FEDERAL TRADE COMMISSION, Appellant v. WHOLE FOODS MARKET, INC., et al., Appellees.
No. 07-5276.
United States Court of Appeals, District of Columbia Circuit.
Argued April 23, 2008. Decided July 29, 2008. Amended and Reissued Nov. 21, 2008.
Rehearing En Banc Denied Nov. 21, 2008.*
548 F.3d 1028
* Circuit Judge Kavanaugh would grant the petition. A statement by Circuit Judge Ginsburg, with whom Chief Judge Sentelle joins, concurring in the denial of rehearing en banc is attached.
Paul T. Denis argued the cause for appellees. With him on the brief were Paul H. Friedman, Nory Miller, and Rebecca Dick. Clifford H. Aronson and Alden L. Atkins entered appearances.
David A. Balto was on the brief for amici curiae American Antitrust Institute, et al. in support of appellant.
Albert A. Foer was on the brief for amicus curiae American Antitrust Institute in support of appellant.
Before: TATEL, BROWN, and KAVANAUGH, Circuit Judges.
Opinion filed by Circuit Judge BROWN.
Opinion concurring in the judgment filed by Circuit Judge TATEL.
Dissenting opinion filed by Circuit Judge KAVANAUGH.
BROWN, Circuit Judge.
The FTC sought a preliminary injunction, under
I
Whole Foods Market, Inc. (“Whole Foods“) and Wild Oats Markets, Inc. (“Wild Oats“) operate 194 and 110 grocery stores, respectively, primarily in the United States. In February 2007, they announced that Whole Foods would acquire Wild Oats in a transaction closing before August 31, 2007. They notified the FTC, as the Hart-Scott-Rodino Act required for the $565 million merger, and the FTC investigated the merger through a series of hearings and document requests. On June 6, 2007, the FTC sought a temporary restraining order and preliminary injunction to block the merger temporarily while the FTC conducted an administrative proceeding to decide whether to block it permanently under § 7 of the Clayton Act. The parties conducted expedited discovery, and the district court held a hearing on July 31 and August 1, 2007.
The FTC contended Whole Foods and Wild Oats are the two largest operators of what it called premium, natural, and organic supermarkets (“PNOS“). Such stores “focus on high-quality perishables, specialty and natural organic produce, prepared foods, meat, fish[,] and bakery goods; generally have high levels of customer services; generally target affluent and well educated customers [and] are mission driven with an emphasis on social and environmental responsibility.” FTC v. Whole Foods Market, Inc., 502 F.Supp.2d 1, 28 (D.D.C.2007). In eighteen cities, asserted the FTC, the merger would create monopolies because Whole Foods and Wild Oats are the only PNOS. To support this claim, the FTC relied on emails Whole Foods‘s CEO John Mackey sent to other Whole Foods executives and directors, suggesting the purpose of the merger was to eliminate a competitor. In addition the FTC produced pseudonymous blog postings in which Mr. Mackey touted Whole
On the other hand, the defendants’ expert, Dr. David Scheffman, focused on whether a hypothetical monopolist owning both Whole Foods and Wild Oats would actually have power over a distinct market. He used various third-party market studies to predict that such an owner could not raise prices without driving customers to other supermarkets. In addition, deposition testimony from other supermarkets indicated they regarded Whole Foods and Wild Oats as critical competition. Internal documents from the two defendants reflected their extensive monitoring of other supermarkets’ prices as well as each other‘s.
The district court concluded that PNOS was not a distinct market and that Whole Foods and Wild Oats compete within the broader market of grocery stores and supermarkets. Believing such a basic failure doomed any chance of the FTC‘s success, the court denied the preliminary injunction without considering the balance of the equities.
On August 17, the FTC filed an emergency motion for an injunction pending appeal, which this court denied on August 23. FTC v. Whole Foods Market, Inc., No. 07-5276 (D.C.Cir. Aug. 23, 2007). Freed to proceed, Whole Foods and Wild Oats consummated their merger on August 28. The dissent argues that a reversal today contradicts this earlier decision, but our standard of review then was very different, requiring the FTC to show “such a substantial indication of probable success” that there would be “justification for the court‘s intrusion into the ordinary processes of ... judicial review.” Wash. Metro. Area Transit Comm‘n v. Holiday Tours, Inc., 559 F.2d 841, 843 (D.C.Cir.1977). It is hardly remarkable that the FTC could fail to meet such a stringent standard and yet persuasively show the district court erred in applying the much less demanding
II
At the threshold, Whole Foods questions our jurisdiction to hear this appeal. The merger is a fait accompli, and Whole Foods has already closed some Wild Oats stores and sold others. In addition, Whole Foods has sold two complete lines of stores, Sun Harvest and Harvey‘s, as well as some unspecified distribution facilities. Therefore, argues Whole Foods, the transaction is irreversible and the FTC‘s request for an injunction blocking it is moot.
