposed merger would prevent him from playing Defendants off one another), and
PX00487-005 (FTC-sponsored declarant Jason Smith of 18 Restaurant Group, from the Raleigh/Durham market,
expressing concerning about the merger "because it eliminates one of our only two options for broadline distribution
services" and rejects other competitors), and Hr'g Tr. 544-45 (FTC witness, Daniel Schablein, Controller at
Wintergreen Resort from the southwestern Virginia market, stating that Sysco and USF were the only legitimate
broadliners for his business), with DX-00227 at 2 (Justin Brooks, owner of Frayed Knot Restaurant and Defendantssponsored declarant, stating "I do not believe that Sysco could raise prices or reduce services on my business" in the
Columbia market because of competition from PFG, Merchants, Reinhart, and Gordon Food Service), and DX-00191
at 2 (Defendants-sponsored declarant Anthony Fucinaro of Anthony's Steakhouse, from the Omaha market, stating,
"If Sysco were to raise prices or lower service levels, I would move my contract to Reinhart, Martin Brothers, and/or
Cash-Wa"), andDX-00232 at 2 (Defendants-sponsored declarant Patrick Cowden of Tobacco Road Sports Cafe, from
the Raleigh/Durham market stating, "If Sysco tried to raise prices or decrease service quality following the merger, I
could and would replace them with any of the other bidders in a heartbeat"), and DX-00209 at 1 (Defendantssponsored declaration from George Huger of Southern Inn Restaurant, from the southwestern Virginia market, stating
that he would have alternatives, including PFG and Staunton Foods, ifhe became dissatisfied with Sysco's prices or
service after the merger).

96

Because of these conflicting local market assessments, the court cannot draw firm conclusions
about the competitiveness of the local broadline markets from the testimonial evidence. 32
d.

Conclusion on unilateral effects in the local markets

In the final analysis, after considering all of the record evidence on local markets, the court
finds that the FTC has shown that unilateral effects are likely to occur in many local markets
because the merger will eliminate one of the top competitors in those markets. Though the court
finds the evidence of unilateral effects in the local markets to be less convincing than in the national
customer market, the evidence nevertheless strengthens the FTC's prima facie case of merger
harm.

4.

Local Event Studies

To further show that the merger would adversely impact local customers, the FTC
presented the results of an econometric event study conducted by Dr. Israel. Dr. Israel analyzed
Sysco's opening of two distribution centers-one in Long Island, New York, in July 2012, and
one in Riverside, California, in June 2013-to determine the impact those openings had on prices
paid by USF customers served from a nearby competing facility. Known as an "entry study,"
Dr. Israel selected the Long Island and Riverside events because they were the only two recent
instances in which Sysco had opened a new distribution center in the same market as a USF
distribution center. From these event studies, the FTC hoped to show that prices fell when Sysco
and USF directly competed and that the merger's elimination ofUSF as a competitor would have
an upward effect on pricing.

32

The FTC did not present testimony or customer declarations about many of the markets that it claims will be highly
concentrated after the merger. That is not, however, fatal to its case. See Brown Shoe, 370 U.S. at 339, 341 (rejecting
the argument that the government had not proven its case because it did not present evidence "in each line of commerce
and each section of the country" and stating that "[t]here is no reason to protract already complex antitrust litigation
by detailed analyses of peripheral economic facts, if the basic issues of the case may be determined through study of
a fair sample").

97

Dr. Israel found that Sysco' s entry in Long Island resulted in a 1.4 percent decline in USF' s
prices for customers in the 75 percent overlap area. PX09350-148. He also ran variations of his
regression analysis on other groupings---customers within a 50 percent overlap area, customers
purchasing more than 100 SKUs, and customers buying private label products-and found that the
price decrease on these groupings was even greater. PX093 50-148. By contrast, Dr. Israel found
a less significant price impact in the Riverside entry study-a negligible price decline of only .06
percent.
Dr. Israel explained that neither of these events were clean entry studies because, in both
cases, Sysco already had an existing distribution facility in the area, and thus already was
competing against USF.

In his opinion, the resulting price effects, therefore, were actually

understated. Dr. Israel also found the results of the Long Island event more compelling than the
Riverside event for two reasons. First, the Long Island facility was a greater distance away from
Sysco's existing facility than the new Riverside facility was from its existing facility. Second, the
Long Island facility served more new business than the Riverside facility. For those reasons, he
concluded, the Long Island study better approximated a true entry event. Hr'g Tr. 1097-98.
Dr. Israel ultimately concluded, based largely on the Long Island study, that the merger's
elimination of USF as a competitor would have an upward pricing effect in local markets.
The court does not find Dr. Israel's entry studies to be convincing evidence that the merger
will harm local customers. Dr. Israel's efforts to distinguish the Long Island and Riverside events
simply do not hold up. Defendants' expert, Dr. Bresnahan, showed that the difference in distance
between the Riverside facility and its nearby existing facility, on the one hand, and the Long Island
facility and its nearby existing facility, on the other, was a mere 14 miles. He also showed that
both new Sysco facilities served a similar fraction of existing Sysco customers. Thus, the two

98

entry events were not as dissimilar as Dr. Israel testified, yet they produced very different resultsone showing a significant price decrease, the other showing a negligible one. There may be
location-specific reasons for the different results, but the reasons offered by Dr. Israel do not
withstand scrutiny and no other evidence explained the difference. The court thus cannot conclude
from these seemingly conflicting entry studies that the merger will harm local customers.
The court further notes that the pricing evidence here is far weaker than that found in other
merger cases. In Staples, for instance, there was "compelling evidence" showing that prices were
13 percent higher in markets where Staples did not have competition from another office
superstore. 970 F. Supp. at 1075-76 (pricing study). Similarly, in Whole Foods, an entry study
showed that Whole Foods dropped its prices by five percent when another organic supermarket
opened in the area. 548 F.3d at 1046-47 (Tatel, J.). In fairness, the FTC was unable to conduct
pricing studies like those done in Staples and Whole Foods here because Defendants have
competing facilities in nearly every local market. But the absence of convincing pricing effects
evidence is the weakest aspect of the FTC's case.

5.

Summaty

In summary, the FTC has bolstered its prima facie case with additional proof that the merger
would harm competition in both the national and local broadline markets. Although the FTC's case
would have been strengthened with more convincing pricing effects evidence, the court
nevertheless finds that the FTC has presented a compelling prima facie case of anticompetitive
effects. See Baker Hughes, 908 F.2d at 991 ("The more compelling the prima facie case, the more
evidence the defendant must present to rebut it successfully."). The court now turns to Defendants'
rebuttal arguments.

