Sweet Deal: Key Takeaways from the District of Delaware's Decision in the U.S. Sugar/Imperial Merger Challenge | Practical Law

Sweet Deal: Key Takeaways from the District of Delaware's Decision in the U.S. Sugar/Imperial Merger Challenge | Practical Law

The US District Court for the District of Delaware denied a challenge by the Department of Justice (DOJ) Antitrust Division to block United States Sugar Corporation's proposed acquisition of Imperial Sugar Company. In the opinion, Judge Maryellen Noreika held that the government failed to prove its prima facie case by inadequately defining and establishing the relevant product and geographic markets in which to analyze the potential anticompetitive effects of the merger.

Sweet Deal: Key Takeaways from the District of Delaware's Decision in the U.S. Sugar/Imperial Merger Challenge

by Practical Law Antitrust
Law stated as of 30 Sep 2022 • USA (National/Federal)
The US District Court for the District of Delaware denied a challenge by the Department of Justice (DOJ) Antitrust Division to block United States Sugar Corporation's proposed acquisition of Imperial Sugar Company. In the opinion, Judge Maryellen Noreika held that the government failed to prove its prima facie case by inadequately defining and establishing the relevant product and geographic markets in which to analyze the potential anticompetitive effects of the merger.
On September 28, 2022, Judge Maryellen Noreika of the US District Court for the District of Delaware, entered a judgement for defendants, allowing the acquisition of Imperial Sugar Company by United States Sugar Corporation to proceed (United States v. United States Sugar Corporation, (D. Del. Sept. 28, 2022). The Antitrust Division of the Department of Justice filed suit in November 2021, seeking to enjoin the merger (see Legal Update, DOJ Challenges Sugar Merger).
U.S. Sugar is a member and owner of United Sugars Corporation (United), which is a cooperative that sells, and sets the prices for, all of the refined sugar produced by U.S. Sugar and three other sugar refiners. According to the complaint, the merger would result in United and competitor Domino controlling approximately 75% of sugar sales in the Southeastern US.
According to the complaint, the merger would result in:
  • Increased prices.
  • Reduced services.
  • Reduced product quality.
  • Vulnerability to coordination.
The district court was starkly critical of the DOJ's evidence, in particular the analysis and testimony given by the government's expert. The court found that the DOJ failed to prove its prima facie case, holding that:
  • The proposed product markets are insufficient because the relevant market should:
    • include refined sugar distributors; and
    • not include all wholesale customers.
  • The proposed geographic markets are too narrow.
  • The United States Department of Agriculture (USDA) has the ability to manipulate sugar supply effectively to counteract any potential anticompetitive effects of the merger.

Product Markets

The DOJ alleged that the relevant product market was the production and sale of refined sugar to wholesale customers. The parties agreed that the market includes refined sugar in all forms, but disagreed on where the sugar must come from and be sold to, with the DOJ arguing that:
  • Sugar distributors should be excluded from the relevant market.
  • All wholesale customers should be included, regardless of the type of customer or industry.
The court disagreed on both counts.
Sugar Distributors
On the question of whether sugar distributors should be included in the relevant market, the court summarized the arguments of the parties by explaining that the:
  • Government considered distributors to be customers, rather than competing suppliers, because, the DOJ argued, they do not produce sugar and so would bear any increased price of refined sugar.
  • Defendants argued that distributors act as competitive sellers of refined sugar in the various geographic markets considered in this case.
  • In siding with the defendants, the court noted that distributors compete with and may act as price constraints on refiners and other sugar suppliers. For example, the court identified evidence that distributors:
  • Purchase large volumes of sugar from a variety of sources, which makes it possible for them to move supply to other parts of the country where there are sugar deficits or high sugar prices.
  • Maintain a diversity of supply, both domestic and foreign, which allow them to obtain and resell sugar at competitive prices.
  • Leverage a large transportation network and storage solutions to maintain and ship sugar, allowing them to exert competitive pressure when and where necessary.
  • Sell to customers that are largely indifferent regarding whether they purchase from a sugar producer or distributor.
  • Are viewed by both customers and other sugar suppliers as competitive participants in the industry.
  • Act as independent actors within the market.
    • Finding there to be high cross-elasticity of demand between distributors' and other suppliers' refined sugar, the court held that they must be considered as part of the same market. In addition, excluding distributors would not reflect the commercial realities of the market.
    • The DOJ admitted that it did not have evidence to prove its case if distributors were included in the product market, nor did the DOJ offer an alternative product market.

