UNITED STATES OF AMERICA, Appellant v. UNITED STATES SUGAR CORPORATION; IMPERIAL SUGAR COMPANY; LOUIS DREYFUS COMPANY LLC; UNITED SUGARS CORPORATION
No. 22-2806
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
July 13, 2023
Before: AMBRO, PORTER, and FREEMAN, Circuit Judges.
PRECEDENTIAL
Argued: January 18, 2023
* Judge Ambro assumed senior status on February 6, 2023.
Melissa Arbus Sherry [ARGUED]
Amanda P. Reeves
Lindsey S. Champlin
David L. Johnson
Charles S. Dameron
Latham & Watkins LLP
555 Eleventh Street, NW
Suite 1000
Washington, DC 20004
Lawrence E. Buterman
Latham & Watkins LLP
1271 Avenue of the Americas
New York, NY 10020
Christopher S. Yates
Latham & Watkins LLP
505 Montgomery Street
Suite 2000
San Francisco, CA 94111
Jack B. Blumenfeld
Brian P. Egan
Morris, Nichols, Arshit & Tunnell LLP
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
Counsel for Defendant-Appellee United States Sugar Corp.
Peter T. Barbur
David R. Marriott
Daniel K. Zach
Michael K. Zaken
Lindsey J. Timlin
Hannah L. Dwyer
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Amanda L. Wait
Norton Rose Fulbright US LLP
799 9th Street, NW
Suite 1000
Washington, DC 20001
Kelly E. Farnan
Richards, Layton & Finger, P.A.
920 N. King Street
Wilmington, DE 19801
Counsel for Defendant-Appellee Imperial Sugar Company and Louis Dreyfus Company LLC
Peter J. Schwingler
Stinson LLP
50 South Sixth Street
Suite 2600
Minneapolis, MN 55402
Hogan McDaniel
1311 Delaware Avenue
Wilmington, DE 19806
Counsel for Defendant-Appellee United Sugar Corporation
Jonathan S. Kanter
Doha Mekki
Maggie Goodlander
David B. Lawrence
Daniel E. Haar
Nikolai G. Levin
Peter M. Bozzo [ARGUED]
U.S. Department of Justice
Antitrust Division
950 Pennsylvania Avenue, NW
Room 3224
Washington, DC 20530-0001
Brian Hanna
Jonathan Y. Mincer
U.S. Department of Justice
Antitrust Division
450 5th Street, NW
Suite 800
Washington, DC 20530-0001
Counsel for Plaintiff-Appellant United States
Lee Hepner
140 San Carlos Street
San Francisco, CA 94110
American Economic Liberties Project
2001 Pennsylvania Avenue NW
Suite 540
Washington, DC 20006
Counsel for Amicus Appellant American Economic Liberties Project
OPINION OF THE COURT
PORTER, Circuit Judge.
The government appeals the denial of its motion to permanently enjoin the acquisition of Imperial Sugar by United States Sugar Corporation. The District Court found that the government failed to identify the relevant product and geographic markets and thus failed to establish a prima facie case under Section 7 of the Clayton Act.
I
Georgia-based Imperial Sugar Company has been in financial distress for years. It went bankrupt in 2001 and
Enter United States Sugar Corporation, a large Florida-based sugar refiner that agreed to purchase Imperial. The government contends that U.S. Sugar‘s acquisition should be blocked because it would have anticompetitive effects in the market for refined sugar. The government alleges that the transaction would leave only two entities in control of 75% of refined sugar sales in the southeastern United States. It proffers an application of the hypothetical monopolist test (HMT) and argues that the results of that test demonstrate the validity of its proposed product and geographic markets.