99

III.

DEFENDANTS' REBUTIAL ARGUMENTS
The FTC has established a presumption that the proposed merger will substantially lessen

competition. Defendants, however, may rebut that presumption by showing that the traditional
economic theories of the competitive effects of market concentration are not an accurate indicator
of the merger's probable effect on competition or that the procompetitive effects of the merger are
likely to outweigh any potential anticompetitive effects. Heinz, 246 F.3d at 715. The more
"compelling the [FTC's] prima facie case, the more evidence the defendant must present to rebut
[the presumption] successfully." Baker Hughes, 908 F.2d at 991. "A defendant can make the
required showing by affirmatively showing why a given transaction is unlikely to substantially
lessen competition, or by discrediting the data underlying the initial presumption in the
government's favor." Id
Defendants advance four arguments to support their claim that the food industry will
remain competitive after the merger: (i) a post-divestiture PFG will be a strong competitor for
customers seeking nationwide distribution; (ii) competition from other broadliners and other
distribution channels will continue and grow; (iii) the entry of new competition and the
repositioning of existing competitors will keep the industry competitive; and (iv) customers will
benefit from efficiencies arising from the merger. The court addresses each of those arguments in
tum and finds that, even taken collectively, Defendants cannot overcome the FTC's strong
presumption of anticompetitive harm.

A.

PFG Divestiture

Aside from the Supreme Court's guidance that "[t]he relief in an antitrust case must be
'effective to redress the violations' and 'to restore competition,"' Ford Motor Co. v. United States,
405 U.S. 562, 573 (1972) (footnote omitted) (quoting United States v. E.I. Du Pont De Nemours

100

& Co., 366 U.S. 316, 326 (1961)), there is a lack of clear precedent providing an analytical

framework for addressing the effectiveness of a divestiture that has been proposed to remedy an
otherwise anticompetitive merger. Compare CCC Holdings, 605 F. Supp. 2d at 56-59 (applying
the framework for market entry analysis in assessing the effectiveness of a licensing agreement
that would enhance the competitiveness of an existing competitor) with FTC v. Libbey, Inc., 211
F. Supp. 2d 34, 47-48 (D.D.C. 2002) (finding defendants' proposed "fix" inadequate-without
going into market entry analysis-because competitor would face higher costs).
Here, both sides cite to the 2004 U.S. Department of Justice's "Policy Guide to Merger
Remedies," which provides the following guidance: "Restoring competition requires replacing
the competitive intensity lost as a result of the merger rather than focusing narrowly on returning
to premerger HHl levels." Antitrust Div., U.S. Dep't of Justice, Antitrust Division Policy Guide
to Merger Remedies 5 (Oct. 2004) [hereinafter 2004 Policy Guide] (emphasis added); see also
Areeda & Hovenkamp 3d ed., supra, if 990d (citing 2004 Policy Guide). A more recent U.S.
Department of Justice Policy Guide provides: "The touchstone principle for the Division in
analyzing remedies is that a successful merger remedy must effectively preserve competition in
the relevant market." Antitrust Div., U.S. Dep't of Justice, Antitrust Division Policy Guide to
Merger Remedies 1 (June 2011) [hereinafter 2011 Policy Guide] (footnote omitted). Both the
2004 Policy Guide and the 2011 Policy Guide add that an effective divestiture should address:
[W]hatever obstacles (for example, lack of a distribution system or necessary
know-how) lead to the conclusion that a competitor, absent the divestiture, would
not be able to discipline a merger-generated increase in market power. That is, the
divestiture assets must be substantial enough to enable the purchaser to maintain
the premerger level of competition, and should be sufficiently comprehensive that
the purchaser will use them in the relevant market and be unlikely to liquidate or
redeploy them.

2004 Policy Guide at 9 (emphasis added) (footnotes omitted); see also 2011 Policy Guide at 8.
With these principles in mind, the court analyzes the effect of the proposed divestiture.

I.

Competitive Pressure Exerted by Post-Divestiture PFG

Defendants argue that the divestiture of 11 "strategically located" USF distribution centers
to PFG, coupled with PFG' s "aggressive" expansion across the country, will "replace [any]
competitive intensity lost as a result of the merger." Defs.' Proposed Findings of Fact and
Conclusions of Law, ECF No. 171 at 156 [hereinafter DFF] (alteration in original) (quoting 2004
Merger Guidelines at 5). In addition to the 11 divested distribution centers, PFG's owner, The
Blackstone Group, a leading private equity firm, has committed $490 million to develop seven
more distribution centers (called "foldouts") and to expand capacity in 16 existing facilities.
Hr'g Tr. 724, 767-69; DFF at 155. Defendants also point to the industry acumen and experience
of PFG's executives, particularly that of its President and CEO, George Holm, who has over 37
years of experience in the foodservice distribution industry. The court does not doubt Blackstone's
financial commitment to PFG or Mr. Holm's leadership capabilities. However, based on the
evidence presented, the court is not persuaded that post-merger PFG will be able to step into USF' s
shoes to maintain-certainly not in the near term-the pre-merger level of competition that
characterizes the present marketplace.
PFG's five-year business plan shows that post-merger PFG will not be nearly as
competitive as USF is today. In the lucrative market for national customers, the plan projects that
PFG will have approximately

ti billion in national breadline sales by 20 l 9-less than half of

USF's 2013 national broadline sales o f . billion. PX09350-074; PX09060-002; PX09060004; PX09060-006; PX09253-023. Stated in terms of market share, PFG estimates that it will
grow to 20 percent of the national breadline market over five years, with the merged Sysco-USP

102

company having the "remaining share of the national broadline business." PFF at 220; Hr'g Tr.
719, 721-22. That percentage is smaller than USF's share of the national broadline customer
market today.

PX09350-187 (Dr. Israel's report stating "the best case scenario under the

divestiture is the emergence of a significantly smaller competitor than USF even several years into
the future"). Defendants are correct that the divestiture does not have to replicate pre-merger HHI
levels. However, the fact that PFGonly expects to achieve less than halfofUSF's current national
customer sales in five years-assuming that its planned expansion efforts are successful-does
not demonstrate that PFG will be sufficiently able to "discipline a merger-generated increase in
market power." See 2011 Policy Guide at 8 (footnote omitted).
The court's concern about PFG's ability to compete effectively in the post-merger world
is not limited to sales and market share projections. PFG's short-term effectiveness will depend
in large part on its ability to incorporate the 11 formerly-USP-held distribution centers. Even
assuming that PFG can do so seamlessly, the new PFG will have only 3 5 distribution centers-far
fewer than the at least 100 distribution centers owned by the combined Sysco/USF. Having only
one-third of the merged company's distribution centers will put PFG at a significant disadvantage
in competing for national customers. Indeed, as Dr. Israel demonstrated, Defendants' largest
national customers use more than 3 5 distribution centers. Those customers represent
of Sysco's national broadline revenues, and

I

I

percent

percent of USF's national broadline revenues.

