Whole Foods Merger: Market Definition & Marginal Consumers

Update June 2009:  The FTC has granted final approval to the proposed settlement.

Update March 2009:  The parties have reached a settlement allowing the merger to move forward with Whole Foods agreeing to divest the intellectual property in the Wild Oats brand, 13 stores, and the leases and assests of 19 closed stores.  A divestiture trustee will supervise the sale.  The divested stores are in Arizona, Colorado, Connecticut, Missouri, New Mexico, Nevada, Oregon, and Utah.

Update Janary 2009: Whole Foods added an equal protection claim in an attempt to strength the district court’s jurisdiction, but subsequently agreed to consent to DC Circuit jurisdiction, the Circuit court then dismissed the case saying Wholefoods had failed to show any right to a hearing prior to FTC proceedings.  The count alleges that the statutory system that allocates some merger supervision to the administrative determination of the FTC, while others are reviewed by DOJ and subject to challenge in federal court, unconstitutionally treats similarly situated defendants differently.  Wholefoods has vowed to re-file in the district court or find some other avenue to assert its claims.

Update December 2008:  Whole Foods has filed a case in the Distict Court for the District of Columbia arguing that the FTC would violate Whole Foods due process rights by proceeding against the merger administratively.  The FTC has moved to dismiss the case or have it transferred to the DC Circuit, which has exclusive jurisdiction to review FTC proceedings.

Update: November 2008: The DC Circuit has denied Whole Foods request for en banc review in the FTC prosecution.  Trial is set for February.

Update:  A consumer action has been filed in the District of Columbia district court arguing that Whole Foods has raised prices since consumating the merger and that its large market share works to prevent traditional supermarkets from entering the primium foods market.

In a decision that could have substantial impact on market definition, a divided panel of the D.C. Circuit ruled that the district court erred in denying the FTC’s request for a preliminary injunction in the Whole Foods/Wild Oats merger.   The FTC argued that the merging firms competed in a premium natural and organic supermarket (“PNOS”) market that was distinct from standard supermarkets and groceries.  The district court held that the FTC could not prove such a market because of evidence that marginal consumers would switch to standard supermarkets if prices increase.

The Court of Appeals held that market definition cannot focus exclusively on marginal consumers.  “In sum,” Judge Brown wrote, “the district court believed the antitrust laws are addressed only to marginal consumers. This was an error of law, because in some situations core consumers, demanding exclusively a particular product or package of products, distinguish a submarket. The FTC described the core PNOS customers, explained how PNOS cater to these customers, and showed these customers provided the bulk of PNOS’s business. The FTC put forward economic evidence-which the district court ignored-showing directly how PNOS discriminate on price between their core and marginal customers, thus treating the former as a distinct market. Therefore, we cannot agree with the district court that the FTC would never be able to prove a PNOS submarket.”

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