FTC Gets Another Shot at Whole Foods/Wild Oats Merger

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Eleven months after Whole Foods Market, Inc. and Wild Oats Markets, Inc. consummated their merger, a divided U.S. Court of Appeals in Washington, D.C. has “reluctantly” reversed a lower court’s decision denying the Federal Trade Commission’s request for a preliminary injunction blocking the combination. In an unusual move, the three-judge panel issued three separate opinions. The majority concluded that the district court in its August 2007 decision (2007-2 CCH Trade Cases 75,831) “underestimated the FTC’s likelihood of success on the merits.”

"Premium, Natural, & Organic Supermarkets"

The FTC filed a complaint to block the transaction in June 2007. It contended that Whole Foods and Wild Oats were the two largest operators of premium, natural, and organic supermarkets (“PNOS”). According to the agency, the merger would create monopolies in 18 markets where Whole Foods and Wild Oats were the only PNOS. The district court denied the injunctive relief, and the appellate court refused the agency’s request for an injunction pending appeal. Whole Foods and Wild Oats then consummated their merger in August 2007.

The district court rejected the PNOS market as the relevant product market for analyzing the competitive impact of the transaction, suggesting that Whole Foods and Wild Oats competed within the broader market of grocery stores and supermarkets. According to the appellate court, the lower court “analyzed the product market incorrectly.”

The FTC offered evidence that a PNOS submarket existed catering to a core group of customers. The district court, however, assumed that market definition had to depend on marginal consumers. The appellate court did not agree with the district court that the FTC would never be able to prove a PNOS submarket.

A concurring opinion agreed with the majority decision that the district court erred in focusing only on marginal customers, but also contended that the lower court overlooked or mistakenly rejected evidence supporting the FTC’s view that Whole Foods and Wild Oats occupied a separate PNOS market. The concurring opinion pointed to evidence that the Whole Foods and Wild Oats CEOs believed that their companies occupied a market separate from the conventional grocery store industry.

Balance of Equities

The appellate court remanded the matter to the district court to balance the public and private equities to determine whether enjoining the merger would be in the public interest. The FTC unsuccessfully urged the appellate court to consider the equities for the first time on appeal. However, the appellate court did note that “the equities in a [15 U.S.C.] § 53(b) preliminary injunction proceeding will usually favor the FTC.”

The concurring opinion stated that private equities should be afforded little weight and should only be considered if Whole Foods can show some public equity favoring the merger, such as increased employment or reduced prices.

Dissent

A dissent contended that the district court properly denied the requested relief because the relevant market for evaluating the merger was all supermarkets, and the merger would not substantially lessen competition in a market that included all supermarkets.

The dissent also took issue with the majority’s focus on core customers in defining the market. The dissent contended that the majority relied on a distinction between marginal consumers and core consumers, even though “the FTC never once referred to, much less relied on, the distinction between marginal and core consumers in 86 pages of briefing or at oral argument.”


FTC Reaction

FTC Bureau of Competition Director Jeffrey Schmidt said, in response to the decision: “We are pleased by today’s decision of the appeals court in the Whole Foods matter and are looking forward to future proceedings before the district court, leading to a full trial on the merits before the Commission.”


The text of the July 29, 2008, decision in FTC v. Whole Foods Market, Inc., and Wild Oats Markets, Inc., No. 07-5276, will appear in CCH Trade Cases.