PX09375-075-077, Figure 3. The court is not convinced that these large national customers will
consider a post-merger PFG to be as capable of meeting their needs as USF is today.
Defendants counter that "PFG will be able to compete aggressively with its additional
distribution centers because the fewer the distribution centers used for a particular customer, the
greater the inbound efficiencies." DFF at 161-62. Because of higher volume per warehouse and

103

lower freight costs, Defendants claim, many customers prefer to be served out of fewer distribution
centers-so having a larger number of distribution centers is not necessarily a competitive
advantage. Id at 28, 161-62; Hr'g Tr. 1570-71, 1573-74; DX-00264at122-23. For example, to
serve Zaxby's, a regional quick serve chain, PFGtrucks drive past some of their own distribution
centers because the longer drive "proves cheaper for the customer." DFF at 161; Hr'g Tr. 852.
PFG can also take advantage of"shuttling," a technique of caravanning multiple trailers on a single
truck, to increase efficiencies. DFF at 162; Hr' g Tr. 855-57. Mr. Holm even stated at his
deposition that he believed that PFG would be able to s e r v e - out of 35 distribution centers
more effectively than USF currently does out

ofll DX-00276 at 96.

The court is skeptical of Defendants' claim that, even with far fewer distribution centers,
PFG will be on equal competitive footing with the merged firm, especially for national customers.
Defendants' own growth belies this fact. Both Sysco and USF have, over time, increased their
number of distribution centers, demonstrating that Defendants view more distribution centers to
be a competitive advantage. Indeed, when Defendants presently compete for national business,
they highlight their nationwide geographic coverage to potential customers. See, e.g., PX030000l4 (USF presentation touting its "[a]bility to leverage our national scale to cost effectively service
customers nationally); PX00247-001-002 (USF email communication t o - describing
the "US Foods Value Proposition" as including a "Privately held National Distribution footprint
company"); PX01062-005 (Sysco presentation to -

highlighting that Sysco's "national

footprint, strong service approach and our breadth of product offerings is what differentiates us
from our competition"); PX00279-001 (USF email t o - (a restaurant chain), mentioning
"national footprint and scale" as a selling point); PX00281-006 (slide presentation t o .
touting USF's "extensive" distribution network). USF's Executive Vice

104

President of Strategy David Schreibman also testified that USF has the ability to leverage its
national scale to cost-effectively service customers, and that USF views its national scale as a
significant competitive advantage.

Hr'g Tr. 1521-22; see also PX03010-001 (internal USF

document stating that the "[o ]nly 'true' options for both Premier and Novation is either Sysco or
USF[;] [t]he regional players will bid, but not be seriously considered"). Furthermore, there was
no evidence presented that Defendants have moved to consolidate their distribution facilities to
take advantage of the supposed benefits of having fewer distribution centers. 33
Notably, not even PFG has always considered the divestiture of only 11 distribution centers
to be sufficient for it to compete on a national level. A PPG internal strategy document, dated
April 3, 2014, sets forth two "final" proposals for additional distribution centers "necessary to
establish a national broadline network." One proposal included options of 16 to 20 distribution
centers, and the other included a list of 14 to 15. Hr'g Tr. 669-71 (discussing PX09193). Six
months later, in October 2014, after PFG had started negotiations with Sysco about the divestiture,
internal PFG communications re-affirmed the need for more than 11 distribution centers.
Following Sysco's proposal to sell only seven distribution centers, a PFG board member wrote to
George Holm:
I would still find a way to tell the FTC that we think it takes 13 but that Sysco won't
let us look at more than 7 which will get us nowhere near a national solution. We
need the package size to be bigger to have any chance of winning and to ever
compete nationally. ... [We] should proactively educate the FTC why 13 opcos
[another word for distribution center] is the bare mimimum.
PX09192-001 (emphasis added); see also PX00526-036; PX00526-141-142; PX09190. PFG did
just that when it met with the FTC, making the case that it needed 13 distribution centers to

33

Defense counsel at oral argument represented that USF recently had closed two distribution centers, Closing Arg.
Hr'g Tr. 113, but counsel for the FTC noted that USF also recently had opened a new distribution center, id. at 12526.

105

"compete effectively for national business." PX00526-039 at 153; PX09070 (PFG's presentation
to the FTC with a map of 13 USF distribution centers needed by PFG, which included the four
metropolitan areas mentioned below). Ultimately, PFG was not able to negotiate the sale of more
than 11 distribution centers, with Sysco having made the decision that it "would rather litigate
w[ith] the FTC than sell more than 11." PFG felt that it was "prudent to engage on 11 for now to
keep the momentum/dialogue going." PX09157-002; PX00526-041at163.
Having fewer distribution centers means that PFG will face coverage gaps m the
geographic areas where it sought, but did not receive, a distribution center. Those areas include:
Cincinnati, Ohio; Omaha, Nebraska; Oklahoma City, Oklahoma; and Los Angeles, California,
where PFG received a different, smaller distribution center than it requested. PX00526-039 at
155-56; see also PX09070.
Defendants argue that PFG' s requests to Sysco for a larger number of distribution centers
than they actually received was part of a bargaining strategy. Closing Arg. Hr'g Tr. 115-16.
However, PFG's recognition that it needed more than 11 distribution centers to compete nationally
is reflected in internal documents that were created months before PFG began negotiating with
Sysco. The court credits those internal projections over PFG's current position that an additional
11 distribution centers is enough to compete for national customers. See Amicus Br. of PFG, ECF
No. 133 at 22-24 (arguing that PFG will be able to compete effectively with 35 distribution
centers).
Defendants argue that, with the planned "foldouts," i.e., new distribution facilities located
in contiguous geographic markets, PFG will have more than the 13 distribution centers it was
seeking, including one in Cincinnati. DX-01706 at 14. However, PFG has never done a foldout,
and according to internal estimates, these facilities may not be operational until, at the earliest,

106

several years following the merger. 34 Defendants assert that "PFG will be well-positioned to bid
on Day One," because even after the bids are submitted, discussions between a customer and a
distributor can take up to a year before a contract is finalized, and PFG can continue its foldout
efforts in the meantime. DFF at 160 (emphasis added). According to Defendants, if the customer
needs service sooner, PFG can provide service via shuttling until the foldout is complete. Id at
161. However, there is substantial evidence showing that customers value having distribution
centers close to their locations and that distribution costs increase with driving distance. Thus the
court is not persuaded that-even with promises of foldouts and the use of shuttling-a sufficient
number of national customers will view PFG as a viable alternative to the merged entity "on day
one" to maintain the intensity that characterizes the present competition between Sysco and USF.

