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Federal Trade Commission v. Whole Foods Market, Inc. — Copyright 2004 Dechert LLP. All rights reserved. Materials have been abridged from laws, court decisions, and administrative rulings and should not be considered as legal opinions on specific facts or as a Asubstitute View for legal counsel. From the Dugout by Paul Friedman and Gorav Jindal Dechert LLP The Threshold, Vol. III, No. 1 Fall 2007 This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the www.dechert.com American Bar Association. Fall 2007 The Threshold Vol. VIII, No. 1 Federal Trade Commission v. Whole Foods Market, Inc.–A View From the Dugout [top] Paul Friedman1 Partner, Dechert LLP Gorav Jindal Associate, Dechert LLP The last issue of The Threshold likened the of Columbia Circuit denied the FTC’s emer- Federal Trade Commission’s (“FTC”) suit to gency motion for an injunction pending ap- block the acquisition of Wild Oats Market, peal. The parties consummated their transac- Inc. (“Wild Oats”) by Whole Foods Market, tion shortly thereafter. The FTC’s appeal from Inc. (“Whole Foods Market”) to one of three the district court’s order remains pending. baseball pitches swung at by the FTC’s Bureau Whole Foods Market has moved to dismiss the of Competition. As this article goes to publi- appeal as moot. The FTC opposes dismissal cation, the battle for this year’s World Series of its appeal. The FTC’s administrative com- championship has recently concluded so we plaint remains pending as well, although the will stick with the baseball metaphor. Some administrative case was stayed in August by loyal fans (mostly FTC alumni) sized up the order of the Commission. FTC’s odds of getting a hit and concluded that the FTC was going to hit a home run. Pat- Our perspective is unique. We got called up terned after FTC v. Staples, Inc., the complaint late, joining a talented team at the top of the teemed with references to “monopoly” mar- seventh inning as Whole Foods Market re- kets and provocative allegations about the tained our firm about one week after the FTC transaction’s effects. Yet, the parties dug in, issued its complaint. The purpose of this arti- contesting the FTC’s view of the market and cle is not to discuss in depth the judge’s deci- the competitive realities. The battle lines were sion, which as noted remains on appeal, but drawn and the lineups were set for trial. rather to provide a hopefully valuable and in- teresting litigant’s perspective on a very sig- The FTC did not prevail. The district court nificant and widely-reported preliminary in- denied the FTC’s request for a preliminary in- junction proceeding. junction, and both the district court and the United States Court of Appeals for the District “The Prelude to the Game”– The Transaction and The 1 Investigation The authors represented Whole Foods Market, Inc. during the preliminary injunction hearing discussed in this article, and also are counsel to it in the subsequent Whole Foods Market first opened its doors in proceedings. 1980 in Austin, Texas as a store focusing on healthy foods. Over time, Whole Foods Mar- ket expanded the range of products offered to 3 Fall 2007 The Threshold Vol. VIII, No. 1 attract a broader universe of customers and to the court entered a temporary restraining order increase sales. Its newest stores, at 50,000– until the court ruled on the motion for a pre- 60,000 square feet, are comparable in size to liminary injunction. other supermarkets. Before the acquisition, Whole Foods Market operated 194 supermar- “The Schedule and the Rules kets in the United States. Wild Oats, another of the Game” supermarket chain with a historical focus on natural, healthy foods, operated 115 stores in The FTC and the defendants had largely the United States in 2007 under three banners: agreed on a schedule for discovery, briefing Wild Oats Marketplace, Henry’s Farmers and trial, as well as the rules under which the Market, and Sun Harvest. Wild Oats’ stores preliminary injunction hearing would proceed, were smaller, averaging about 24,000 square before we came on board. Both the schedule feet. and the rules significantly affected litigation strategy. In February 2007, Whole Foods Market agreed to buy the stock of Wild Oats at a per share The agreed-upon Case Management Order price of $18.50, or $565 million. The FTC (“CMO”) called for a preliminary injunction issued a Second Request on March 13; there hearing in less than two months. The schedule were 26 documents and data specifications, leading up to the hearing was ambitious but, as including many of the standard requests in the it turned out for both sides, manageable.3 To Model Second Request for retail transactions. assist