Corporate & Securities Law

The Food Fight is Over: Whole Foods and FTC Settle Dispute Over Merger of Organic Markets

By Sheppard Mullin Richter Hampton, LLP

After nearly two years of vigorously disputing the competitive impact of Whole Foods Market Inc.'s acquisition of Wild Oats Market, Inc., on March 6, 2009 the Federal Trade Commission announced a settlement with Whole Foods that will substantially restore competition allegedly eliminated by Whole Foods' 2007 acquisition of Wild Oats and resolves the antitrust regulator's charges that the acquisition violated federal antitrust laws.

The Settlement

In challenging the acquisition, the FTC argued the merger violated federal antitrust laws by substantially lessening competition in 29 geographic markets in the country and that this would result in higher prices in these markets. Under the consent order, Whole Foods will sell 32 stores, about 12% of the total number of stores Whole Foods and Wild Oats held before the merger. Of the 32 stores, twelve are currently operating. Whole Foods closed nine and Wild Oats closed ten of these stores before the merger. At the time of the merger, Whole Foods operated 194 stores in 37 states, the District of Columbia and the United Kingdom. Wild Oats operated 74 stores in 24 states.

Under the consent order, responsibility for marketing and selling the 32 stores will be placed with a divestiture trustee who will have six months to sell the Wild Oats stores and related assets to one or more FTC-approved buyers. If the trustee has not sold the assets within six months, the Commission may extend the time provided to do so for an additional six months. The order also will require Whole Foods to maintain the viability and competitiveness of the stores until the divestiture is complete.

"As a result of this settlement, American consumers will see more choices and lower prices for organic foods," said FTC Chairman Jon Leibowitz. (See FTC article). Chairman Leibowitz further commented that the settlement "allows the FTC to shift resources to other important matters and Whole Foods to move on with its business."

In addition to the store divestitures, Whole Foods must divest Wild Oats' intellectual property, including rights to the "Wild Oats" brand. This brand, the FTC stated in its press release concerning the settlement, "retains significant name recognition and loyalty among consumers."

The agreement is expected to become effective on April 6, 2009, when the 30 day period for public comment comes to end.

Case History

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. In June 2007, the FTC issued an internal, administrative complaint alleging that the merger would violate Section 7 of the Clayton Act. Section 7 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." The FTC contemporaneously 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.

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 then applied for an emergency motion to enjoin the merger which the United States Court of Appeals for the District of Columbia denied. Following this denial, Whole Foods completed its acquisition of Wild Oats.

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). On November 21, 2008, the three-judge panel issued an amended opinion in which each of the three judges takes a different stance. FTC v. Whole Foods Market, Inc., D.C. Cir., No. 07-5276, amended opinion, 11/21/08. Judge Brown explained the different outcomes for the FTC's petitions by finding that compared to the standard for an emergency injunction, 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."

Implications for Future Mergers

When the Court of Appeals released its amended decision, some commentators suggested the FTC might interpret it 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.

That view may be correct. Less than two weeks after the Whole Foods settlement was announced, the FTC successfully challenged a merger of two of the three major suppliers of computer software for automotive repairs. F.T.C. v. CCC Holdings, Inc., Case No. 08-2043 (D.C. filed March 18, 2009). The district court cited the Court of Appeals opinion in Whole Foods eighteen times in its decision to grant a preliminary injunction of the merger. In addition, the court quoted extensively from Judge Brown's opinion, in particular, her findings regarding what showings the FTC must make to obtain a preliminary injunction. If CCC Holdings is any indication, Whole Foods has already become a favorable precedent for the FTC in challenging mergers and acquisitions.
 

Authored By:

Heather M. Cooper

(213) 617-5457

HCooper@sheppardmullin.com

Full post as published by Antitrust Blog Review on April 02, 2009 (boomark / email).