2.

Additional Disadvantages Faced by Post-Merger PFG

In addition to its lack of nationwide geographic coverage, the court has other concerns

about PFG's ability to compete against the merged entity. Because it will purchase in smaller
product volumes than the merged Sysco entity, PFG could face higher product acquisition costs,
or cost of goods sold ("COGS"), than its competitor. PX05051-003 (Blackstone Memorandum
indicating that "due to its scale, USF has better procurement than PFG and the 11 [distribution
centers] will likely spend more to acquire private label products and get less supplier rebate
dollars"); PX09350-205 (Dr. Israel's opinion that, even with the divestiture, PFG is unlikely to
make up the gap in COGS between itself and the parties today). PFG also will offer substantially
fewer SKUs than the merged entity. PFG today sells less than half the total number of SKUs as
USF and one third the number of private label SKUs. PX06055-004 (USF offers 350,000 SKUs,

34
PFG' s Senior VP of Operations estimated that PFG' s "priority" foldouts in Cincinnati, Ohio, Detroit, Michigan and
Buffalo, New York, will not be operational until fiscal year 2018, and Montgomery, Alabama will not be operational
until 2017. Hr'g Tr. 735-38.

107

of which 30,000 are private label); PX09507-007; PX09507-013 (PFG offers 150,000 SKUs, of
which- are private label). PFG's fewer SKU offerings will be a competitive disadvantage.
PFG also will face disadvantages in terms of human resources. Defendants point out that,
as part of the divestiture package, PFG would acquire over "4, 400 USF personnel, including senior
executives and personnel with healthcare expertise at the 11 distribution centers, and corporate
regional leadership, national sales personnel, merchandising personnel, and others with national
sales expertise; [and] a 12 month non-solicit of PFG employees at the 11 distribution centers."
DFF at 155 (citing Hr'g Tr. 815-25; DX-06100 at 1). However, even assuming that every USF
employee at the 11 distribution centers becomes a PFG employee, PFG will still have fewer than
half the sales representatives of either Sysco or USF today and less than one-quarter of the sales
representatives of the combined firm. PX09350-181-184, Figure 18. And, PFGwill only receive,
at most, one-fifth of the national sales employees at USF dedicated to serving national customers.
Hr'g Tr. 1528-31 (stating that only about 20 percent ofUSF's national account team will be made
available for PFG to hire).
Moreover, PFG will be at a competitive disadvantage in its ability to offer value-added
services. The lucrative healthcare segment is illustrative. George Holm conceded that PFG has
had limited success with national healthcare customers. Hr' g Tr. 716-17. Some of that lack of
success is due to PFG's limited footprint, but it is also attributable to PFG's lack of expertise in
the healthcare segment and its inability to deliver value-added services to those customers. See,

e.g., PX00594-025at100 (PFGhas a very small portion o~ members' business because
PFG lacks acute care expertise); PX00474-001 ("PFG offers a more limited selection of
healthcare-specific products than US Foods."). Even if over time PFG can acquire health care
expertise, in the short run it will be at a competitive disadvantage as compared to the merged

108

entity. 35 For instance. Joan Ralph, Group Vice President of Premier testified that. even with the
healthcare employees PFG acquires through the divestiture. PFG will have significantly less
healthcare expe1tise than USF today. Hr'g Tr. 413: PX09350-21 l-212. And. as IFDA President
1vfark Allen testified. Sysco and USF have the best understanding of the healthcare class of trade.
DX-00294 at 121. The merger would only enhance that strategic advantage.

3.

Posf-1\ferger PFG as an Independent Competitor

A final factor that cuts against the divestiture as a proposed fix is that PFG will be
dependent on the merged entity for years following the transaction. "In order to be accepted.
curative divestitures must be made to ... a \villing, independent competitor capable of effective
production .... " CCC Holdings, 605 F. Supp. 2dat 59 (quoting Tfllite Consol. Indus. v. Ff'11irlpool
Co11J., 781 F.2d 1224, 1228 (6th Cir. 1986)) (internal quotation marks omitted). As the court

observed in CCC Holdings, it cau be a ''problem'' to allow "continuing relationships between the
seller and buyer of divested assets after divestiture. such as a supply ruTangement or technical
assistance requirement which may increase the buyer's vulnerability to the seller's behavior." Id.
(internal quotation marks omitted). Under the Transition Services Agreement PFG will have
complete access to USF private label products for three years at its I I new distribution centers.
and therefore will be relying on the merged entity to license those products to PFG. See DX-06100
at I; PX09060-005. PFG will also have the right to license USF's database for at least five years,
with a continuing option for five more. PFG, therefore, will noi be a truly independent competitor.

109

For the foregoing reasons, the court is not persuaded that the proposed divestiture will
remedy the anticompetitive effects of the merger.
B.

Existing Competition

/.

Regionalization

Defendants assert that existing competition can and will constrain potential price increases
or other unilateral effects in the national customer market. Their primary argument is that the ability
of national customers to switch or threaten to switch to a network of regional distributors will inhibit
anticompetitive behavior by the merged company. See Defs.' Opp 'n Br. at 40-41. Defendants point
to many large national customers who multi-source their foodservice distribution needs, including
using various regional broadliners to service individual locations. Defendants cite as examples
Amerinet, Sodexo, the Defense Logistics Agency,-, Subway, a n d - , all of whom
operate regionally under multiple contracts. See id at 15.
But, for several reasons, the ability to regionalize is not likely to inoculate national
customers from potential anticompetitive effects.

The decision of many large customers to

predominantly use one breadline distributor is not simply a preference, as Defendants would
characterize it, but a rational business decision. As already discussed, for the most part, the largest
national customers-particularly GPOs, foodservice management companies, and hospitality
companies-predominantly rely on Sysco or USF for their breadline distribution needs. The largest
customers, generally speaking, make from 61 percent to 100 percent of their breadline purchases
from Sysco or USF. See FTC Closing Slide 35; PFF at 113-16. Even customers who contract
regionally, such as -

and - ' buy in very high quantities from Defendants.

