Two recent appellate court decisions in the United States and European Union have overturned lower court merger decisions adverse to antitrust agencies. The U.S. Circuit Court of Appeals for the District of Columbia ruled that the trial court erred when it denied the Federal Trade Commission’s (FTC) request to enjoin the merger of Whole Foods Market Inc. and Wild Oats Markets Inc., and the European Court of Justice (ECJ) ruled that the Court of First Instance (CFI) erred when it overturned the European Commission's approval of a joint venture between Sony Corp. and Bertelsmann Music Group (BMG). Both decisions may embolden the antitrust agencies.
FTC victory in Whole Foods/Wild Oats merger
Almost a year after Whole Foods purchased rival Wild Oats Markets, the D.C. Circuit overturned a lower court ruling that had permitted the merger of the two organic grocery store chains. The decision in FTC v. Whole Foods Market Inc., No. 07-5276, 2008 WL 2890688 (D.C. Cir. July 29, 2008), by a divided D.C. Circuit now puts this consummated merger in jeopardy.
Whole Foods first announced its intent to purchase Wild Oats in February 2007. Five months later, the FTC sought to enjoin the merger, claiming that the combination of the two largest chains in the premium, natural and organic supermarket (PNOS) market would stifle competition and violate § 7 of the Clayton Antitrust Act. In August 2007, a federal district court rejected the FTC's argument that there was a narrow PNOS market and found that Whole Foods and Wild Oats also faced competition from more conventional supermarkets. See FTC v. Whole Foods Market Inc., 502 F. Supp. 2d 1 (D.D.C. 2007). Since the two retailers had negligible power in this broader market, the district court reasoned, a merger between them would not substantially lessen competition. On Aug. 28, 2007, one week after the district court's decision, Whole Foods and Wild Oats consummated their merger.
Standard of Proof
The D.C. Circuit began by affirming the standard of review in cases in which the FTC seeks a preliminary injunction. Under § 13(b) of the Federal Trade Commission Act, 15 U.S.C 53(b), a district court may grant preliminary relief "[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest." The district court declined to consider the equities because it found that the FTC failed to show any likelihood of success. In an opinion by Judge Janice Rogers Brown, the D.C. Circuit stated that a preliminary injunction is appropriate if the FTC raises "questions going to the merits so serious, substantial, difficult, and doubtful as to make them fair ground for thorough investigation."
Id. at *3 (citing FTC v. H.J. Heinz Co., 246 F.3d 708, 714-15 (D.C. Cir. 2001)). If it meets this standard, the FTC is entitled to a presumption against the merger on the merits, and need not present "detailed evidence of anti- competitive effect at this preliminary phase."
Protection of Core Customers
At both the trial and appellate court levels, the case turned on the definition of the relevant product market. Whole Foods and the district court focused their attention on Whole Foods' marginal customers. Whole Foods argued that these customers would not remain loyal in response to a price increase by Whole Foods, and already "cross-shopped" with more traditional supermarkets such as Safeway Inc. Therefore, conventional grocery retailers were in the same market as PNOS retailers and the merger between Whole Foods and Wild Oats would not be anticompetitive.
The D.C. Circuit held that the district court incorrectly analyzed the product market by focusing only on the marginal customer, rather than the so-called "core" or "committed" customer. The D.C. Circuit held that a "core consumer can, in appropriate circumstances, [also] be worthy of antitrust protection." According to the court, the FTC's evidence demonstrated that there existed a distinct PNOS submarket that catered to core customers who "have decided that nature and organic is important, lifestyle of health and ecological sustainability is important." The court also found that the FTC's evidence indicated that Whole Foods and Wild Oats competed with traditional supermarkets "only on the dry grocery items that were the fringes of their business" and not in high-quality perishables that represent 70% of Whole Foods' revenue. Id. at *8. This so-called "fringe competition" for marginal customers would not protect the core customers who needed the "whole package" from Whole Foods. Since the district court failed to address these core customers, the D.C. Circuit disagreed with the district court's conclusion that "the FTC would never be able to prove a submarket."
