Antitrust and Consumer Law Section Newsletter October 2007

• From the Section Co-Chairs
• Upcoming Section Events
  • Privacy and Information Security: Emerging Issues for Businesses and Consumers
  • Speed Mentoring
• Recap of Recent Section Events
  • Risk of High Deductible Health Plans
  • Emerging Issues in Internet Pharmacies
  • Local Government Antitrust Enforcement
  • Court-Appointed Receiverships in Fraud Cases
  • Health Care Organization Salary Sharing Antitrust Cases
• Opportunity to Join for Non-D.C. Bar Members
• Committee Reports
  • Antitrust Law Committee Report
  • Consumer Law Committee report
  • Committee for Young Lawyers
  • Volunteer and Outreach Activities
  • Other Opportunities
• Steering Committee Roster
• Note: FTC v. Whole Foods Market
  • Footnotes

Back to Top

Privacy and Information Security
November 27, 2007
12:00-2:00 pm
D.C. Bar Conference Center

Emerging Issues for Businesses and Consumers:
Learn from distinguished panelists who will address emerging issues in privacy, information security, and federal regulations protecting the confidentiality of health information. Topics will include up-to-the-minute news on security breach notification laws; the FTC’s role in protecting consumers from lax data security standards and identity theft; and the HIPAA Security Rule and CMS’ Security Guidance on Remote Access to Protected Health Information.

Panelists:
Robin Campbell, Esq., Crowell & Moring LLP;
Molly Crawford, Esq., Division of Privacy and Identity Protection, FTC Bureau of Consumer Protection;
John C. Parmigiani, President, John C. Parmigiani & Associates, LLC, former director of Enterprise Standards for HCFA (now CMS) and former Chairman of the HIPAA Administrative Simplification Security and Electronic Signature Standards Implementation Team.

Moderators:
Robyn Diaz, Esq., associate general counsel, MedStar Health, Inc.;
Sondra L. Mills, Esq., U.S. Department of Justice, Office of Consumer Litigation.

Speed Mentoring
Planned “Speed Mentoring” event: The section recognizes the importance of mentoring and we are planning a "Speed Mentoring" evening, introducing new attorneys to more experienced practitioners. This event will be structured like speed dating, with each attendee spending a few minutes with each of a series of more experienced antitrust and consumer law practitioners. Receptions before and after that session will encourage continued discussion. We will circulate details soon!

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

Back to Top

On February 21, 2007, Whole Foods Market, Inc. and Wild Oats Markets, Inc. agreed that Whole Foods would acquire Wild Oats. Both companies operated high-end supermarkets with an emphasis on organic and perishable products. On June 6, 2007, the Federal Trade Commission (“FTC”) filed a complaint in the U.S. District Court for the District of Columbia requesting a preliminary injunction preventing the merger. On August 16, Judge Paul Friedman denied the FTC’s request. On August 24, the U.S. Court of Appeals for the District of Columbia denied the agency’s request for a preliminary injunction pending appeal, and Whole Foods and Wild Oats consummated the transaction.

The FTC’s complaint was particularly notable in that it alleged a relevant product market that differed from that alleged in challenging prior grocery store mergers. Instead of an “all supermarkets” product market, as in prior FTC actions, here the agency alleged a market limited to premium natural and organic supermarkets and identified18 local markets in which the merger would likely restrain competition.[1] The FTC’s alleged product market included neither mainstream supermarkets such as Safeway or Kroger, nor specialized markets such as Trader Joe’s or Wegmans. The agency likened this market definition to the position it successfully advanced in challenging Staples’ attempt to acquire Office Depot.[2] In that case, the agency alleged that the relevant product market was restricted to office superstores, a definition that excluded small office supply retailers and large merchandisers such as Wal-Mart from the relevant market.