Regionalization is available today, as it will be after the merger. But market actors are not moving
to that model. To the contrary, as PFG's George Holm testified, the "clear trend" among large

110

customers is to move to a single nationwide provider. Hr'g Tr. 597-98. The court can only infer
from this trend that regionalization is not a reasonable option for many national customers.
Regionalization likely has not taken hold for a variety of reasons. The record shows that
when a customer increases its number of distributors, it incurs greater management and supply chain
costs, making it far less desirable to switch to a multi-regional model.

The court found the

deposition testimony of Dan Cox, the President and CEO of DMA, particularly illuminating, given
that the reason for DMA' s existence is to consolidate the product and service offerings of multiple
regional distributors and compete for national customers. Mr. Cox testified that using a sole source
broadliner "forms the most efficient supply chain." DX00265 at 44. He explained that "[m]ore
products at each delivery reduces our cost to service and therefore reduces their supply chain costs.
By aggregating [customers'] spend it makes the delivery system more efficient." Id. at 44-45.
A regional arrangement also brings with it the disadvantage of multiple points of contact.
As Mr. Cox testified, a single point of contact simplifies communications, which DMA touts as an
advantage over multi-sourcing broadline distribution. Id. at 14, 46, 68. He also added that a single
information technology system is important to national customers, and DMA offers such a platform
to attract them. As Mr. Cox explained: "[I]f they come to DMA and deal with five different
members, they wouldn't have to learn and understand five different order entry platforms. We have
just one platform." Id at 68. A multi-regional approach thus likely would require a customer to
develop greater information technology capabilities to manage its foodservice distribution
contracts.
Another downside of a multi-regional model is the difficulty in obtaining consistent
products-particularly private label products-across a national customer's different locations.
Mr. Cox offered the example o f - , with which DMA does over -

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million in business.

-

demands that DMA comply with its product specifications "at a level of 90 percent," id

at 74, indicating that even when a large customer uses multiple regional distributors, they impose
rigorous demands with regard to product consistency. Product consistency, of course, can be
achieved by purchasing from multiple distributors who carry the same brand-named products. But
that approach would limit a customer's ability to purchase private label products, which typically
offer a better value proposition than branded products.
PFG's George Holm concurred with Dan Cox's assessment of national customers' business
needs and why they avoid regionalization. When asked why large national customers contract
mainly with either Sysco or USF and why there is a clear trend toward those customers using a
single broadliner, Holm offered numerous reasons: the "ability to get SKUs in quickly"; "one place
to contact"; "[o]ne IT system"; "[o]ne sales contract"; "[o]ne person to deal with"; "the same
product [across] their system"; writing "one check as opposed to several"; "simplified contract
administration"; and easier "management of approved item lists and specifications." Hr' g Tr. 60004. The court thus concludes that the possibility ofregionalizing broadline foodservice is not likely
to protect national customers from the merger's anticompetitive effects.

2.

DMA

Today, the only other competitor with a nationwide footprint is DMA. Defendants claim
that DMA is capable of effectively competing against the merged entity because it provides a
single point of contact, a single contract with consistent terms across customer locations, and a
single ordering platform. DFF at 165-66 (citing DX-00265 at 63-64, 66, 68). The court disagrees.
Defendants acknowledge that DMA is not a one-stop-shop for national customers as Sysco
and USF are today. Indeed, Defendants recognize that "larger customers 'look to [DMA's]

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members regionally ... rather than D:NIA as a national solution."' Id. at 164-65 (quoting DX00265 at 86).

As Dan Cox, the President and CEO of DMA,
explained:

DX-00265 at 64-65. As a result,

Id. at 65.
National customers who value private label products, such as GPOs or foodservice
management companies,

-·

Id. at 79-80.
See id. at 224-26.
And, even if a national customer wanted to switch to DMA,
As

~Jr.

Cox explained. '

" Id. at 99.

113

Id. at

100, 157. For example,

recently considered switching its business to DMA, but
. Id. at 227-

decided to stay with Sysc
29.

, the court does not view DMA as a
viable competitor that can constrain a post-merger Sysco.

3.

Conclusion as to Existing Competition

Based on the evidence presented, the court is convinced that national customers will be
better off in a marketplace that has two strong competitors capable of nationwide broadline
distribution than in a marketplace in which there is a single undisputed heavyweight of broadline
distribution whose only competitive constraints is a transitioning PFG, DMA, and a collection of
regional players.
C.

Entr-y of New Firms and Expansion of Existing Competitors

Defendants argue that the entry of new competitors and the expansion of existing
competitors will keep the industry competitive. If a court finds that "there exists ease of entry into
the relevant product market," that finding "can be sufficient to offset the government's prima facie
case of anti-competitiveness." Cardinal Health, 12 F. Supp. 2d at 55. "The prospect of entry into
the relevant market will alleviate concerns about adverse competitive effects only if such entry
will deter or counteract any competitive effects of concern so the merger will not substantially
harm customers." Merger Guidelines § 9. Ease of entry must be "timely, likely, and sufficient in
its magnitude, character, and scope to deter or counteract the competitive effects of concern." Id.
(emphasis added).

As with their other rebuttal arguments, Defendants bear the burden of

demonstrating the ability of other distributors to "fill the competitive void" that will result from

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the proposed merger. See Swedish Match, 131 F. Supp. 2d at 169. Defendants assert that a lack
of technological, legal, and regulatory barriers makes entry into the foodservice distribution
industry relatively easy. Yet although all it may take is a "guy and a truck" to become a foodservice
distributor, becoming a broadline foodservice distributor with the ability to compete for national
customers is another thing altogether.
The broadline foodservice distribution industry is extraordinarily capital and labor
intensive. It costs roughly $35 million to build a single distribution center. Hr' g Tr. 586. In
addition, the distribution center must be stocked with goods. A fleet of expensive, refrigerated
trucks is required to deliver the products. People-lots of them-are needed to sell the broadline
service, maintain and stock the warehouse, and deliver the products. See Swedish Match, 131 F.
Supp. 2d at 171 (finding high barriers to entry where the evidence showed "substantial sunk costs
in plant construction, product development, and marketing" required to compete). And, even if a
newcomer were to make the substantial investment to start a broadline distribution company, there
is no guarantee that customers will follow. Incumbency is a powerful force in the foodservice
distribution industry.

