On July 29, 2008, the United States Court of Appeals for the District of Columbia Circuit (“Circuit Court”) reversed the district court’s denial of the Federal Trade Commission’s (“FTC’s or Commission’s”) request for a preliminary injunction to block the merger of Whole Foods Market, Inc. (“Whole Foods”) and Wild Oats Markets, Inc. (“Wild Oats”). The split decision authored by Judge Brown could potentially have significant implications for companies contemplating transactions that are reviewed by the FTC. The decision suggests that the FTC may face lower hurdles than the Department of Justice (“DOJ”) when preliminarily challenging transactions in federal court and may encourage the FTC to be more aggressive in seeking to block transactions, particularly in the District of Columbia.
In February 2007, Whole Foods announced its intention to acquire Wild Oats for $565 million. After an investigation, the FTC filed a complaint in federal district court on June 6, 2007, to enjoin the transaction pending a full administrative trial on the merits. The FTC argued that the transaction was likely to substantially lessen competition in a number of premium, natural and organic supermarket (“PNOS”) markets. The district court rejected the FTC’s proffered product market definition, concluding that Whole Foods and Wild Oats compete within the broader market of conventional grocery stores and supermarkets. Consequently, the district court denied the request for the preliminary injunction. After the Circuit Court refused to grant the FTC’s emergency motion for an injunction pending appeal, the parties consummated the transaction on August 28, 2007.
Even though the FTC lost its emergency motion before the Circuit Court and Whole Foods completed its acquisition of Wild Oats, the FTC decided to proceed with its appeal. Accordingly, both sides submitted briefs and argued their case before a panel of the Circuit Court. In its opinion, the Circuit Court held that the district court improperly decided the product market issue and failed to balance the equities required by the preliminary injunction standard set forth by the Federal Trade Commission Act (“FTC Act”) § 13(b).1 The matter has been remanded to the district court for further proceedings consistent with the opinion.
Under § 13(b) of the FTC Act, a district court may grant a preliminary injunction “[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.” In applying § 13(b), the Circuit Court stated that the FTC’s request for a preliminary injunction usually will be granted if the Commission “rais[es] questions going to the merits so serious, substantial, difficult[,] and doubtful as to make them fair ground for thorough investigation.” Under this standard, according to the Circuit Court, the FTC is not required to prove the merits of its case nor is the court required to determine whether the transaction violates the antitrust laws. Because the district court failed to consider the equities in its decision, the Circuit Court held that the only way the district court’s opinion could have been consistent with the § 13(b) standard was if it found that the “FTC entirely failed to show a likelihood of success.”
The district court clearly believed that the FTC failed to show a likelihood of success on the merits given its holding that Whole Foods and Wild Oats were part of a broad supermarket market. The Circuit Court, however, found that the FTC had presented evidence to suggest that PNOSs could make up a distinguishable market. The Circuit Court discussed how PNOSs cater to certain “core” customers who provide the bulk of their business and also gave credence to the FTC’s economic evidence, which the district court almost entirely ignored. Ultimately, the Circuit Court concluded that it could not “agree with the district court that the FTC would never be able to prove a PNOS submarket.”
While a significant victory for the FTC, the Circuit Court declined to order relief in favor of the FTC, but instead remanded the case and instructed the district court to weigh the equities as required by the FTC Act.
This decision likely will give the FTC more confidence in bringing preliminary injunction actions in federal district court, especially in the District of Columbia. Arguably, the standard articulated by the Circuit Court in the Whole Foods decision reduced the FTC’s burden in obtaining preliminary relief. The Circuit Court’s opinion likely will be interpreted by the FTC to mean that short of entirely failing to show a likelihood of success on the merits the FTC is entitled to the presumption that a preliminary injunction is warranted. Although the Whole Foods decision will carry its greatest weight within the District of Columbia, the FTC undoubtedly will cite the precedent in all jurisdictions in which it seeks a preliminary injunction.
