With two cases proceeding and one just getting started concerning Whole Foods’ merger with Wild Oats, Whole Foods and the Federal Trade Commission are in for a whole lot of litigation. First, there is the FTC’s Section 7 action on the merits of the merger, which will be heard in an administrative hearing in February 2009. Second, there is the federal court case in which the district court, on remand, will weigh the equities and determine whether injunctive relief would be in the public interest. Third, there is Whole Foods’ due process lawsuit seeking to stop the FTC from conducting the Section 7 hearing and have it heard in federal court. There is also the recent, amended decision of the United States Court of Appeals for the District of Columbia which has implications for key antitrust issues like market definition and antitrust merger cases more generally.
In February 2007, Whole Foods and Wild Oats announced that Whole Foods would acquire Wild Oats. The parties filed premerger notifications under the Hart-Scott Rodino Act for the $565 million merger, as required by Section 7A of the Clayton Act, 15 U.S.C. § 18a, as amended. The FTC investigated the merger through a series of document requests and hearings.
Section 7 of the Clayton Act prohibits acquisitions, including mergers, where in any line of commerce or in any activity affecting commerce in any section of the country, "the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly." It is the principal federal substantive antitrust law governing the formation of mergers, acquisitions and joint ventures. When the FTC believes an acquisition violates Section 7 and that enjoining an acquisition pending an investigation would be in the public interest, the Commission may ask a federal court to temporarily block the acquisition under Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b).
In June 2007, the FTC did exactly that. It issued an internal, administrative complaint alleging that the merger would violate Section 7 of the Clayton Act and at the same time, petitioned the district court for a preliminary injunction to prohibit the parties from closing the transaction pending completion of the administrative proceeding.
In late July and early August, 2007, the district court held a hearing on whether to grant the temporary injunction. The FTC contended Whole Foods and Wild Oats are the two largest operators in a relevant product market it defined as "premium, natural, and organic supermarkets" or "PNOS." See FTC v. Whole Foods Market, Inc., 502 F.Supp. 2d 1, 28 (D.D.C. 2007). Whole Foods, by contrast, asserted that the relevant product market is all supermarkets, not a narrower market of PNOS only.
As in many antitrust cases, this issue of how the relevant market should be defined for antitrust purposes was critical. If the relevant market was all supermarkets, the merger would be lawful because it would not lessen competition in the broad market of all supermarkets. Together, Whole Foods and Wild Oats operated 300 of the approximately 34,000 supermarkets in the United States. On the other hand, if the relevant market was only PNOS, the merger would substantially lessen competition in eighteen cities where Whole Foods and Wild Oats were the only PNOS.
The district court determined that Whole Foods competes against all supermarkets, not just PNOS, that the relevant market for antitrust purposes must be all supermarkets, and that the merger would not substantially lessen competition in a market that includes all supermarkets. The court denied the FTC’s motion for a preliminary injunction, thus allowing the merger to proceed. The FTC applied for an emergency motion to enjoin the merger which the United States Court of Appeals for the District of Columbia denied. Whole Foods and Wild Oats consummated their merger on August 31, 2007.
Circuit Court Decision and Amended Decision
On July 29, 2008, the same appellate court that had rejected the FTC’s emergency motion reversed, in a two-to-one decision, the district court judgment denying the FTC’s request for injunctive relief . FTC v. Whole Foods Market, Inc., No. 07-5276 (D.C. Cir. July 29, 2008). However, on November 21, 2008, the three-judge panel issued an amended opinion. FTC v. Whole Foods Market, Inc., D.C. Cir., No. 07-5276, amended opinion, 11/21/08. The amended opinion leaves the court with no majority because no judge concurs with another judge’s opinion. Judge Tatel amended his previous opinion and now concurs only with Judge Brown’s judgment. Judge Kavanaugh amended his earlier dissenting opinion. With three different stances, each warrants discussion.
Judge Brown’s Opinion
Judge Brown first noted that for the emergency motion, the FTC was required to show "such a substantial indication of probable success" that there would be justification for the court’s intrusion into the ordinary processes of…judicial review." Brown Op at 4. By contrast, the standard for preliminary relief is more lenient and requires a showing that "weighing the equities and considering the Commission’s likelihood of ultimate success, [preliminary relief] would be in the public interest." Id., citing FTC v. H.J. Heinz Co., 246 F.3d 708, 714-15 (D.C. Cir. 2001). These different standards mean that the court would not contradict itself in reversing the district court’s decision but refusing to grant the FTC’s emergency motion. Brown Op. at 4.