See H&R Block, 833 F. Supp. 2d at 75 (finding that "importance of

reputation and brand in driving consumer behavior" limited an existing competitor's ability to
expand). Even if it were possible for a new entrant to overcome the incumbent's advantage, it
would take years. These high barriers to entry will further entrench the merged company's market
power. PX03003-005 (USF lender presentation describing broadline foodservice distribution as
having "High barriers to entry for scale players").
Defendants also contend that existing firms have demonstrated the capacity to expand to
compete against the merged firm. They highlight the fact that other broadline distributorsincluding Shamrock, Ben E. Keith, and Reinhart-started out as small businesses serving only

115

limited items to local customers, but were able to grow to regional prominence. They describe
examples of competitors that have recently opened new facilities or plan to do so.
But none of these examples overcome the fundamental problem with expansion as a
constraint on the merged company-like new entry, successful expansion is extraordinarily capital
intensive and demands a long time horizon. Based on their assessment that expansion would not
be an economically viable strategy, regional distributors have said that they have no plans to
expand or reposition in order to serve national customers. - ' w h i c h has
centers mostly located in the

I

distribution

, has told the FTC that such a massive expansion

would not be "viable" in the short term, given the "time and cost required." P.xm-006. Other
regional distributors, including
have similarly been dissuaded by the time, costs, or risks of expansion. P.xm-036 at 139-42;
P.xm-004; P.xm-003; P.xm-005-006; P.xm-048-049.
Companies rarely enter new markets without an existing customer base because the costs
and risks are prohibitive. There is a real "chicken-and-egg" problem with such expansion, known
in the industry as "greenfield" expansion.

Companies will not make the significant capital

expenditure of building a new distribution center unless they already have customers to serve, but
customers will not commit to a distributor unless it has demonstrated the ability to serve its needs.
As a result, expansion in the industry is typically done through "foldouts"-building distribution
centers in contiguous geographic areas-so that customers can be served from an existing facility
until the new facility is built. But even foldouts take time to succeed. They can take from one to
three years to complete, and it can take four to five years for a foldout facility to achieve sales per
square foot similar to established broadline facilities. PX00529-042 at 166-68; Hr'g Tr. 837-39;

see also PX00558-051 at 201-04. Although a foldout strategy may preserve competition in a

116

particular local market, it cannot effectively be used to replace the competition benefitting national
customers lost by the merger. The only way in which a regional player could expand sufficiently
and quickly enough to compete with the merged company would be through a sizeable acquisition
of multiple distribution centers.
In summary, the court finds that, absent a substantial acquisition opportunity, expansion
by regional players will not be timely, likely, and of sufficient magnitude to counteract
anticompetitive harm.

See Cardinal Health, 12 F. Supp. 2d at 58 ("Although the smaller

wholesalers may adequately compete and expand to service both the primary and secondary needs
of local customers, this Court finds that they would not sufficiently expand to compete with the
nationals.").

D.

Efficiencies
I.

Requirement for Merger-Specific and Verifiable Efficiencies

Although the Supreme Court has never recognized the "efficiencies" defense in a Section 7
case, the Court of Appeals as well as the Horizontal Merger Guidelines recognize that, in some
instances, efficiencies resulting from the merger may be considered in rebutting the government's

primafacie case. Heinz, 246 F.3d at 720 (citations omitted). Where, as in this case, the court finds
high market concentration levels, defendants must present "proof of extraordinary efficiencies" to
rebut the government's prima facie case.

Id (citations omitted) (requiring "extraordinary"

efficiencies to rebut an increase in HHI of 510 points); see also Areeda & Hovenkarnp 3d ed.,

supra, if 97lf (requiring "extraordinary" efficiencies where the "HHI is well above 1800 and the
HHI increase is well above 100"). The court is not aware of any case, and Defendants have cited
none, where the merging parties have successfully rebutted the government's prima facie case on
the strength of the efficiencies. See CCC Holdings, 605 F. Supp. 2d at 72 (stating that "courts

117

have rarely, if ever, denied a preliminary injunction solely based on the likely efficiencies"). Yet
even if evidence of efficiencies alone is insufficient to rebut the government's primafacie case,
such evidence may nevertheless be "relevant to the competitive effects analysis of the market
required to determine whether the proposed transaction will substantially lessen competition."

Arch Coal, 329 F. Supp. 2d at 151 (citations omitted).
The court must "undertake a rigorous analysis of the kinds of efficiencies being urged by
the parties in order to ensure that those 'efficiencies' represent more than mere speculation and
promises about post-merger behavior." Heinz, 246 F.3d at 721. Specifically, the court must
determine whether the efficiencies are "merger specific"-meaning they represent "a type of cost
saving that could not be achieved without the merger"-and "verifiable"-meaning "the estimate
of the predicted saving must be reasonably verifiable by an independent party." H&R Block, 833

F. Supp. 2d at 89 (internal quotation marks omitted) (citing Merger Guidelines § 1O); Cardinal
Health, 12 F. Supp. 2d at 62 ("In light of the anti-competitive concerns that mergers raise,
efficiencies, no matter how great, should not be considered if they could also be accomplished
without a merger."). Defendants bear the burden of demonstrating that their claimed efficiencies
are merger specific, H&R Block, 833 F. Supp. 2d at 90, which requires demonstrating that the
efficiencies "cannot be achieved by either company alone," Heinz, 246 F.3d at 722.

And,

Defendants must also demonstrate that their claimed efficiencies would benefit customers. CCC

Holdings, 605 F. Supp. 2d at 74.
Defendants claim that the merger will generate over one billion dollars in annual cost
savings and operational synergies and, "[e]ven when discounted substantially for unforeseen
integration complications, possible customer loss, and the divestiture, the merged company's
efficiencies are expected to generate over $600 million in savings." DFF at 178. Defendants argue

118

that the $600 million efficiencies estimate is "the product of meticulous analysis and planning,"
which occurred over the course of eight months and involved over 100 employees at McKinsey,
an independent consulting firm, and over 170 Sysco and USF employees who are extremely
familiar with the business. Id. at 179. As Defendants explained, "Sysco, USF, and McKinsey
reviewed a back-breaking amount of information from the merging firms, analyzed historical
integration data, modeled possible cost-savings opportunities, and built a new organizational
structure around the companies' combined customer base, and designed detailed day 1, day 100,
and year 1 plans for integration." Id. Of the $600 million cost savings identified by McKinsey,
Defendants' expert Dr. Hausman identified more than $490 million as merger specific. To rebut
Dr. Hausman's opinion on efficiencies, the FTC presented Mr. Rajiv Gokhale of Compass
Lexecon as an expert in financial economics. He opined that at least 65 percent of Defendants'
efficiencies were not merger specific. PX09351-007.
The court does not question the rigor and scale of the analysis conducted by McKinsey.
Nor does the court have any reason to question the accuracy of McKinsey' s total annual cost
savings estimate. But that is not the issue before the court. The issue is whether Defendants have
shown that the projected "merger-specific" cost savings are substantial enough to overcome the
presumption of harm arising from the increase in market concentration and other evidence of
anticompetitive harm. As to that question, the court is unpersuaded that Defendants' combination
would result in $490 million in merger-specific cost savings. Defendants have not shown that that
amount, or at least a substantial portion of it, could not be achieved independently of the merger.
Nor does it appear that Dr. Hausman conducted any independent analysis of the McKinsey
estimate to determine which savings, if any, can be achieved without the merger.