The Whole Foods opinion also may enhance the reality and/or perception that the FTC and the DOJ must satisfy different standards when petitioning the courts for preliminary injunctions. The FTC is entitled to seek preliminary injunctions under § 13(b) of the FTC Act, whereby a court may grant the Commission’s motion if upon “weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest.” In contrast, the DOJ’s authority to petition for preliminary relief comes from § 15 of the Clayton Act, which does not set forth a specific preliminary injunction standard. Courts have thus tended to hold the DOJ to the traditional common law standard, which usually requires a showing of a substantial likelihood of success on the merits. Further, because the DOJ tends to consolidate its actions for preliminary and permanent injunctions, it is required to show that the merger violates § 7 of the Clayton Act by a preponderance of the evidence. Accordingly, some commentators have suggested that the FTC standard may be less burdensome than the DOJ standard. However, it is unclear whether, from a practical standpoint, courts have actually granted preliminary injunctions to the FTC in cases where they would have denied the same relief to the DOJ. In fact, Commissioners Garza, Jacobson, and Kempf of the Antitrust Modernization Commission noted that they believe that the standards applied to the agencies are essentially the same and that legislation to ensure that the standards are identical “is not truly necessary.”
However, the Whole Foods decision, at the very least, lends superficial credence to the notion that the FTC has a lower burden of proof as compared to the DOJ when seeking a preliminary injunction. Even if there is no real effect in the way courts treat the agencies’ preliminary injunction petitions, the mere heightening of the perception that the FTC’s standard is less burdensome may work against firms whose transactions are reviewed by the FTC. For instance, the FTC may have more leverage in seeking divestitures from merging parties because the perceived risk of taking a matter to litigation has increased as a result of this decision.
The decision is also significant given the procedural differences between the agencies. Generally, when the DOJ seeks a preliminary injunction, it simultaneously seeks a permanent injunction. As a result, if the DOJ loses in federal court, the parties are afforded some certainty that their transaction will not be further challenged. The FTC, on the other hand, is permitted to seek permanent relief through its own administrative process, and therefore, does not need to seek a permanent injunction in federal court. In the past, the FTC has rarely decided to pursue an administrative trial after losing a preliminary injunction petition. Notably, in Whole Foods, the FTC did not dismiss its administrative complaint after its loss at the district court level, and shortly after the Circuit Court’s opinion was issued, the Commission rescinded its stay of the administrative proceedings. These procedural differences leave open at least the possibility that the FTC might pursue relief despite being unable to obtain a preliminary injunction. Significantly, parties may have to defend their transaction both in federal court and at the administrative level, even if their transaction has already closed.
The Circuit Court also briefly discussed the relevance of market definition in cases where there is direct evidence of anti-competitive effects. In its appellate brief the FTC stated in a footnote that market definition is “a means to an end” and where there is direct evidence of competitive harm the FTC may not need to prove a relevant market. The Circuit Court, although baffled by the FTC’s assertion of this issue only on appeal, nevertheless considered the issue in its opinion. The Circuit Court first commented that the FTC’s argument was at odds with § 7 and existing precedent. However, the Circuit Court then acknowledged that the traditional analytic structure utilized by the courts “does not exhaust the possible ways to prove a § 7 violation” and that in a unilateral effects case, “it might not be necessary to understand the market definition to conclude a preliminary injunction should issue.” This language, although not central to the holding, may signal a willingness of the court to break from the traditional framework developed for § 7 cases, which requires a definition of the product market in which to assess the transaction. This potential shift could be helpful to the antitrust agencies, which in recent years have encountered difficulties in obtaining preliminary injunctions for transactions involving differentiated products due to the failure to define defensible product markets at the district court level.
It remains to be seen what the final outcome will be in the Whole Foods-Wild Oats transaction. The FTC has reopened its administrative proceedings to challenge the transaction in a full trial on the merits. If a violation of § 7 is found, the Commission has the authority to order divestitures. Additionally, the case has been remanded to the district court for a consideration of the equities, which, according to Judge Brown, typically weigh in favor of the FTC. However, the concurring opinion notes that since the merger has already been consummated, the equities may weigh in favor of the parties. In addition, given the significance of the case, the parties may choose to appeal the decision for en banc review by the full Circuit Court. Whatever the outcome, firms considering entering into transactions with significant antitrust risks should consult with counsel to evaluate the potential likelihood of the deal being challenged by the FTC. A transaction in front of the FTC may be more likely to end up in court and subjected to a standard that weighs heavily in favor of the agency.