Almost a year after Whole Foods Market, Inc. purchased rival Wild Oats Markets, Inc. for $565 million, a federal appeals court in Washington, D.C. 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 (D.C. Cir. July 29, 2008), by a divided D.C. Circuit Court of Appeals now puts this consummated merger in jeopardy.

Whole Foods first announced its intent to purchase Wild Oats in February 2007. Five months later, the Federal Trade Commission (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 Section 7 of the Clayton 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 held that a merger between them would not substantially lessen competition. On August 28, 2007, one week after the District Court’s decision, Whole Foods and Wild Oats consummated their merger.

Appellate Court’s Decision

Standard of Proof

The Circuit Court began by affirming the standard of review in cases where the FTC seeks a preliminary injunction. Under Section 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 Circuit Judge Janice Rogers Brown, the Circuit Court 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.” See Op. at 8 (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 anticompetitive 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. 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 Circuit Court 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 Circuit Court held that “core consumer can, in appropriate circumstances, [also] be worthy of antitrust protection.” According to the Circuit 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 Circuit 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 comprise 70% of Whole Foods’ revenue. 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 Circuit Court disagreed with the District Court’s conclusion that “the FTC would never be able to prove a PNOS submarket.”

A Look at the Future

The Circuit Court 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 District Court Judge Paul Friedman will simply reiterate his factual conclusion, and find that the FTC has also failed to satisfy the lower standard endorsed by the Circuit Court. Judge Brown’s opinion for the Circuit Court, supplemented by Circuit Judge David S. Tatel’s concurring opinion, cite a mass of evidence on market definition that was either ignored or given insufficient weight.

If Judge Friedman decides that a preliminary injunction is appropriate, there is a serious question about the form it would take. A number of the Wild Oats stores acquired in the merger have already been sold or closed and, as Circuit Judge Brett M. Kavanaugh points out in his dissenting opinion, it is no easy matter to “unring the bell.”

If it is assumed that some injunctive remedy can be found, the next question is how and where the trial on the merits will proceed. Would a preliminary injunction, perhaps followed by another interim appeal, then conclude the involvement of the federal courts – at least until the case may circle back again after a full administrative trial and appeal to the Commission itself? Alternatively, even if Whole Foods prevails again on the preliminary injunction issues, will the FTC proceed with an administrative trial anyway? (The recent announcement that Commissioner Tom Rosch will sit as an Administrative Law Judge in this matter provides a strong indication that the Commission is determined to proceed regardless of what happens in federal court.) And, under either scenario, will there be additional evidence of “post-merger” events, and perhaps new theories of liability or defense offered by the parties?

Conclusion

Despite all these uncertainties about the ultimate fate of the Whole Foods/Wild Oats combination, the present decision is a significant victory for the FTC, which should make it easier for the agency to get preliminary relief against proposed mergers in the future. This more favorable standard may be controversial, however, because existing precedents hold the Department of Justice to a higher standard.