119

Sysco did not hire McK.insey to identify merger-specific savings for antitrust purposes.
Rather, it initially hired McK.insey in the fall of 2013 to determine whether a merged company
could achieve enough cost savings to make the combination worthwhile. Hr' g Tr. 1862-63. After
McKinsey concluded that the merger would generate sufficient cost savings and Sysco and USF
announced the merger, McK.insey began a more in-depth analysis beginning in January 2014 to
identify "particular synergies that would arise from the deal." Id. at 1864-65. Carter Wood, the
McKinsey Director who led the effort, testified that his firm was hired "to estimate what is possible
by combining these two companies such that, number one, they would have confidence or not to
go ahead with the deal; and two, to create value for the newly integrated company." Id. at 1914.
McK.insey was not given instructions on identifying merger-specific savings, and Mr. Wood
testified that he was not familiar with the term "merger specific." Id. at 1904.
Dr. Hausman used McK.insey's projections as his baseline for identifying merger-specific
savings. Id. at 2053. However, it is not clear what independent analysis Dr. Hausman did to
reduce McK.insey's projected savings of $600 million annually to

sll million in merger-specific

savings. In his report, Dr. Hausman explained:
In my previous academic research I have emphasized the effect of cost saving
efficiencies on marginal cost, which can be approximated by average variable cost.
Thus I will take a conservative approach to the estimated efficiencies and focus on
cost savings from changes in variable costs that arise from the merger and would
not occur otherwise.

DX-01355 at 67 (footnote omitted). It is not apparent, however, how Dr. Hausman calculated
merger-specific savings using this approach, as neither his testimony nor his report spell out
precisely how he went about identifying the amount of variable cost savings to include in his
merger-specific estimate.

120

Table 4a of Dr. Hausman's rebuttal rep01t illustrates the difficulties with verif}"ing his
analysis. Dr. Hausman itemized the ''nm-rate of merger-specific variable cost synergies·' into four

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categories: (i) Merchandising, (ii) Operations. (iii) Sales, and (iv) Corporate. In each of those four
categories, Dr. Hausman listed the component pa1ts (in the first column) and the conesponding
amounts (in the fourth colmnn) that comprise the category cost savings estimate. Yet for each of
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these elements, Dr. Hausman relied exclusively on documents created by either McKinsey or
Defendants. See DX-01353 at Ex. C, 2 n.i. He performed no independent analysis to verify these
numbers. Id. ("All source material is either Sysco, US Foods, or McKinsey material and I take
those materials at face value.").
But even taking Dr. Hausman's variable cost savings numbers as presented, the court is
not convinced that the full $490 million in projected savings is merger specific. For example,
nearly half of the -

million in merger-specific savings identified by Dr. Hausman come from

the "Merchandising" category, also known as "category management." The $281 million that
Dr. Hausman attributed to category management cost savings comes directly from McKinsey' s
calculations. Category management refers to a process of optimizing a distributor's product
assortment by gaining insights into which SKUs its customers value and then optimizing the SKU
inventory to match customers' demands and procure those products in the most cost-efficient
manner. Hr'g. Tr. 1881. Both companies prior to the merger already were undertaking category
management efforts. PX00592-035 at 137-40; PX00592-049 at 193-94.
Although McKinsey Director Mr. Wood testified that McKinsey made an effort to identify
only incremental merchandising savings, that is, savings arising only because of the merger, he
could not say whether the $281 million included some cost savings that Defendants might have
been able to achieve separately. For instance, before the merger, Sysco was undergoing a category
management program, called Project Naples, which was due to end in June 2015. However,
Project Naples covered only two-thirds of Sysco's product categories; Sysco planned to complete
the remaining categories at a later date. Mr. Wood testified that the $281 million figure was in
addition to the Project Naples costs savings, but he could not say whether or not that number was

122

in addition to the cost savings that Sysco could achieve through its continued cost savings efforts
beyond June 2015.
USF, meanwhile, suspended its category management project after the merger's
announcement.
management

At the time the merger was announced, USF had only conducted category

onl tol categories out of 300.

PX00592-035at139; PX00592-048-049at192-

93. Mr. Wood could not say whether the $281 million was in addition to cost savings that USF
might have achieved had it continued its category management program. Thus, Dr. Hausman's
estimate of $281 million in "merger-specific" savings in Merchandising-a number that, again,
relied exclusively on McKinsey's calculations-likely overstates the achievable merger-specific
category management savings.
The FTC has pointed to, and Defendants have not rebutted, other ways in which
Dr. Hausman's reliance on McKinsey's estimates likely overstated the savings arising from the
merger. During the hearing, Mr. Wood acknowledged that part of the sales synergy estimatewhich represents savings from combining the salesforces of the two companies-would be
achieved by having customers place orders via an e-commerce platform. However, migration to
electronic ordering can be achieved by either company independently of the merger. Hr' g Tr.
1904-05. Another savings strategy identified by McKinsey, "maximizing backhaul," refers to
having delivery trucks stop by suppliers to reload goods on their way back to the warehouse, in
order to save an extra trip to those suppliers. Hr'g Tr. 1894-95. However, backhaul savings can
also be achieved independently of the merger. See Hr' g Tr. 1905-06.

2.

