In recent months, the Federal Trade Commission (FTC) has been successful in two different cases in its strategy of trying to move the primary focus of its merger challenges away from the federal courts to its own administrative trial process. The FTC’s rationale is that Congress intended for the FTC to apply its unique expertise to considering the complex issues raised by mergers, and that the initial role of the courts should be simply to determine whether the FTC has raised enough questions regarding a transaction to warrant a preliminary injunction (PI) to stop a merger pending a full review by the FTC. These developments have important implications for all potential merger challenges.
The more recent development involves the FTC challenge to the acquisition by Whole Foods of its chief rival, Wild Oats Markets, both of which operate what the FTC called “premium, natural and organic supermarkets.” The transaction was announced in February 2007 and challenged by the FTC the following June. The district court denied the FTC’s motion for a PI after a very short hearing last July, and the D.C. Circuit Court of Appeals subsequently declined to grant an emergency injunction pending an appeal of the district court’s decision. Nevertheless, even though Whole Foods consummated the merger and shut down, sold, or converted a number of Wild Oats stores, the FTC pursued its appeal.
On July 29, 2008, the D.C. Circuit Court reversed the district court’s denial of a PI. FTC v. Whole Foods, No. 07-5276 (D.C. Cir. July 29, 2008). In a 2-1 decision, the D.C. Circuit held that the district court adopted an incorrect approach to the PI standard and market definition. The district court in Whole Foods had defined the market as the marginal customers of premium, natural, and organic supermarkets (PNOS), rather than core consumers of PNOS. The court reasoned that the merging parties may have been able to raise prices on core consumers, who were less likely to move to alternative supermarkets for the purchase of certain items, and therefore found that the district court had underestimated the likelihood of FTC success on the merits. The case has been remanded to the district court to determine the appropriateness of an injunction based on the new market definition.
In reaching this decision, the D.C. Circuit noted that under controlling law, the FTC creates a rebuttable presumption in favor of granting a PI by ”rais[ing] questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation.” In order to defeat the presumption, the parties must show that the merger will benefit the public. On balance, the PI standard favors the government case: “A greater likelihood of the FTC’s success will militate for a preliminary injunction, unless particularly strong equities favor the merging parties.” While this standard is not new, its application in this case by the D.C. Circuit to the facts at hand gave considerable deference to the arguments raised by the FTC. Significantly, while the opinion cautions that the district court may not “simply rubber-stamp an injunction whenever the FTC provides some threshold evidence,” it also pointedly observes that the FTC is not required to prove the merits of the case.
It is unclear what will happen next in the Whole Foods case, which has now been remanded to the District Court not only to reconsider the evidence supporting a PI, but to do so in light of the changed circumstances that have occurred since the consummation of the merger last year.
The Whole Foods decision was issued only a short while after the FTC had won a significant victory in a hospital merger challenge. On June 6, 2008, Inova Health Systems (Inova) and Prince William Health System (PWHS) announced the withdrawal of plans to merge, citing “unusual process changes” by the FTC, which initiated an administrative challenge and filed a motion in federal court for PI to halt the merger in early May. Inova/PWHS is the second of two recent FTC victories in the hospital-merger area (after Evanston, see below) and significant in its own right for two reasons. First, the challenge signals a shift in the FTC’s strategy in how it litigates PIs. Second, the case illustrates the unusual hands-on approach of Commissioner Rosch.
In Inova/PWHS, the FTC pursued a novel approach to its motion for a PI in federal court. PI proceedings under §13(b) of the FTC Act have historically involved extensive hearings with evidence and analysis on a scale comparable to a full trial. As a practical matter, the results of PI proceedings have typically been outcome determinative because administrative proceedings can take years to complete and many mergers cannot survive such a long delay before closing. In Inova/PWHS, the FTC convinced the Eastern District of Virginia to decide the government’s motion for preliminary injunction on an accelerated schedule based on the preexisting evidentiary record without any live testimony and limited oral argument. The government managed this feat by promising the court that it would complete its administrative review of the merger subsequent to the PI on an expedited schedule, which would presumably reduce the outcome-determinative effect of the court’s PI decision by providing the parties complete substantive review within a reasonable time period. Thus, the FTC envisioned a process that shifted the trial on the merits to the administrative proceedings rather than allowing the possibility of a trial on the merits before the district court.
This action was also notable for the role played by Commissioner Rosch. FTC Commissioners typically play a number of parts, including a gatekeeping role in determining which cases to pursue, and an appellate role in reviewing decisions by administrative law judges (ALJs). In Inova/PWHS, the FTC took the extraordinary step of designating Rosch as the presiding ALJ in the FTC’s administrative proceedings against Inova. In an unusual ruling consistent with the FTC’s accelerated strategy, Rosch denied the parties’ motion to the stay administrative proceedings pending the outcome of the FTC’s PI motion in federal court. Had the parties not abandoned their merger, this ruling would have permitted the FTC to foreshorten its administrative review by simultaneously conducting administrative proceedings while pursuing a PI in federal court.
It is too early to tell whether the FTC’s strategy pursued in Inova/PWHS will be used successfully in future challenges. The Eastern District of Virginia, a court known for its fast docket, was an ideal, and perhaps unrepresentative, forum for an accelerated Section 13(b) strategy. Moreover, with these victories in Inova/PWHS and now in Whole Foods/Wild Oats, the FTC will certainly have increased confidence and credibility to pursue PI actions in federal court.
However, to the extent it does so and prevails under a standard that is different from that which is applied to the Department of Justice’s Antitrust Division (DOJ) when it seeks to challenge a merger, important policy issues are raised. The FTC and DOJ both have jurisdiction to challenge mergers, and both do so under the same provisions of the Clayton Act. But if the FTC is able to obtain a PI under a relatively lenient standard in federal court, and then pursues an administrative process that can take a year or more to play out, FTC challenges as a practical matter will be much more difficult for merging parties to litigate than challenges brought by the DOJ. Policymakers may question whether the fate of a merger should hinge so much on whether the FTC or the DOJ is the reviewing entity. Furthermore, this question is particularly important for life science companies since most mergers in this industry are reviewed by the FTC.