United States v. United States Sugar Corporation

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_______________

No. 22-2806

_______________

UNITED STATES OF AMERICA,

Appellant

v.

UNITED STATES SUGAR CORPORATION; IMPERIAL

SUGAR COMPANY; LOUIS DREYFUS COMPANY LLC;

UNITED SUGARS CORPORATION

_______________

On Appeal from the United States District Court

for the District of Delaware

(D.C. Civil No. 1:21-cv-01644)

District Judge: Honorable Maryellen Noreika

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Argued: January 18, 2023

Before: AMBRO*, PORTER, and FREEMAN,

Circuit Judges.

*

Judge Ambro assumed senior status on February 6, 2023.

(Filed: July 13, 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.

2

Timothy G. Cameron

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

3

Daniel K. Hogan

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

4

San Francisco, CA 94110

Katherine Van Dyck

American Economic Liberties Project

2001 Pennsylvania Avenue NW

Suite 540

Washington, DC 20006

Counsel for Amicus Appellant American Economic

Liberties Project

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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. 15 U.S.C. § 18. It

concluded that the government overlooked the procompetitive

effects of distributors in the market for refined sugar,

erroneously lumped together heterogeneous wholesale

customers, and defined the relevant geographic market without

regard for the high mobility of sugar throughout the country.

Because the District Court’s rejection of the government’s

proposed product market is not clearly erroneous, we will

affirm.

I

5

Georgia-based Imperial Sugar Company has been in

financial distress for years. It went bankrupt in 2001 and

suffered a costly accident at its plant in 2008, prompting its

owners to put it up for sale. Purchased by the Louis Dreyfus

Company, Imperial has since received from Louis Dreyfus

only a subsistence level of investment to keep its operation safe

and environmentally sound. Imperial’s internal reports

describe it as an “import-based, price-uncompetitive sugar

refinery” that is “structurally uncompetitive” and suffers from

a shrinking customer base, losing roughly ten percent of its

customers from 2021 to 2022. For more than five years, Louis

Dreyfus has been trying to sell it.

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

1

Capper-Volstead cooperatives are agricultural cooperatives

exempted from certain antitrust scrutiny. See 7 U.S.C. §§ 291–

92.

6

produce only about seven percent of national output—an

insufficient share either to invoke a per se presumption of

anticompetitiveness or to merit an injunction under a rule-of-

reason analysis. Second, U.S. Sugar argues that sugar

distributors constitute a crucial competitive check on producer-

refiners that would undermine any attempt to increase prices.

This effect, it argues, goes unappreciated in the government’s

HMT analysis and undermines the government’s product

market definition. Finally, it argues, evidence of the high

mobility of refined sugar throughout the country renders the

government’s proposed regional markets vacuous and

unrepresentative.

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

7

The District Court had jurisdiction under 15 U.S.C. § 25

(“district courts of the United States are invested with

jurisdiction to prevent and restrain violations of [the Clayton]

Act”). It entered final judgment on September 23, 2022. The

government filed a notice of appeal on September 26, 2022.

This Court has jurisdiction under 28 U.S.C. § 1291.

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

2

U.S. Sugar suggests, that, by arguing only in terms of plenary

review, the government has forfeited a clear error challenge.

But “[a] party cannot waive, concede, or abandon the

applicable standard of review,” so we reject this contention.

United States v. Escobar, 866 F.3d 333, 339 (5th Cir. 2017)

(per curiam).

8

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.

III

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

3

Though the government characterizes the District Court’s

product market holding as “legal error” and urges us to review

the question de novo, to do so would create inconsistency:

market definition inquiries such as this rely heavily upon the

testimony of expert witnesses who are prohibited from

rendering legal opinions. M.S. ex rel. Hall v. Susquehanna

Twp. Sch. Dist., 969 F.3d 120, 129 (3d Cir. 2020) (noting that

“an expert cannot testify to [a] legal conclusion”). Therefore,

the history of Section 7 litigation and reliance upon expert

witnesses necessitates an understanding of product market

definition as a factual inquiry.

9

to rebut the government’s prima facie case shifts to the

defendant. See, e.g., United States v. Baker Hughes Inc., 908

F.2d 981, 982–83 (D.C. Cir. 1990). Third, “[i]f 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.