Insufficiency ofEstimated Merger-Specific Savings

Even if the court were to credit Dr. Hausman's total estimate of merger-specific
efficiencies, the figure would only amount to less than one percent of the merged entity's annual

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revenue. PX09375-l 18 (Dr. Israel's rebuttal report stating that Dr. Hausman's original estimate
of merger-specific, variable cost efficiencies of -

million per year represents only one percent

of Sysco and USF's combined annual broadline revenue). 36 Even assuming that 100 percent of
the cost savings would be passed on to customers, the savings are unlikely to outweigh the
competitive harm to customers. Since the savings are equal to a small percentage of the combined
company's total revenue, even a modest increase in price could offset any cost savings generated
by the efficiencies. At oral argument, Defendants' response to this concern was that the market
would not allow even a slight price increase, as customers would exercise their other options, such
as regionalizing. See Closing Arg. Hr' g Tr. 117-18. Having found that this merger will result in
high national customer and local market concentration levels, the court does not share Defendants'
confidence that the market would not tolerate such a price increase. As the court observed in
Cardinal Health, "[t]he critical question raised by the efficiencies defense is whether the projected

savings from the merger[ ] are enough to overcome the evidence [showing] that possibly greater
benefits can be achieved by the public through existing, continued competition." 12 F. Supp. 2d
at 63. Here, Defendants have fallen short of making that showing.

E.

Conclusion

Upon consideration of all of the evidence presented, the court concludes that Defendants'
rebuttal evidence is not sufficient to overcome the presumption of anticompetitive harm that the
FTC was able to establish through evidence of high post-merger market concentrations and other
evidence of competitive harm. The court thus concludes that the FTC has met its burden of
demonstrating a likelihood of success. That is, the FTC has raised "questions going to the merits
so serious, substantial, difficult and doubtful as to make them fair ground for thorough

36

In 2013, Sysco and USF's combined broadline revenue wasiHJjiiJ.1•!=11PX09350-216, Table 27. One percent
of that sum is greater than Dr. Hausman' s merger-specific cost savmgs estrrnate o f . million.

124

investigation, study, deliberation and determination by the FTC in the first instance and ultimately
by the Court of Appeals." Heinz, 246 F.3d at 714-15 (citation omitted) (internal quotation marks
omitted).
IV.

THE EQUITIES

Although the court has found that the FTC has shown a likelihood of success on the merits
and thus created a presumption in favor of injunctive relief, see Swedish Match, 131 F. Supp. 2d
at 172, Section 13(b)'s "public interest" standard still requires the court to weigh the public and
private equities of enjoining the merge, Heinz, 246 F.3d. at 726. Here, the primary public interests
to be considered include (i) the public interest in effectively enforcing antitrust laws and (ii) the
public interest in ensuring that the FTC has the ability to order effective relief if it succeeds at the
merits trial.
The public's interest in enforcing antitrust law plainly favors enjoining Defendants'
proposed merger.

See id. ("The principle public equity weighing in favor of issuance of

preliminary injunctive relief is the public interest in effective enforcement of the antitrust laws.");
Swedish Match, 131 F. Supp. 2d at 173 ("There is a strong public interest in effective enforcement

of the antitrust laws that weighs heavily in favor of an injunction in this case.").
The second public interest factor-preserving the FTC's ability to order effective relief
after the administrative hearing-also supports an injunction. As stated by the Court of Appeals,
"if the merger were ultimately found to violate the Clayton Act, it would be impossible to recreate
pre-merger competition" because the merging parties would have already combined their
operations and they would be difficult to separate, even by a subsequent divestiture order. Id.
("Section 13(b) ... embodies Congressional recognition of the fact that divestiture is an inadequate
and unsatisfactory remedy in a merger case."). That problem is amplified here because the

125

proposed merger involves two transactions, not just one: (i) Sysco's merger with USF and (ii)
PFG's purchase ofUSF's distribution centers and other assets. The parties have represented that,
absent an injunction, Sysco and USF will merge their operations and divest 11 distribution centers
and associated assets-including personnel, IT Systems, and USF private label products-to PFG,
which will incorporate those assets into its own operations. As the FTC has pointed out, it would
face an especially daunting and potentially impossible task of "unscrambling" the eggs (i.e.,
returning the merging companies to their pre-merger state) if the ensuing administrative
proceedings were to determine that the merger violates Section 7 of the Clayton Act. Additionally,
it is difficult to conceive how a subsequent divestiture order-which would attempt to restore the
parties to their pre-merger state-could be fulfilled without causing significant disruption to the
foodservice distribution industry, its customers, and the ultimate consumers-Americans who eat
outside the home.
Defendants contend that the public equities weigh against granting the preliminary
injunction because the merger will generate substantial efficiencies that will be passed on to
customers. They claim that, ifthe FTC obtains the injunction, Defendants and their customers will
be harmed because "Sysco and US Foods will abandon the merger and consumers will be deprived
of its benefits." DFF at 186-87 (citing Hr' g Tr. 1516-17). But the court cannot conclude, on this
record, that the merger's cost savings will outweigh the potential harm to customers from losing
the country's second largest broadline distributor as a competitor for their business. Dr. Israel's
merger simulation model predicted that, even taking into account the estimated cost savings, the
merger would harm customers. PX09350-l 14-121, Table 3. Although the court has reservations
about some of Dr. Israel's merger simulation model inputs, the court finds that the record as a

126

whole-at the very least-raises substantial questions about whether the merger will harm
consumers. Therefore, the public equities here favor granting the preliminary injunction.
The court recognizes the extraordinary amount of time, energy, and money that Sysco,
USF, and PFG have devoted to the proposed merger. Their efforts, and the risk that the parties
will abandon the merger rather than proceed to an administrative trial on the merits is, however,
"at best, a private equity" which cannot overcome the significant public equities weighing in favor
of a preliminary injunction. See Heinz, 246 F.3d at 727 (internal quotation marks omitted).
CONCLUSION
In the end, after considering the record in its entirety, the court returns to Judge Tatel's

observation in Whole Foods: "[T]here 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."
Whole Foods, 548 F.3d at 1043 (Tatel, J.) (citation omitted) (internal quotation marks omitted).
The court finds that the FTC has carried its burden of showing a "reasonable probability" that a
merger of the country's two largest broadline foodservice distributors, Sysco and USF, would harm
competition. Defendants' merger is likely to cause unduly high market concentrations in two
relevant markets-broadline foodservice distribution to national customers and broadline
foodservice distribution to local customers-and eliminate a key competitor in those markets,
USF.

The evidence offered by Defendants to rebut the FTC's showing of likely harm was

unavailing. The equities also favor granting the requested preliminary injunction. The FTC,
therefore, has established that it is likely to succeed in proving, after a full administrative hearing,
that the effect of Sysco' s proposed acquisition of USF "may be substantially to lessen competition,
or to tend to create a monopoly" in violation of Section 7 of the Clayton Act.

127

The court thus grants the FTC's Motion for Preliminary Injunction. A separate order
accompanies this Memorandum Opinion.

Dated: June 23, 2015

AmitP.
a
U · ed States District Judge

128