Judge Brown next found the district court erred in assuming that the "marginal" consumer, not the "core" or "committed" consumer, must be the focus of any antitrust analysis. Brown Op. at 12, 13. "To the contrary," Judge Brown wrote, core consumers can, in appropriate circumstances, be worthy of antitrust protection." Id. at 13. This assumption led the district court to ignore FTC’s evidence that strongly suggested Whole Foods and Wild Oats competed for core consumers within a PNOS market, even if they also competed on individual products for marginal consumers in the broader market. Id. Further, core consumers constituted at least a majority of Whole Foods’ and Wild Oats’ customers. The district court, Judge Brown found, ignored the FTC’s evidence concerning core customers, and consequently underestimated the FTC’s likelihood of success on the merits.
Moreover, although the merger was a fait accompli, "only in a rare case would we agree a transaction is truly irreversible." Id. at 5. Judge Brown concluded she could not agree with the district court that the FTC could never prove a PNOS market, and remanded the case to the district court to consider the equities as section 53(b) requires.
Judge Tatel’s Opinion
As to the standard for granting a preliminary injunction under section 53(b), Judge Tatel clarified that the standard is met in the D.C. Circuit if the FTC raises questions as to the merits "so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation…" This clarification does not, he added, dilute the likelihood of success standard as the dissent claimed, because it scrupulously follows Heinz, which even Whole Foods insisted the court apply. Moreover, section 53(b) has a unique public interest standard distinct from the common law standard for preliminary injunctions. Tatel Op. at 2, 3.
Next, Judge Tatel found the district court "overlooked or mistakenly rejected" evidence supporting the FTC’s position that Whole Foods and Wild Oats occupy a separate market of PNOS. Judge Tatel referred to the FTC’s expert’s study that when a Whole Foods store opened near an existing Wild Oats store, it reduced sales at the Wild Oats store dramatically, but when a conventional supermarket opened near a Wild Oats store, Wild Oats’ sales were virtually unaffected. This strongly suggests, Judge Tatel stated, that although Wild Oats customers consider Whole Foods an adequate substitute, they do not feel the same way about conventional supermarkets. Judge Tatel also found that the district court failed to consider the FTC’s expert testimony that Whole Foods would capture most of the revenue from the closed Wild Oats, which likewise suggested that consumers consider Whole Foods an adequate substitute and do not feel this way about ordinary supermarkets. Unlike the district court which did not refer to statements of Whole Foods’ CEO – a major focus of the FTC’s argument – Judge Tatel said these statements mattered "because we assume that economic actors usually have accurate perceptions of economic realities." Op. at 8, citing Rothery Storage & Van CO. v. Atlas Van Lines, Inc., 792 F. 2d 210, 218, n.4 (D.C. Cir. 1986).
Judge Tatel conceded an important point, that the absence of evidence that Whole Foods charges more in markets where there are no Wild Oats stores suggests that Whole Foods directly competes with conventional supermarkets. But, he wrote, "that is not the only way to prove a separate market." To support this, he relied on Brown Shoe Co. v. United States, 370 U.S. 294 (1962) and the seven non-exhaustive "practical indicia" of whether a separate market exists that the Supreme Court listed in that decision. In any event, Judge Tatel continued, the FTC did present evidence indicating that Whole Foods and Wild Oats charged more when they were the only PNOS present, such as a study of prices in North Carolina before and after a regional chain, Earth Fare, opened stores where there was a Whole Foods or Wild Oats store. He also criticized Whole Foods’ expert’s study that prices remained steady regardless of the presence or absence of a nearby Wild Oats because the study examined Whole Foods’ pricing on a single day several months after the company announced its intent to acquire Wild Oats and after the company was no longer competing with Wild Oats.
Judge Kavanaugh’s Opinion
Judge Kavanaugh found that "the FTC completely failed to make the economic showing that is Antitrust 101" when it failed to present solid economic evidence that Whole Foods, after the merger, could profitably impose a small but significant and nontransitory increase in price". Dissenting Op. at 3 (referring to the "SSNIP" test). He sharply criticized Judge Brown’s and Judge Tatel’s opinions for not accounting for the basic economic principles that must be considered under modern antitrust doctrine. Op. at 16.
