Monday, July 09, 2007

FTC's "Narrow View" of Markets May Threaten Franchisors

You would think that franchisors would be feeling pretty good about their antitrust exposure following Leegin Creative Leather Products, Inc. v. PSKS, Inc., the June 28 U.S. Supreme Court decision that overturned the application of the per se rule of illegality to vertical price fixing.

However, a recent Federal Trade Commission challenge to a non-franchise merger might nevertheless cause franchisors to worry about facing government antitrust scrutiny, according to a prominent franchise attorney.

Last month, the FTC brought a court and administrative action against Whole Foods Market’s proposed acquisition of Wild Oats Markets, Inc., alleging that the combination of supermarket chains would substantially lessen competition in the nationwide market for “premium natural and organic food supermarkets.”

Relevant Market

As previously discussed on Trade Regulation Talk, the relevant market definition alleged by the FTC has been the subject of much controversy, particularly since the vast majority of natural and organic food is sold through traditional supermarkets.

The FTC challenged the Whole Foods/Wild Oats combination by alleging a relevant market of “premium natural and organic food supermarkets,” which are differentiated from conventional supermarkets by (1) the breadth and quality of their perishables; (2) the wide array of natural and organic products and services and amenities they offer; and (3) the customer’s shopping experience “where environment can matter as much as price.”

"Extraordinarily Narrow Boundaries"

“Owing to the extraordinarily narrow boundaries of this alleged relevant market . . . the FTC’s decision to bring this action should be of concern to franchisors,” wrote Peter J. Klarfeld, in a July 6 Wiley Rein LLP Franchise Alert newsletter.

Franchisors have not had to worry much about antitrust challenges to many of their business practices because they do not have economic power in any “reasonably defined relevant market,” according to Klarfeld. The industry sectors in which franchisors deal (fast food, lodging, retail, real estate sales) are “just too vast for any brand to monopolize” and substitutes for the products and services are readily available.

Particular Quality, Image, Lifestyle

But what would happen if the relevant market did not consist of all competitors offering reasonably interchangeable products and services? What if the market included “only those competitors that offered products of the same perceived quality, a particular level of service and/or a particular advertising image,” he asked.

“What if associating a product or service with a certain ‘lifestyle’ narrowed the relevant market for antitrust purposes to other companies that attempted to invoke a similar ‘lifestyle’ in their advertising?”

Adoption of the FTC’s market definition in the Whole Foods/Wild Oats case could create relevant markets for restaurant chains that feature a particular kind of food or seek to attract a particular clientele (such as “kid-friendly” businesses).

Klarfeld suggests that the FTC may place limits on its relevant market theory as its action proceeds. “But as the FTC’s complaint now stands, its implications could create considerable mischief for franchisors.”

The court complaint is Federal Trade Commission v. Whole Foods Market, Inc. and Wild Oats Markets, Inc., U.S. District Court for the District of Columbia, Case 1:07-cv-01021, filed June 6, 2007.

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