U.S. Sugar answers first that it does not even sell its own sugar but rather participates with three other producers in a Capper-Volstead agricultural cooperative, United Sugar, that markets and sells the firms’ output collectively but exercises no control over the quantities that its members produce.1 Even if operated at capacity, it argues, Imperial‘s facility could
After an expedited trial, the District Court denied the government‘s plea for an injunction. It determined the credibility of the expert witnesses and carefully weighed the evidence. As to product market definition, the Court concluded that U.S. Sugar was right to extoll the effects of sugar distributors, who account for approximately 25% of sales of refined sugar in the U.S. It rejected the government‘s proposed product market, concluding that any proposed product market must include sales of refined sugar sold by distributors if it is to be relevant. Turning to the proposed geographic market, the Court recounted considerable evidence presented at trial of sugar‘s high geographic mobility and the ease with which producers and distributors could avail themselves of arbitrage by selling to out-of-region buyers. It concluded that the government‘s analysis failed to account for this mobility, making its proposed markets too narrow to be relevant. The government timely appealed.
II
On appeal from a Rule 52 ruling, we review “findings of fact for clear error” and “conclusions of law de novo.” See FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 335 (3d Cir. 2016) (”Hershey“).2 As for the specific issues on appeal, “the determination of a relevant market is composed of the articulation of a legal test which is then applied to the factual circumstances of each case.” Id. (quoting White & White, Inc. v. Am. Hosp. Supply Corp., 723 F.2d 495, 499 (6th Cir. 1983)). Thus, “while a district court‘s conclusion concerning what constitutes the relevant market is subject to the clearly erroneous standard of review, the district court‘s formulation of the market tests may be freely reviewed on appeal as a matter of law.” Worldwide Basketball & Sport Tours, Inc. v. Nat‘l Collegiate Athletic Ass‘n., 388 F.3d 955, 960 (6th Cir. 2004). A court‘s conclusion concerning what constitutes the relevant market is a finding of fact that is “clearly erroneous” only if it is “completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data.” Berg Chilling Sys., Inc. v. Hull Corp., 369 F.3d 745, 754 (3d Cir. 2004). “[S]o
we review for clear error.” FTC v. Hackensack Meridian Health, Inc., 30 F.4th 160, 167 (3d Cir. 2022).3 However, “where a district court applies an incomplete economic analysis or an erroneous economic theory to those facts that make up the relevant geographic market, it has committed legal error subject to plenary review.” Hershey, 838 F.3d at 336.
A. The District Court did not clearly err in rejecting the government‘s product market definition.
1. The relevant product market is the market for refined sugar.
A claim arising under the Clayton Act, § 7, is evaluated under a three-part burden-shifting framework. Hackensack, 30 F.4th at 166. First, the government must establish a prima facie case that the merger is anticompetitive. Id. To do so, it must “propose the proper relevant market and . . . show that the effect of the merger in that market is likely to be anticompetitive.” Id. Second, the burden to produce evidence
This appeal concerns only the first prong of the first part of that analysis: identification of the relevant market. The government argues that, in defining a product market under Section 7, the District Court clearly erred by treating distributors as separate sources of refined sugar capable of undercutting efforts by a hypothetical monopolist to restrict output and increase price.
The government contends that the HMT, the test “commonly used in antitrust actions to define the relevant market,” FTC v. Sanford Health, 926 F.3d 959, 963 (8th Cir. 2019), requires courts to adhere to a stratified model of the market in which refiners sell to distributors, which then sell to wholesalers, which then sell to retailers, which then sell to consumers. In this abstract, stratified model, a distributor would have no source of refined sugar beyond the refiners in its (properly defined) geographic market. Therefore, the government argues, a court cannot take cognizance of distributors or alternate sugar sources as potential checks on refiners’ market power.
This case is somewhat atypical among product-market-definition disputes, as it is not a dispute about defining the product. Notably, in United States v. E.I. du Pont de Nemours & Co., the Supreme Court was pressed to answer whether
Here, all are agreed: the product is refined sugar. The dispute is over defining the product market as either that for the sale of refined sugar or for the “production and sale” of refined sugar, Appellant‘s Br. 2, the latter of which excludes parties who sell but do not produce—i.e., distributors and wholesalers. The government contends that a proper application of the HMT requires us to limit our focus to only those firms that both produce and sell refined sugar and to exclude sellers who do not themselves refine sugar. It reasons that even if, arguendo, distributors can bring sugar to market from other regions of the country or from overseas in response to higher local prices, all refined sugar must begin with a refiner, so under the HMT, distributors are customers, not suppliers, and should be treated as such under a proper application of the test. It therefore maintains that the District Court erred in considering distributors who could counteract monopolistic restrictions by releasing their own supplies.