Judge Kavanaugh pointed to FTC v. Staples, 970 F. Supp. 1066 (D.D.C. 1997) where the FTC alleged a distinct submarket as in this case. In Staples, the key fact that led the court to accept the FTC’s narrow market definition was that in areas where Staples was the only office superstore, it was able to set prices significantly higher than in areas where it competed with other office superstores. Op. at 4, 6. The FTC did not, Judge Kavanaugh wrote, "come close to presenting this kind of evidence in this case." Op. at 2-3. Although there was evidence that if a Wild Oats store near a Whole Foods store were to close, most Wild Oats customers would shift to Whole Foods, this said nothing about whether Whole Foods could impose a five percent or more price increase and still retain those customers. Op. at 11. As to the FTC’s evidence of prices falling in North Carolina after Earth Fare opened stores near Whole Foods stores, Whole Foods’ prices returned to normal levels soon after those entries. Likewise, although the FTC presented evidence that Whole Foods’ profit margins decreased in areas where it competed against Wild Oats, the relevant inquiry is whether prices ever differed as a result of competition from Wild Oats. Id. at 13.
Judge Kavanaugh agreed with the district court that there simply was not the economic evidence to support the FTC’s position. The FTC could not overcome this by alleging the statements of Whole Foods’ CEO and providing evidence of several of the practical indicia from Brown Shoe. Op. at 17, n. 5. Mr. Mackey’s statements were not evidence that Whole Foods and Wild Oats were in their own distinct market. Rather, they could be understood as suggesting that Whole Foods and Wild Oats differentiated themselves from the rest of the market. Moreover, intent is not an element of Section 7 and a desire to extinguish one’s rivals is consistent and often is the motive behind competition. Op. at 12, 13, citing A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. 881 F.2d 1396, 1402 (7th Cir. 1989).
"In my judgment," Judge Kavanaugh concluded, this Court got it right a year ago in refusing to enjoin the merger, and there is no basis for a changed result now." Op. at 2.
Effect of the Amended Opinion
The FTC may interpret Judge Brown’s and Judge Tatel’s opinions as supporting a presumption in favor of granting a preliminary injunction to block a merger even when the FTC is unable to fully demonstrate a likelihood of success on the merits.
The case also reminds parties to use caution, not hyperbole, in what they say about a target or a deal. "Hot" documents can lead to investigation and create inferences about the relevant market and effects of the merger.
But, with no majority opinion, it is unclear if the amended decision will be binding on future panels. The D.C. Circuit appears to have adopted this position in refusing to grant Whole Foods’ request for en banc (full court) review. See Order denying Whole Foods’ petition for a rehearing en banc, (citing King v. Palmer, 950 F.2d 771, 783 (D.C. Cir. 1991) (en banc) ("without implicit agreement" among a majority of the judges "we are left without a controlling opinion")). On the other hand, Judge Kavanaugh himself observed that the "mere fact there is no majority opinion does not mean that the decision constitutes no precedent for future cases…As the Supreme Court has frequently explained, in the vast majority of cases without a majority opinion there is still a binding holding of the Court –even if it can occasionally be difficult to determine." Dissenting Op. at 21-22, n. 8. Regardless, this "confused decision" may "invite years of uncertainty and litigation over what the holding of this case is." Id.
The D.C. Circuit’s amended decision does not mark the end of litigation concerning the merger. To the contrary, the federal case is still to be heard on remand to consider the equities of dismantling the merger. Further, an administrative hearing on the FTC’s Section 7 complaint, filed back in June 2007, will begin February 16, 2009, according to the scheduling order in the case. Click here to read more.
Additionally, on December 8, 2008, Whole Foods brought an action in federal court to ban the FTC from conducting the administrative hearing, claiming that it gives the agency three opportunities to challenge the merger and that the process is unconstitutional as applied to it. Whole Foods Market, Inc., D.D.C., No. 1:08-cv-02121,12/8/08. Whole Foods claims the FTC has prejudged the outcome of the case by reaching unqualified conclusions in its legal briefs about the merits of the merger, imposed an unreasonably short discovery schedule developed by a commissioner, not an independent administrative law judge, and raises due process issues relating to the appointment and disqualification of officials who will be presiding over the administrative case.