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FTC, Whole Foods Reach Agreement on Wild Oats Acquisition

March 9, 2009

The FTC has settled one of the most contentious merger challenges in recent history by reaching an agreement with Whole Foods Market Inc., allowing it to partially "unscramble the eggs" of Whole Foods's consummated merger with Wild Oats. Under that agreement, Whole Foods will divest 31 former Wild Oats locations (and one Whole Foods location), along with the Wild Oats brand and associated intellectual property. The settlement signals the FTC's willingness to compromise and seek a practical resolution, despite recent litigation momentum favoring the FTC.

The settlement, announced on March 6, calls for the assets in question to be put immediately into the hands of a divestiture trustee, who will be responsible for finding an acceptable buyer or buyers. The settlement caps nearly two years of litigation over the $565 million transaction, first announced in February 2007. In June 2007, the FTC sought, and won, a temporary restraining order preventing the transaction, only to see its motion for a preliminary injunction denied in August of that year. In the face of ongoing Commission opposition, Whole Foods and Wild Oats consummated their merger later that August. Nearly a year later, in July 2008, the DC Circuit Court of Appeals reversed the District Court, holding that the FTC had adequately demonstrated the need for a preliminary injunction under the more lenient standard of Section 13(b) of the FTC Act. That ruling also confirmed that a preliminary injunction can be an appropriate remedy even where, as Whole Foods and Wild Oats had done, the parties have already consummated their merger. Whole Foods signaled its willingness to settle in January, and the Commission agreed to remove the matter from administrative litigation to facilitate a negotiated settlement.

The remedy itself represents a significant compromise by both sides. The FTC alleged, with minor changes between its initial complaint in the District Court and its administrative complaint, that the merger would adversely affect competition in the market for premium natural and organic supermarkets in 22 geographic markets (essentially metropolitan areas) in which Whole Foods and Wild Oats stores were already in competition, and 7 other markets in which one of the parties had planned, but for the transaction, to enter.

Nominally, the consent order provides relief in 17 of the 29 markets named in the complaints, by ordering the divestiture of 13 stores that are currently in operation, and 19 stores that are closed. But with 19 of the stores to be divested currently out of operation, and with industry observers suggesting that many of the 13 operating stores are "underperformers," compounded by the current economic realities, it may be difficult for a purchaser (or purchasers) to use the assets to mount a meaningful competitive challenge to Whole Foods in the cities in question.

Nonetheless, the FTC may not have been able to do better had it continued to litigate, as the more time elapsed, the less attractive any divested assets might look to a potential purchaser, particularly if store closures continued. Given the enormous resources already consumed by the case, a negotiated resolution, in the words of Chairman Leibowitz, will allow the Commission to "shift resources to other important matters."

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Wm. Randolph Smith
Partner – Washington, D.C.
Phone: +1.202.624.2700
Ryan C. Tisch
Partner – Washington, D.C.
Phone: +1.202.624.2674