U.S. Sugar, in turn, citing our decision in Allen-Myland, Inc. v. IBM Corp., 33 F.3d 194 (3d Cir. 1994), argues that where, as a matter of fact, independent distributors in this industry already are and will remain competitors, acknowledging them as such is entirely consistent with our case law. There, we addressed allegations against IBM of
to the extent that leasing companies deal in used, non-IBM mainframes that have not already been counted in the sales market, these machines belong in the relevant market for large-scale mainframe computers. Unlike IBM, there is no allegation that the manufacturers of these computers possess the market power to control prices, much less that they would do so in concert with IBM. When these computers are placed in service by leasing companies, they provide an alternative that limits IBM‘s power in the market.
Id. at 203 (footnotes omitted).
Allen-Myland thus makes clear that resellers may serve as competitive checks on a seller-manufacturer. The government offers a different interpretation. In its telling, the Allen-Myland Court “reversed because manufacturers’ market shares would already include new large-scale mainframe computers sold by manufacturers to leasing companies,” and to add the products in again when end-users leased them from leasing companies would lead to double-counting “because the leasing companies themselves ‘do nothing to increase the supply of new machines.‘” Appellant‘s Br. 26 (quoting Allen-Myland, 33 F.3d at 202) (cleaned up).
While the government‘s quoted language from the Allen-Myland opinion is accurate, it lacks context. The Allen-Myland Court did say that leasing companies themselves did
The government‘s focus on “production and sale” is a red herring. The proper product market definition here is the market for refined sugar, much as it was the market for “flexible packaging material” in du Pont, 351 U.S. at 400, or for concrete-grade sand in Erie Sand & Gravel, 291 F.2d at 281. The District Court noted that the “Government introduced no evidence at trial that purchasers care whether their sugar supplier is a refiner producer, a marketing entity, a cooperative or a distributor.” J.A. 36, ¶ 85. So defining the product market to include production and sale is irrelevant to consumer
2. The District Court‘s analysis, based in practical indicia, was valid.
There is some ambiguity regarding the extent to which the District Court relied upon HMT analysis in making its decision. It mentioned the HMT only once, in the section of its opinion analyzing the government‘s proposed geographic market. In defining the product market, it instead focused on the “practical indicia” of “industry or public recognition of the submarket as a separate economic entity, the product‘s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” J.A. 46–47 (quoting Brown Shoe Co., Inc. v. United States, 370 U.S. 294, 325 (1962)). And it properly defined its inquiry as one of interchangeability and cross-elasticity in order “to recognize where competition exists.” J.A. 47.
The District Court did not err by considering facts on the ground rather than relying upon HMT analysis. Our precedent makes this clear. Cf. Hershey, 838 F.3d at 345 (“We are not suggesting that the hypothetical monopolist test is the only test that the district courts may use.“). The government cites no authority for its contrary view that “the hypothetical monopolist test . . . governs market definition.” Appellant‘s Br. 22 (emphasis added). The District Court permissibly considered the “highly factual issue” of cross-elasticity of demand and the “[s]pecial characteristics of the relevant industry [that] may influence market definition.” Tunis Bros. Co., Inc. v. Ford Motor Co., 952 F.2d 715, 723 (3d Cir. 1991).
It found that “distributors are the primary importers of refined [sugar] imports,” tending “to purchase the majority of foreign-produced refined sugar imports” in the United States, J.A. 33-34, ¶ 79. And U.S. Sugar‘s expert witness, Dr. Hill, testified “that distributors buy from a variety of sources, which gives them independence and the ability to compete with refiners in the market.” Id. Based on sufficient evidence and weighing the testimony of the parties’ expert witnesses, the District Court thus rejected, in this industry, the government‘s preferred rigid hierarchy of refiners, distributors, wholesalers, retailers, and consumers, with each only buying from the source above it.