The complaint was also notable for its many colorful quotations of Whole Foods CEO John Mackey. For example, Mr. Mackey allegedly advised a Whole Foods board member that:

By buying [Wild Oats] we will . . . avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm [Whole Foods’] gross margins and profitability. By buying [Wild Oats] . . . we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain rival to us. . . .[Wild Oats] may not be able to defeat us but they can still hurt us . . . [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever.[3]

Surprisingly, in denying the FTC’s request for a preliminary injunction, the district court made virtually no mention of these and other statements by Mr. Mackey.[4] Instead, Judge Friedman focused on economic evidence going to the definition of the relevant product market, which he deemed the decisive issue in the case.[5] The court found that the FTC’s proposed market of premium natural and organic supermarkets was too narrow, and that the relevant market encompassed at least all supermarkets.[6]

The FTC and Department of Justice Horizontal Merger Guidelines provided the analytical framework for determining whether a group of products is a relevant product market. The guidelines ask whether a “hypothetical monopolist over that group of products would profitably impose at least a ‘small but significant and nontransitory’ increase in price.”[7] If the increased profits gained by the hypothetical price increase are greater than the profits lost as customers switch to alternatives or decide not to purchase the product at all, the price increase is profitable. A challenging aspect of this analysis is determining how customers would likely respond to a hypothetical price increase. In this case, the district court found that “[t]here is no evidence in the record from which to determine cross-elasticity of demand between premium and organic supermarkets and other supermarkets and grocery retailers.”[8]

Whole Foods persuaded the court that the FTC’s study of Wild Oats’ pricing following entry by Whole Foods was not a relevant indicator of how Whole Foods’ pricing would change in response to an exit by Wild Oats. Although the FTC’s expert also presented evidence that Whole Foods’ margins are higher in markets in which there is no competition from Wild Oats, the district court’s opinion did not address this argument in any detail, simply reiterating the point made by Whole Foods’ economic expert that margin analysis is not always appropriate to determine pricing effects. Ultimately, the court found that the FTC failed to meet its burden to prove that premium natural and organic supermarkets constitute a relevant product market and that “if Whole Foods and Wild Oats merged and Whole Foods imposed small but significant and nontransitory price increases—sales loss would make a price increase unprofitable.” [9]

The most important lesson of this case appears to be that, unless presented with compelling pricing evidence, courts may well be skeptical of narrow relevant markets that exclude firms selling the same goods as the merging companies. The FTC’s success in establishing such a narrow product market in Staples was largely attributable to persuasive economic evidence that the FTC presented at trial. The Staples defendants argued that stores such as Wal-Mart could constrain Staples’ prices following a merger with Office Depot, but the FTC presented historical data showing, among other things, that Staples charged higher prices in areas where it did not face competition from another office superstore.

That evidence enabled the court to define the product market without relying on more subjective evidence. In Whole Foods, the court rejected a similar market definition because the economic evidence did not strongly support such an approach. Instead, the FTC relied heavily on contemporaneous business documents and other qualitative evidence to establish premium natural and organic supermarkets as a relevant antitrust market. While the statements of the Whole Foods CEO were evidently an important factor in the FTC’s decision to challenge to the merger, the court did not seem to consider this evidence probative on the question of whether Whole Foods could raise prices following the merger.

Karin F.R. Moore
O’Melveny & Myers LLP

Footnotes
[1] Complaint 34, FTC v. Whole Foods Market, Inc., No. 07-1021 (D.D.C. June 6, 2007).


[2] FTC v. Staples, Inc.,970F Supp. 1066(D.D.C. 1997).

[3] Complaint 1-2(brackets in original).

[4] See Darren S. Tucker and Kevin L. Yingling, too Hot to Handle: Internal Partty Documents in Whole Foods and Other Modern Merger Challenges, THE ANTITRUST SOURCE, October 2007,at http://www.abanet.org/antitrust/at-source/07/10/Oct07-Tucker10-18f.pdf.

[5] FTC V. Whole Foods, Inc., et al., ---F. Supp.2d--- 2007-2 Trade Cases 75,831,2007 WL 2377000 at *4, *12 (citing FTC v. Staples, Inc., 970 F. Supp. 1066, 1076(D.D.C. 1997)).

[6] Id. at *32.

[7] U.S. Department of Justice and Fedral Trade Commission Horizontal Merger Guidelines Sec. 1.0 (1992).

[8] 2007 WL 2377000 at *16.

[9] Id.

Back to Top