FTC Wins Appeal of Oats Deal

MARK HAMSTRA

WASHINGTON — A three-judge panel of the U.S. District Court of Appeals here last week found that a lower court erred in allowing Whole Foods to acquire Wild Oats last year, an unusual move that could force Whole Foods to sell some locations, legal experts told SN last week.

The Federal Trade Commission last year sought a preliminary injunction to block the merger on antitrust grounds, but the U.S. District Court allowed the deal to be consummated based on arguments that the two “supernatural” chains compete directly with traditional supermarkets as well as against each other. The FTC sought a stay of the merger pending appeal, but lost that effort as well, which cleared the way for the merger to go forward. The FTC appealed anyway.

Since then, Whole Foods sold off 35 Sun Harvest and Henry's Farmers Market locations, closed a handful of Wild Oats stores and converted several to the Whole Foods banner. It has also dismantled the former Wild Oats headquarters operations in Boulder, Colo., and eliminated some distribution operations.

Chris MacAvoy, a partner in the Washington law firm Howrey LLP, who has worked on several supermarket antitrust cases, said the court's reversal of the U.S. District Court's ruling that allowed the merger was both “unusual and unprecedented.”

“How do you undo the allegedly unlawful effects of a merger when the horse has left the barn, and the barn has been sold?” he told SN. “Now the District Court could be faced with the reality of what kind of relief is available.”

A range of scenarios could unfold, MacAvoy and others explained, including an effort by Whole Foods to get a rehearing before the full appeals court; an effort by the FTC to obtain an injunction to prevent further integration of the two companies; a new hearing in the District Court; and a settlement between the two sides. If the case goes back to U.S. District Court, Judge Paul Friedman, who originally allowed the merger, could force Whole Foods to sell some stores, MacAvoy said. It is also possible that Friedman could rehear the case and come to the same conclusion he did before.

A settlement between the FTC and Whole Foods also could involve the sale of some locations, MacAvoy and others pointed out.

Austin, Texas-based Whole Foods Market said it was considering whether to seek a rehearing before the full Court of Appeals, but in the meantime was conducting “business as usual.”

“In our view, the Court of Appeals' decision provides a roadmap for Judge Friedman to once again deny the FTC's request for a preliminary injunction,” Whole Foods said.

NOTORIOUS CASE

The FTC's effort to block the merger on antitrust grounds gained notoriety last year in part because it seemed counterintuitive to many observers, but also because John Mackey, chairman and chief executive officer of Whole Foods, publicly blasted the FTC's investigation in a blog on his company's website. The FTC also revealed as part of the investigation that Mackey had posted pseudonymous messages on the Yahoo! stock message boards for years praising his own company and bashing Wild Oats.

As bizarre as those developments were, the latest ruling by the Court of Appeals is even stranger, legal experts said.

Although the courts have often ruled against mergers after they have been completed, this may be the first time the FTC has won an appeal after losing its effort to get a stay pending appeal, sources said. Compounding the unusual nature of the case was the split decision of the three-judge panel. One of the judges ruled against the FTC, saying that Whole Foods had successfully argued its case that acquiring Wild Oats would not allow it to raise prices, but the other two supported the FTC, although for seemingly different reasons.

Writing for the majority, Judge Janice Brown concluded that Judge Friedman “underestimated the FTC's likelihood of success” in the case when he did not issue a preliminary injunction to halt the merger. Although both Whole Foods and Wild Oats have plenty of “marginal” customers who could find alternative products at traditional supermarkets or other sources, the two chains could also have “core” customers for whom Whole Foods and Wild Oats may be the only “premium natural and organic” option, especially for certain perishables. Those core customers should have been given more weight in the lower court, Brown concluded.

Judge David Tatel agreed with Judge Brown to some degree but focused his conclusion more on the concept that Judge Friedman should have acknowledged that even if the FTC did not prove there was an antitrust violation, it may have “raised serious and substantial questions as to the merger's legality,” which could have been enough to grant a preliminary injunction.

Judge Brett Kavanaugh, in his dissent, concluded that Judge Friedman was correct in allowing the acquisition, because the FTC had not demonstrated its “likelihood of success” in proving the illegality of the deal.

“With all due respect, I do not believe that the law allows the FTC to just snap its fingers and block a merger,” he wrote. “But today the panel majority seeks to unring the bell. In my judgment, this court got it right a year ago in refusing to enjoin the merger, and there is no basis for a changed result now.”

Stephen Calkins, a law professor at Wayne State University, Detroit, and a former FTC attorney, said the dissension among the three-judge panel increases the chances for Whole Foods' ability to get a rehearing in the appeals court.

“I presume the defense will ask for review, and the FTC certainly cannot rest easy until all of this plays out,” he told SN. “Put that aside, and there's the question of whether this case would be settled.”

Both sides could have an interest in settling, which could involve Whole Foods selling off some stores or reopening some closed Wild Oats locations in the 18 markets where the FTC found that the merger created a monopoly. However, such an outcome might not be as easy to achieve, he explained.

“The case was never a good one for settlement, because the whole point of the FTC case was that one needed a major brand like Whole Foods to preserve competition, and I don't know if there is another like that that Whole Foods could point to [to purchase some of the acquired Wild Oats stores],” he said.

Winning this appeal would provide a major boost for the FTC for future cases, Calkins explained, because of the “concurrence that the FTC complaint should get a deferential hearing in the courts.”

In a prepared statement, Jeffrey Schmidt, director of the FTC's Bureau of Competition, said the FTC was “pleased” with the appeals court decision.