On July 13, 2023, the U.S. Court of Appeals for the Third Circuit declined to block the $315 million purchase of Imperial Sugar Company (“Imperial”) by United States Sugar Corporation (“U.S. Sugar”), rejecting the Department of Justice’s (“DOJ”) claim that the merger would violate antitrust law and increase prices. See United States v. United States Sugar Corp., et al., No. 21-cv-1644, 2023 WL 4526605 (3d Cir. July 13, 2023). The Third Circuit’s decision let stand the District of Delaware’s initial order from September 2022, United States v. U.S. Sugar Corp., et al., No. 20-1644 (MN), 2022 WL 4544025, at *20-21 (D. Del. Sept. 23, 2022), which declined to enjoin the merger on the grounds that DOJ failed to identify the relevant product and geographic markets. Both decisions drive home the necessity of a proper market definition in merger cases, and they reflect enforcers’ continued uphill battle when it comes to challenging mergers in the courts.

DOJ’s suit alleged that the acquisition would harm competition under Section 7 of the Clayton Act, 15 U.S.C. § 18 (“Section 7”) because it would leave only two entities in control of 75% of refined sugar sales in the southeastern United States. Such challenges to proposed mergers are reviewed under a three-part burden-shifting framework wherein the government must first assert a prima facie case that the subject merger is anticompetitive. FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 337-38 (3d Cir. 2016). To do so, the government must (1) identify the proper relevant market; and (2) show that the effects of the merger are likely to be competitive. Id. If the government succeeds, the burden shifts to the defendant to produce evidence rebutting the government’s prima facie case, and then shifts back to the government to produce additional evidence of anticompetitive effects. See id.; see also United States v. Baker Hughes Inc., 908 F.2d 981, 982-82 (D.C. Cir. 1990).

Here, in formulating a prima facie case, DOJ defined the relevant product market as “the production and sale of refined sugar” by refiners and other suppliers “to wholesale customers.” In doing so, DOJ relied on the hypothetical monopolist test (“HMT”)—a common method of defining the relevant market per DOJ’s current Horizontal Merger Guidelines based on whether customers would be able to resist monopolistic price increases by purchasing product outside the proposed market.

However, the District Court found DOJ’s proposed product market too narrow, primarily because it did not account for potential competition by sugar distributors, and DOJ had acknowledged it could not prevail based on a market including such firms. United States v. U.S. Sugar Corp., et al. (D. Del.) at *20-21. The court also found that, in any event, the U.S. Department of Agriculture (“USDA”) could counteract any anticompetitive harm from the merger by regulating the amount of sugar, and therefore, sugar prices, in U.S. markets.

On appeal, DOJ argued that the District Court erred in rejecting its proposed product market by (1) treating distributors as independent sources of refined sugar; (2) diverging from the HMT; (3) requiring DOJ to “subdivide” the market to distinguish between retail and industrial wholesalers; and (4) considering the potential salutary effects of USDA’s regulatory program. With respect to the role of distributors, DOJ asserted, the court was required to limit its focus to firms that both produce and sell refined sugar. Including distributors in this category, the government claimed, would improperly “double-count” the sugar that they purchase from refiners and other suppliers.

Writing for a three-judge panel, Circuit Judge David Porter held that when defining the relevant market in Section 7 cases, “courts may draw distinctions as necessary”—based on “practical indicia”— “to understand a merger’s effects on consumers.” Because distributors can (and do) act simultaneously as sugar buyers and resellers, the Circuit reasoned, the District Court committed no error in rejecting DOJ’s more limited market definition. Indeed, the Circuit explained, by purchasing and later reselling sugar produced by refiners, distributors provide an alternate source of sugar that serves as a “check” on refiners’ market power, and therefore, constitute an important part of the relevant product market for purposes of assessing potential anticompetitive harm. The Circuit similarly upheld the District Court’s findings distinguishing retail and industrial wholesalers, noting that doing so “more accurately described the reality of the market.”

The Circuit did, however, agree with DOJ that it was improper to consider USDA’s regulatory activities as a remedy for any antitrust harm. The Circuit characterized this reasoning as an attempt to repeal the antitrust laws by implication, and, relying on United States v. Philadelphia National Bank, 374 U.S. 321, 350 (1963), noted the high standard for doing so based on a regulatory statute. The Circuit further observed that while the government’s simultaneous efforts to keep sugar prices high through USDA policy and lower them through antitrust suits seem “contradictory,” the government is allowed to pursue contradictory aims and such “price supports do not create immunity from antitrust.” However, because the District Court’s reasoning in this regard did not affect its ruling on DOJ’s market definition, the Circuit declined to reverse on these grounds.

DOJ’s efforts in this case echo the current administration’s increased interest in antitrust enforcement, particularly with respect to mergers, set forth in an executive order in 2021, and reiterated in DOJ and the Federal Trade Commission’s proposed new Merger Guidelines (“New Guidelines”) released on July 19, 2023. In line with the Circuit’s reasoning in U.S. Sugar, the New Guidelines reference the HMT as just one of several “tools” that can be used to define a relevant market, including “practical indicia,” such as 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. But the New Guidelines also expand the traditional HMT—which focused on increased prices—to consider whether a hypothetical monopolist would likely worsen terms of sale in the candidate market “along any dimension of competition,” including price as well as quality, service, capacity investment, choice of product variety or features, or innovative effort. (emphasis added).

While it is not clear that this more flexible test would have changed the outcome in U.S. Sugar, its adoption would likely ease enforcers’ burden when defining the relevant market for purposes of Section 7 challenges. We’ll be watching how the New Guidelines proposal unfolds.