Antitrust Alert: U.S. FTC and Whole Foods Settle Long-Running Merger Challenge
Today the Federal Trade Commission and Whole Foods Markets settled the FTC's challenge to Whole Foods' 2007 acquisition of Wild Oats Markets, which the agency alleged would lessen competition in the operation of "premium natural and organic supermarkets." Although not an unmitigated victory for the FTC, this lengthy dispute may have enhanced the agency's enforcement powers in merger challenges.
In June 2007, the FTC filed an action in federal district court in Washington, D.C., and issued an administrative complaint, claiming the acquisition would violate the antitrust laws in numerous local markets where Whole Foods and Wild Oats competed or potentially would compete. (The amended complaint identified 29 geographic markets, 22 where Whole Foods and Wild Oats competed and 7 in which they were potential competitors, based on expected new entry by one of them.) The district court granted a temporary restraining order but, after a two-day hearing, in August 2007 denied the FTC's request for a preliminary injunction to block the merger pending the agency's administrative proceeding. The FTC stayed its administrative challenge, pending appeal of the district court decision. In July 2008, a year after the initial challenge, the D.C. Court of Appeals reversed the district court, in an opinion that could strengthen the FTC's authority to challenge mergers. The FTC then pursued its administrative proceeding, until settlement talks began in January 2009.
This case has been significant on several fronts.
Proving that the relevant product market is as narrow as "premium natural and organic supermarkets" would have been critical to the FTC case. Whole Foods argued that it and Wild Oats competed with conventional grocery stores, which increasingly are selling organic products. The FTC emphasized that Whole Foods and Wild Oats offer a unique package of products, amenities, and high levels of service that differentiate them from most other food retailers. The district court agreed with Whole Foods, finding that "marginal" customers would switch to conventional stores from Whole Foods/Wild Oats, if they raised prices. The appeals court reversed, and the majority found support for the FTC's position that Whole Foods and Wild Oats competed in a separate market for premium natural and organic supermarkets. The appeals court also emphasized that, at the preliminary injunction stage, the agency need not have finally resolved its relevant market definition. In the future, this may give the FTC more flexibility to challenge mergers without committing itself to this element of its case or fully developing evidence to prove it.
Of greater significance to future FTC enforcement is the court of appeals' discussion of the preliminary injunction standard. To obtain a preliminary injunction in a merger case, the FTC must satisfy Section 13(b) of the FTC Act, which allows the district court to grant the injunction if, "weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest." It has been debated whether this is easier than the traditional four-part equity standard, which the Justice Department must satisfy.
The appeals court determined in effect that a district court must use a sliding scale in balancing the likelihood of FTC success against the equities. The FTC need not show irreparable harm, and private equities alone cannot override the FTC's showing it will likely succeed. The district court had focused on the likelihood of success and failed to consider the public equities. The appeals court also emphasized that, in this injunction context, the FTC is not required to prove the merits of its case, which may await the administrative proceeding.
After this decision, at least in the D.C. Circuit, the FTC's raising serious and substantial questions on the merits creates a strong presumption in favor of granting a preliminary injunction, then shifting the burden to the parties to show the equities favor the merger. The decision also suggests that the courts largely should defer to the FTC's determination there has been a violation, leaving the final resolution to its administrative proceeding. This has bolstered the FTC's ongoing efforts to increase the importance and authority of its administrative process in merger review.
In future matters, however, the FTC's ability to rely on this precedent may be questioned. In November 2008, the concurring judge in the two-judge majority withdrew his support for the "majority" opinion, although he did not change his vote to reverse the district court. Therefore, there now is no "majority" opinion, putting in dispute the precedential value of the original majority opinion that was so generous to the FTC in discussing its injunction standard.
The settlement announced today ends the FTC administrative litigation process and requires that Whole Foods sell 32 stores and the Wild Oats brand. The relief seems very different than it would have been in 2007, given developments since then. First, the 32 stores that Whole Foods must divest provide relief in only 17 of the 29 geographic markets where the FTC alleged the combination would cause competitive harm. For the remaining markets, essentially the only relief under the consent order is the divestiture of the Wild Oats name. Second, of the 32 stores that Whole Foods must divest, only 13 are currently operating stores. Fully 19 of the stores to be divested are closed, former Wild Oats stores. In sum, the FTC may be getting what relief is available as the world exists today, but it likely represents much less than what the FTC would have sought in relief pre-merger, a result of the Whole Foods prevailing before the district court and being allowed to complete the merger in 2007.
There were several sideshows in this long saga. For example, the writings of Whole Foods' own CEO gave the FTC valuable evidence to prove its case. As highlighted in the FTC complaint, internally the CEO had said that, "by buying [Wild Oats] we will…avoid nasty price wars in [particular cities]… [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever." The CEO was also discovered to have, under a pseudonym, written blog postings criticizing Wild Oats. Antitrust regulars will recognize these as raising important client counseling issues.
In another sideshow, Whole Foods pushed back on the FTC's appointing one of its own Commissioners to serve as administrative law judge in the agency's own proceeding. The Commission had voted unanimously to challenge the merger, and Whole Foods argued that Commissioner Thomas Rosch therefore had prejudged the outcome of the case, disqualifying him as an impartial judge. Commissioner Rosch retained the ALJ appointment long enough to set a tight pre-trial schedule – to demonstrate that for the district court to grant a preliminary injunction would not long delay the resolution of the case – and the FTC then appointed one of its usual ALJs to preside.
By settling the Whole Foods challenge at this stage of the dispute, the FTC may or may not have been able to protect competition for consumers of organic groceries. The FTC certainly has made headway in strengthening its authority to halt even consummated mergers and rely on its own administrative proceedings to resolve whether a transaction violates the antitrust laws.
The public may comment on the consent agreement for thirty days before it is finalized. The FTC's press release and settlement documents can be found at the FTC's web site.
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