The District Court‘s factual findings are extensive and carefully noted. It considered the government‘s proposed market, the objections thereto, and other factors on which it was free to rely to inform its view of the situation. The government would prefer that the HMT be deemed to “govern” the field at Stage I and that its own construction of the HMT be accepted without scrutiny. The law does not require the
3. The District Court was not required to accept a market encompassing “widely divergent customers.”
The government contends that the District Court committed “legal error” by “requiring” the government to “further subdivide the market and differentiate between refined sugar sales to industrial customers and refined sugar sales to retail customers.” Appellant‘s Br. 27 (cleaned up). It proposed a product market in which wholesale customers include industrial food and beverage manufacturers, retailers, food service companies, and distributors. J.A. 37, ¶ 87. The District Court found that, in advocating for this proposed market, the government‘s expert failed to differentiate between refined sugar sales to industrial customers and those to retail customers and that he “made no attempt to consider whether industrial consumers have the same competitive alternatives as other customers.” Id.
“Defining a relevant product market is . . . a factual question,” and the District Court treated it as such. Polypore Intern., Inc. v. FTC, 686 F.3d 1208, 1217 (11th Cir. 2012). It looked to the facts, considered expert witness testimony, made credibility determinations, and concluded that the government witness was less credible and his testimony less helpful than that of the defendant‘s witness. This is not “a matter of law,” as the government styles it, but a matter of fact. Appellant‘s Br. 27; see SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1062 (3d Cir. 1978).
Contrary to the government‘s portrayal, the District Court did not make any categorical statements about a need to always subdivide markets. It simply recognized that when defining a market, courts may draw distinctions as necessary to understand a merger‘s effects on consumers. That factual determination was not clearly erroneous.
To establish its prima facie case, the government must propose the proper relevant market, “includ[ing] both a product
B. The District Court‘s consideration of USDA responses as a remedy for antitrust harm was error, but it is not material.
The District Court offered one further argument against the government‘s case: that “even if U.S. Sugar‘s acquisition of Imperial were likely to have any anticompetitive effects, the Court believes that the USDA has the ability to counteract those effects” by “increas[ing] the amount of low- or no-duty sugar that can be imported into the U.S.” J.A. 63. “Doing so,” it reasoned, “would increase the available sugar for sale in the U.S., thereby bringing prices back down.” Id. In particular, the Court highlighted the USDA‘s “discretionary ability to increase the amounts imported under the TRQ [tariff-rate quota] system and U.S.-Mexico Suspension Agreements in order to maintain reasonable prices.” Id.
The government is correct to describe this line of reasoning as improper. “Repeals of the antitrust laws by implication from a regulatory statute are strongly disfavored, and have only been found in cases of plain repugnancy between the antitrust and regulatory provisions.” United States v. Phila. Nat‘l Bank, 374 U.S. 321, 350 (1963) (citations omitted). A finding of implied repeal “can be justified only by a convincing showing of clear repugnancy between the antitrust laws” and an alternative “regulatory system.” United States v. Nat‘l Ass‘n of Sec. Dealers, 422 U.S. 694, 719 (1975). And in this case, there is no argument presented that any statutory provision immunizes the sugar industry against antitrust challenge. The government‘s simultaneous efforts to keep sugar prices high
That said, as the District Court‘s reasoning on USDA price supports did not alter the outcome of its opinion, reversing it would not salvage the government‘s case. The Court‘s analysis of market definition stands unaffected by those portions of its opinion on USDA policy.
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Defining a relevant market depends in equal parts upon defining the product market and the geographic market, and a failure to do either is dispositive. The District Court concluded that the government failed to define a relevant product market. Its analysis is not clearly erroneous. We will affirm.