We recently reported that the FTC decided to sue to block the proposed merger between Sysco and US Foods. However, since that time, several important developments have occurred in the case. First, the D.C. federal court ruled that Sysco’s legal chief cannot have access to confidential business data, finding that Sysco’s top attorney is too closely involved with Sysco’s competitive decision-making. The judge said that Russell Libby, Sysco’s chief legal officer and executive vice president of corporate affairs, is not allowed to have access to business data labeled as confidential because he is an active participant on Sysco’s executive team and regularly advised Sysco on upper-level business decisions. In its decision, the court wrote:
Because of Mr. Libby’s close proximity to Sysco’s competitive decision-making and because of his business development responsibilities, the risk of inadvertent disclosure of trade secrets outweighs the limited impairment Sysco might experience from Mr. Libby’s restricted access to certain discovery.
The judge’s decision sides with arguments made by the FTC and intervenors Reinhart Foodservice LLC and Shamrock Foods Co. The FTC, Shamrock and Reinhart did not oppose general counsel at Sysco and US Foods from accessing the information, but did ask the court to impose restrictions on how general counsel for the two companies accessed the confidential information. The judge agreed, ruling that the documents could only be ruled through some form of a secure-data room or protected document review system. Additionally, the judge outlined a significant penalty provision in the resulting protective order, which allows for penalties of up to $250,000 for any wrongful disclosures of the confidential information. Even still, the judge did not acquiesce to all of the FTC’s and intervenor’s requests, finding that the intervenors’ request to limit in-house counsel’s access to confidential material contained in unredacted draft and final pleadings, deposition and hearing transcripts and expert reports too restrictive.
Second, Sysco has sought and been granted by the court access to the identities of the some 92 declarants who contributed to the FTC’s complaint against Sysco. In support of their argument, Sysco claimed in their supporting brief:
Now that plaintiffs have emerged from their ex parte investigation and chosen to make the declarations an element of their case, they should not be permitted to hide this evidence and further impede Sysco and US Foods’ defense … Defendants are left to build their defense in the dark. If [the FTC and several state plaintiffs] want the court to consider witness testimony, then defendants must have a meaningful opportunity to cross-examine those witnesses.
The court was persuaded by Sysco’s arguments and ordered the FTC to disclose the identity of the 92 witnesses. The court’s ruling rejected the FTC’s argument that the witnesses’ identities must remain confidential because if they were made public many of the witnesses would not longer cooperate in the case. However, the FTC could only cite to one unidentified declarant who would not have voluntarily cooperated if it had known that its identity would become public. According to the court’s ruling:
After considering the parties’ arguments, the court concludes that defendants shall be granted the relief they seek: to disclose the declarants’ identities to their employees strictly for the purpose of preparing their defense. The court reserves for another day the broader question whether the identities of the declarants should be made public.
Finally, following the court’s ruling on the 92 witnesses, Sysco filed its formal opposition to the FTC’s motion for preliminary injunction. Sysco’s opposition argues that: 1) a market for broadline food service distribution centers for “national customers” does not exist; 2) local markets are highly competitive; 3) synergies will reduce Sysco’s annual costs by at least $600 million; and 4) a robust, binding divestiture package with Performance Food Group creates a stronger competitor. Bill DeLaney, Sysco’s president and chief executive officer, said, “We look forward to presenting all of the facts in court and ultimately, through this merger, delivering better service at a lower cost through a more efficient, innovative and competitive combined company.”
Court hearings are scheduled to begin in the FTC’s case against Sysco and US Foods on May 5, 2015. We will continue to follow this story and provide updates as important court rulings and other events transpire in the case.