the court, the parties provided expert re- The FTC did not, however, request any pricing 2 ports and witness declarations to the court si- data. In response, Whole Foods Market and multaneous with the exchange among the par- Wild Oats produced a total of about 16.5 mil- ties. This enabled the court to review the evi- lion pages of documents and over 2.4 giga- dence in advance of the hearing and to prepare bytes of data. The FTC also conducted inves- its own questions for the witnesses and the tigational hearings of five employees each of lawyers at the hearing. Whole Foods Market and Wild Oats, the for- mer CEO of Wild Oats, and the CEO of Trader The hearing itself was streamlined. The only Joe’s. testimony presented live was the cross- examination and redirect examination of ex- On June 6, 2007, after conclusion of the FTC’s pert witnesses. The format, therefore, placed a investigation, the Commissioners voted 5-0 to file suit in the District of Columbia District Court seeking a temporary restraining order and preliminary injunction to prevent Whole 3 The CMO required the parties to exchange final Foods Market from acquiring any stock or as- lists of fact witnesses, including a brief summary of their anticipated testimony, on June 27, 2007. Fact dis- sets of Wild Oats. With the parties’ consent, covery closed nine days later, on July 6. Initial expert reports were due on July 9, rebuttal expert reports were due on July 13, and expert depositions were to be taken 2 Specification 5(e) of the FTC’s Model by July 18. Declarations of fact witnesses were due on Second Request for transactions involving July 13. Opening briefs on the motion for preliminary retail industries requests pricing data for the top injunction were due on July 20, reply briefs were due by 2000 UPCs by annual dollar sales. See July 25, a two-day hearing was scheduled for July 31- http://www.ftc.gov/os/2004/04/040428modelrequest. August 1, and proposed findings of fact and conclusions pdf. of law were due by August 3. 4 Fall 2007 The Threshold Vol. VIII, No. 1 significant premium on the clarity of declara- durable competitive rivalry between Whole tions, the selection of company documents, Foods Market and Wild Oats; and (2) econo- and the selection of deposition testimony to metric analyses conducted by the FTC’s eco- highlight to the court. nomic expert, Dr. Kevin Murphy, predicted anticompetitive effects if the merger were con- “The FTC’s Lineup”–The summated. Case Against the Transaction The FTC’s case featured statements by Whole Foods Market CEO John Mackey, which have The FTC’s case depended on its narrow view been featured in press reports across the coun- of the relevant product market. In a departure try. For example, in one e-mail, Mackey from prior merger enforcement involving food wrote: retailing,4 the FTC alleged a product market consisting of “premium and natural organic By buying [Wild Oats] we will greatly supermarkets” (“PNOS”). The FTC resisted enhance our comps over the next few defining, until compelled by the court, the pre- years and will avoid nasty price wars in cise characteristics of participants in the mar- Portland (both Oregon and Maine), ket it alleged. Eventually, the FTC listed ten Boulder, Nashville, and several other qualitative attributes that a market participant 5 cities which will harm our gross mar- “generally,” but not always, would possess. gins and profitability. Furthermore, we According to the FTC, only four firms in the eliminate forever the possibility of entire United States met its definition of Kroger, Super Value, or Safeway using PNOS: Whole Foods Market, Wild Oats, their brand equity to launch a compet- Earth Fare (a Southeastern regional supermar- ing national natural/organic food chain ket operator), and New Seasons (an Oregon- to rival us . Eliminating them based operator with less than ten stores in the means eliminating this threat forever, Pacific Northwest). The FTC relied on two or almost forever.6 main lines of evidence to support its position, arguing that: (1) company documents, primar- The FTC also featured statements by Wild ily statements by Whole Foods Market’s cur- Oats’ ex-CEO as evidence of what the FTC rent CEO and statements by Wild Oats’ former described as “unique” competition between the CEO, showed the existence of a unique and two firms. Batting cleanup for the FTC was its economic 4 expert, Dr. Kevin Murphy, the George J. Stig- A review of the FTC’s prior supermarket enforce- ler Distinguished Service Professor of Eco- ment matters reveals that in all eighteen of such matters since the adoption of the 1992 FTC Horizontal Merger nomics at the University of Chicago.

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