FTC Wins Reversal in Whole Foods
D.C. Circuit Opinion Will Energize FTC's Ability to Block Mergers
What a difference a year makes. After losing all of its litigated merger challenges in 2007 (Peoples Natural Gas; Western Refining; Whole Foods), 2008 has yielded significant wins for the FTC. Through a decidedly more strategic procedural attack on proposed transactions, the Commission trumped two highly publicized deals. Earlier this year, the FTC launched a double-pronged approach against the Inova hospital merger, moving ahead with administrative proceedings while a preliminary injunction ("PI") was pending in federal court. (The parties ended up abandoning the deal without even waiting for the PI hearing to be held.) Now, months after Whole Foods and Wild Oats consummated their merger, the D.C. Circuit resuscitated the FTC's argument that injunctive relief is appropriate to stop a deal.
As some background, Whole Foods first announced its plan to buy smaller rival Wild Oats as part of a $565 million specialty supermarkets merger in February 2007. The FTC sued to block the deal in June 2007, claiming the merger would hobble competition in a narrowly-defined market for premium, natural and organic supermarkets ("PNOS"). The district court concluded that the FTC had failed to prove that a PNOS market existed and denied the FTC's request. The Commission appealed to the D.C. Circuit, requesting a temporary injunction while pending review of the lower court's opinion, but was turned down. Whole Foods and Wild Oats consummated the merger within days of that denial.
On July 29, the D.C. Court of Appeals handed the FTC a significant win by confirming a favorable standard for enjoining a merger under Section 13(b) of the FTC Act. Section 13(b) empowers the Commission to seek preliminary—or permanent—injunctions "[u]pon a proper showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the public interest." The Circuit court also rejected Whole Foods' arguments that a post-consummation Section 13(b) injunction is untimely, stating that federal courts "have the power to grant relief on the FTC's complaint, despite the merger's having taken place."
In reversing the district court, the Court of Appeals found that (1) the FTC's PI request should be evaluated under a "sliding scale," which entitles the Commission to a presumption against the merger and an opportunity to argue the public equities at stake, and (2) the lower court committed legal error by assuming market definition depends on marginal customers. The reversal was not unanimous and the dissent stated that the law does not allow the FTC "to just snap its fingers and block a merger." The dissent cites many of the same cases on the FTC's PI standard, but interpreted the "likelihood of success" requirement as meaning that the FTC must offer "some solid evidence that the post-merger company could profitably impose" a small but significant non-transitory increase in price. But based on the majority's discussion of the Section 13(b) standard and the flexibility in defining a narrow submarket, it may be more challenging for private parties to litigate the PI issue than previously believed.
The case is now remanded to the district court to balance the equities and determine further proceedings, as the FTC is looking forward to taking its case to administrative litigation. The fact that the deal is closed and the businesses are well along on integration is not a new issue for the FTC, which has required post-closing divestitures in prior cases.
While the lower court and the FTC will now have to grapple with how to proceed after the deal is closed, the ramifications for future FTC enforcement seem clear. The FTC will use the favorable legal standard to energize its merger enforcement.
Click for the opinion of the U.S. Court of Appeals for the D.C. Circuit.
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