Wednesday, December 10, 2008

Whole Foods Attempts to Block FTC Administrative Proceedings on Merger

This posting was written by John W. Arden.

Whole Foods Market has filed a federal lawsuit attempting to prevent the FTC from conducting an administrative trial on February 16, 2009 regarding last year’s Whole Foods-Wild Oats merger.

A complaint, filed December 8 in the federal district court in Washington, D.C., claimed that the FTC’s administrative action would violate Whole Foods’ due process rights and the Administrative Procedure Act.

“How can the same FTC sit as judge and jury sometime in the future on the very same case in which it has already declared that the Whole Foods-Wild Oats merger is illegal and its key expert’s testimony is ‘garbage’?” asked John Mackey, co-founder and CEO of Whole Foods Market.

After failing to convince a federal court to block the merger, the FTC is “attempting to get a second bite at the apple by challenging this merger in administrative proceedings conducted by and within the Commission itself,” according to the complaint.

Violation of Due Process

The Commission allegedly deprived Whole Foods’ due process rights by:

 Prejudging the case in public legal briefs prior to commencing the administrative proceeding;

 Imposing an “unreasonably truncated and arbitrary” discovery schedule that prejudices the specialty grocer;

 Appointing as Presiding Official of the administrative proceeding one of its own Commissioners who had prejudged the case and then replacing him with an administrative law judge and “stripping him of his independence to modify the schedule without the Commission’s permission," and

 Failing to disqualify a Commissioner from adjudicating the ultimate merits of the merger.

Prejudgment and Bias

Count one of the complaint asserted a violation of due process based on the Commission’s prejudgment and biases.

According to Whole Foods, even before the commencement of the administrative trial or the introduction of any evidence, the FTC stated that it had (1) established that “premium natural and organic supermarkets constitute a distinct market for antitrust purposes,” (2) proved that the “premium natural and organic supermarkets market” was the appropriate relevant market in which to analyze the merger, (3) concluded that the relevant market was supported by extensive evidence presented to the district court, (4) determined that the merger would substantially lessen competition, (5) concluded that Whole Foods’ expert economic analysis was “garbage” lacking any empirical foundation, and (6) concluded that Whole Foods’ witnesses were unreliable and “subject to manipulation.”

In view of these statements, the administrative proceedings will be fundamentally flawed and cause Whole Foods to suffer irreparable harm to its constitutional rights to due process, the complaint asserted.

Unreasonable Scheduling Order

The second count alleged that the Commission’s “unreasonable” scheduling order—closing discovery by December 19, 2008 and requiring depositions to be completed by December 19, 2008—deprived Whole Foods of a fair opportunity to prepare its defenses to the Commission’s charges.

In count five, the scheduling order was alleged to violate the Administrative Procedure Act, which requires the FTC to refrain from engaging in “arbitrary and capricious” conduct.

Failure to Disqualify

Count three maintains that the Commission has violated the due process clause by depriving Whole Foods of a fair and impartial adjudicatory proceeding. Due process requires that the Commission disqualify itself from adjudicating the merits of the merger, it claimed.

Whole Foods asked the federal district court to find that the Commission violated due process, to order the Commission to terminate the administrative proceeding and proceed in federal district court, and to award Whole Foods costs incurred in bringing the action.

The complaint is Whole Foods Market, Inc. v. Federal Trade Commission, Case 1:08-cv-02121, filed December 8, 2008. A news release on the development appears here on the Whole Foods website.

The Whole Foods-Wild Oats merger was consummated on August 28, 2007, after the federal district court in Washington, D.C. denied the Commission’s motion for a preliminary injunction blocking the deal (2007-2 Trade Cases ¶75,831).

On July 29, 2008, the U.S. Court of Appeals in Washington, D.C. “reluctantly” reversed the federal district court a lower court’s decision (2008-2 Trade Cases ¶76,233). In an unusual move, a three-judge panel issued three separate opinions. The majority concluded that the district court in its August 2007 decision “underestimated the FTC’s likelihood of success on the merits.”

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