Wholesale Customers

  • The court also addressed the inclusion of all wholesale customers in the proposed product market. The DOJ proposed a market that included industrial food and beverage producers along with retail companies and food services companies. The court, however, found no evidence to support a conclusion that all of those customers face the same competitive options and purchasing behavior. To the contrary, the court actually cited evidence that industrial customers are actually treated differently than other customers. The court found that a lack of sufficient evidence to support a market that includes all wholesale customers further undermined the plausibility of the DOJ's proposed product market.

Geographic Markets

  • While the failure of the DOJ to prove a relevant product market is fatal to their claims, the court addressed flaws in the geographic markets as well. The DOJ alleged two possible geographic markets:
  • Georgia Plus, which includes Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee.
  • Southeast, which includes the Georgia Plus states, along with the District of Columbia, Delaware, Kentucky, Maryland, Mississippi, Virginia, and West Virginia.
  • The court noted that both of these markets include competitive overlap between Imperial and United. The markets were, however, selected based on the location of the customers and not the suppliers.
  • According to the DOJ's expert, both of these markets would satisfy the hypothetical monopolist test. The DOJ's expert also concluded, without analysis, that the defendants' proposed markets encompassing all areas of competitive overlap or the entire US, would also satisfy this test. The court found it to be implausible that these markets of disparate size would each be potentially relevant geographic markets in this case.
  • The court identified other issues with the DOJ's proof regarding the geographic market, including that it failed to take into account that:
  • Many customers within either region purchase a significant amount of sugar from outside those geographic regions.
  • Sugar is relatively low cost and easy to transport long distances.
  • Nearby suppliers may meaningfully increase sales in the area.
  • The economic reality is that sugar flows easily across the country from areas of surplus to deficit in response to prices and demand.
  • The court further dismissed a potential third market, called by the DOJ the USDA South, noting that neither the DOJ's expert nor any other proffered evidence meaningfully analyzed the potential impact of the merger on that proposed market.
  • Finally, the court noted that the DOJ appeared to invite the court to find a market that fit its claims, which the court declined to do.
  • Holding that the DOJ failed to meet its burden to establish a relevant market, the court did not address second prong of the prima facie case, that is, a determination of whether the merger is likely to have anticompetitive effects.

Protection Against Anticompetitive Effects

  • The court declined to address whether the merger is likely to have anticompetitive effects. However, the court held that even if there were such effects, there are sufficient industry realities and regulatory controls in place to protect customers. Relying heavily on testimony from a witness with extensive knowledge of the USDA's Federal Sugar Program, which establishes a floor for sugar prices and regulates the supply of sugar in the US, the court concluded that the USDA could effectively regulate the industry to counteract anticompetitive effects, for example by:
  • Controlling the supply and production of domestic sugar.
  • Managing the amount of imported sugar allowed to enter the US at low or no duty.
  • The defendants' witness, who also testified that the merger may actually lower prices, noted further that:
  • The merger could improve competition by increasing efficiencies, for example by providing Imperial's Port Wentworth facility with a source of domestic raw sugar.
  • Even if the merger resulted in a regional price increase, sugar would flow in from other areas to bring the prices back down.
  • The court found that the DOJ failed to meet its burden and declined to enjoin the merger. The DOJ has filed a notice of appeal to the US Court of Appeals for the Third Circuit. In addition, the DOJ filed a motion for an emergency temporary injunction to pause the deal while the appeal is pending, which was denied by the district court (see United States v. United States Sugar Corporation, (D. Del. Sept, 28, 2022).
For more on how the antitrust agencies evaluate mergers, see Practice Note, How Antitrust Agencies Analyze M&A.