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

10

DuPont’s patent on cellophane created a monopoly or whether

the relevant product market should be more broadly conceived

of as “flexible wrapping materials,” of which cellophane was

just one kind. 351 U.S. at 396–400. Similarly, in Erie Sand &

Gravel Co. v. FTC, we were asked to decide whether “lake

sand” used to make concrete was its own product or whether

sand from a pit or sand from a bank could fairly be included

with it. 291 F.2d 279, 281 (3d Cir. 1961). These cases typify

the standard product-market-definition inquiry.

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

11

unlawful tying in violation of the Sherman Act. Id. at 200. In

defining the relevant market, the question arose whether leases

of computer mainframes competed with computer

manufacturers’ sales to end users. Id. at 202. Reversing the

district court, we held that

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

12

“nothing to increase the supply of new machines” when the

machines in question were IBM machines. 33 F.3d at 202. But

“to the extent that leasing companies deal in used, non-IBM

mainframes that have not already been counted in the sales

market,” “they provide an alternative that limits IBM’s power

in the market.” Id. at 203. So when the product is defined by

its source, e.g., “IBM computers” or “U.S. Sugar refined

sugar,” then aftermarket sales or leases of that product “do

nothing to increase the supply” thereof. Id. at 202. But when

an ostensible downstream party—a leasing company or

wholesaler—has alternative sources for the same kind of

product, e.g., computers or refined sugar, and places them in

the stream of commerce, they impose a competitive check

upon that source’s power in the market. And this is more likely

to be true the more homogeneous the product: customers

generally place less value upon the question of who

manufactured the product when the product is a commodity,

like sugar, rather than a branded piece of technology, like a

computer. See George Stigler, A Theory of Oligopoly, 72

JOURN. POL. ECON. 44, 49 (1964) (“From the viewpoint of any

one buyer . . . [t]he costs of shifting among suppliers will be

smaller the more homogeneous the goods[.]”).

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 E.I. 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

13

welfare and a purely self-serving description by the

government.

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).

14

That factual inquiry was well-founded and not clearly

erroneous. The District Court found that “[d]istributors have

the ability to purchase large quantities of refined sugar from

many different sources, including foreign competitors, and this

allows distributors to price resales competitively.” J.A. 33, ¶

79. It also found that “[d]istributors account for approximately

25% of sales of refined sugar in the U.S.,” id. at 34, ¶ 80, and

noted that “[a]t trial, there were many examples of customers

purchasing large quantities of sugar from distributors,” id., ¶

81, with distributors “compet[ing] for sales to wholesale

customers of all sizes, including large industrial customers,”

J.A. 35, ¶ 83.

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

15

District Court to do either, and its decision as to product-

market definition evinces no clear error.

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).

16

The government asserts that “the Supreme Court has

repeatedly confirmed[] there is no legal requirement that

plaintiffs divide a broadly defined market into submarkets.”

Appellant’s Br. 27. Its references meant to support the

argument are not on point. Appellant’s Br. 28 (citing Brown

Shoe, 370 U.S. at 327; United States v. Phillipsburg Nat’l Bank

& Tr. Co., 399 U.S. 350, 360 (1970); United States v. Greater

Buffalo Press, Inc., 402 U.S. 549, 553 (1971); United States v.

Cont’l Can Co., 378 U.S. 441, 457–58 (1964)). In Brown Shoe,

the Court held that a district court was not “required to employ

finer[] distinctions” or pursue “[f]urther division” of the

market where such “division does not aid [the court] in

analyzing the effects of [a] merger.” 370 U.S. at 327. To say

that finer distinctions are not “required” does not mean that

they are prohibited. Id. The standard is what “aid[s]” a district

court in analyzing the facts. Id. And the government’s other

cases stand for the mere proposition that a court should not let

the existence of submarkets persuade it to “disregard a broader

line of commerce that has economic significance.”

Phillipsburg Nat’l Bank, 399 U.S. at 360. Here, the District

Court did not disregard the broader line of commerce in refined

sugar; it simply determined that distinguishing between

industrial and retail sales more accurately described the reality

of the market.

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

17

market and a geographic market.” Hackensack, 30 F.4th at 166.

As it has failed to articulate a relevant product market, we do

not consider its argument as to a proposed geographic market.

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

18

through USDA policy and to lower them through antitrust suits

may seem contradictory, but it is not unlawful for the

government to pursue contradictory aims, and price supports

do not create immunity from antitrust.

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.

* * *

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.

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