A Look at the Future
The D.C. Circuit did not enter an injunction itself, but rather remanded the case to the district court "for proceedings consistent with this opinion." This battle is not over, and a lot of questions still remain. It is highly unlikely that Judge Paul L. Friedman on the district court will simply find that the FTC has failed to satisfy the lower standard endorsed by the D.C. Circuit. The majority and concurring opinions in that court cite evidence on market definition that was either ignored or given insufficient weight at trial.
If Friedman decides that a preliminary injunction is appropriate, there is a serious question about the form it would take. A number of Wild Oats stores have already been sold or closed and, as Judge Brett Kavanaugh points out in his dissenting opinion, it is not easy to "un-ring the bell." If some injunctive remedy can be found, the FTC has already announced that it will conduct an administrative trial, with a commissioner sitting as trial judge, and there will be additional evidence of "post-merger" events, and perhaps new theories of liability or defense offered by the parties.
Despite uncertainties about the ultimate fate of the Whole Foods/Wild Oats combination, the present decision is a significant victory for the FTC, one which should make it easier for the agency to get preliminary relief against proposed mergers in the future. But it raises concerns because a different — and higher — standard applies to preliminary injunctions sought by the Department of Justice Antitrust Division. The different standards between the two agencies are likely to be controversial, as is the FTC's decision to try the case with a commissioner (who voted to bring the case) as trial judge.
The European Commission Prevails in Sony/BMG
Meanwhile, last month, the ECJ set aside the 2006 judgment of the CFI, which had annulled the European Commission's 2004 approval of the Sony/BMG music joint venture. In December 2004, Impala, an association of independent music production companies, appealed the approval decision to the CFI. In July 2006, the CFI overturned the commission's decision, marking the first time the court had annulled a merger clearance. Sony/BMG appealed to the ECJ. The ECJ concluded that the CFI committed "a number of errors of law in its judgment."
Procedure and Burden of Proof
The ECJ held that the CFI had erred in treating certain conclusions set out in the statement of objections (SO) as being established. The ECJ held that the commission is not required to maintain the factual or legal assessments set out in the SO in its ultimate decision, nor does it have to explain the differences between the SO and its final decision on the merger. The ECJ also found that the CFI had erred in requiring that the commission apply particularly demanding requirements to the evidence and arguments put forward by the parties in response to the SO. The ECJ confirmed that merging parties' evidence can be relied on by the commission and should not be subject to more exacting standards than those used to evaluate the arguments of competitors, customers and other third parties. Since the CFI decision, the commission has avoided issuing an SO in some complex merger cases to avoid inconsistency between the SO and the final decision. The commission has also subjected parties to burdensome requests for information to meet the exacting standard from the CFI's decision in Sony/BMG. Now it can return to normal procedures.
Criteria for assessment of collective dominance
The ECJ also confirmed the criteria for establishing collective dominance: sufficient market transparency so that companies can monitor whether others are "deviating"; a tacit collusion that must be sustainable over time, which means there must be a credible threat of retaliatory measures to deter participants from "cheating"; and the inability of third parties to jeopardize that collusion. However, the ECJ found that the CFI misconstrued the legal criteria on collective dominance, and it confirmed that these criteria require concrete evidence.
The European Court's decision is helpful in clarifying the commission's burden of proof in merger cases, the procedures to be followed by the commission and the procedural rights of merging parties. Most importantly, it confirms that the commission's SO is only provisional. These clarifications from the ECJ should facilitate the commission's assessment of mergers within the relatively tight time frame set out by the EC Merger Regulation and relieve some of the burden on merging parties. But it also highlights the inefficiency of judicial review of merger cases in the European Union. Four years have passed since Sony and BMG first filed their joint venture. The length of time involved shows that despite improvements, the process for judicial review of EC merger decisions still needs reform.