Only in a rare case would we agree a transaction is truly irreversible, for the courts are “clothed with large discretion” to create remedies “effective to redress [antitrust] violations and to restore competition.” Ford Motor Co. v. United States, 405 U.S. 562, 573, 92 S.Ct. 1142, 31 L.Ed.2d 492 (1972). Indeed, “divestiture is a common form of relief” from unlawful mergers. United States v. Microsoft Corp., 253 F.3d 34, 105 (D.C.Cir.2001) (en banc). Further, an antitrust violator “may be required to do more than return the market to the status quo ante.” Ford Motor, 405 U.S. at 573 n. 8, 92 S.Ct. 1142. Courts may not only order divestiture but may also order relief “designed to give the divested [firm] an opportunity to establish its competitive position.” Id. at 575, 92 S.Ct. 1142. Even remedies which “entail harsh consequences” would be appropriate to ameliorate the harm to competition from an antitrust violation. United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 327, 81 S.Ct. 1243, 6 L.Ed.2d 318 (1961).
Thus, the courts have the power to grant relief on the FTC‘s complaint, despite the merger‘s having taken place, and this case is therefore not moot. See Byrd v. EPA, 174 F.3d 239, 244 (D.C.Cir.1999) (“The availability of a partial remedy is sufficient to prevent [a] case from being moot.“). The fact that Whole Foods has sold some of Wild Oats‘s assets does not change our conclusion. To be sure, we have no “authority to command return to the status quo,” Weyerhaeuser, 665 F.2d at 1077, in a literal way by forcing absent parties to sell those assets back to Whole Foods, but there is no reason to think that inability prevents us from mitigating the merger‘s alleged harm to competition. The stores Whole Foods has sold are only those under the Harvey‘s and Sun Harvest labels, which were never relevant to the anticompetitive harm the FTC fears. Our inability to command their return does not limit the relief available to the FTC. As to the distribution facilities, neither party has described what they are, suggested Wild Oats would not be a viable competitor without them, or explained why the district court could not order some provisional substitute. Moreover, the FTC is concerned about eighteen different local markets. If, as appears to be the situation, it remains possible to reopen or preserve a Wild Oats store in just one of those markets, such a result would at least give the FTC a chance to prevent a § 7 violation in that market.
III
“We review a district court order denying preliminary injunctive relief for abuse of discretion.” FTC v. H.J. Heinz Co., 246 F.3d 708, 713 (D.C.Cir.2001). However, if the district court‘s decision “rests on an erroneous premise as to the pertinent law,” we will review the denial de novo “in light of the legal principles we believe proper and sound.” Id.
Despite some ambiguity, the district court applied the correct legal standard to the FTC‘s request for a preliminary injunction. The FTC sought relief under
In deciding the FTC‘s request for a preliminary injunction blocking a merger under
In any case, a district court must not require the FTC to prove the merits, because, in a
The district court did not apply the sliding scale, instead declining to consider the equities. To be consistent with the
IV
However, the court‘s conclusion was in error. The FTC contends the district court abused its discretion in two ways: first, by treating market definition as a threshold issue; and second, by ignoring the FTC‘s main evidence. The district court acted reasonably in focusing on the market definition, but it analyzed the product market incorrectly.
A
First, the FTC complains the district court improperly focused on whether Whole Foods and Wild Oats operate within a PNOS market. However, this was not an abuse of discretion given that the district court was simply following the FTC‘s outline of the case.
Inexplicably, the FTC now asserts a market definition is not necessary in a § 7 case, Appellant‘s Br. 37-38, in contravention of the statute itself, see
That is not to say market definition will always be crucial to the FTC‘s likelihood of success on the merits. Nor does the FTC necessarily need to settle on a market definition at this preliminary stage. Although the framework we have developed for a prima facie § 7 case rests on defining a market and showing undue concentration in that market, United States v. Baker Hughes Inc., 908 F.2d 981, 982-83 (D.C.Cir.1990), this analytical structure does not exhaust the possible ways to prove a § 7 violation on the merits, see, e.g., United States v. El Paso Natural Gas Co., 376 U.S. 651, 660, 84 S.Ct. 1044, 12 L.Ed.2d 12 (1964), much less the ways to demonstrate a likelihood of success on the merits in a preliminary proceeding.
In this case, however, the FTC itself made market definition key. It claimed “[t]he operation of premium natural and organic supermarkets is a distinct ‘line of commerce’ within the meaning of Section 7,” and its theory of anticompetitive effect was that the merger would “substantially increase concentration in the operation of [PNOS].” Compl. ¶¶ 34, 43. Throughout its briefs, the FTC presented a straightforward § 7 case in which “whether the transaction creates an appreciable danger of anticompetitive effects ... depends upon ... [the] relevant product ... [and] geographic market ... and the transaction‘s probable effect on competition in the product and geographic markets.” FTC‘s Br. Mot. Prelim. Inj. 11-12. It purported to show “undue concentration in the relevant market,” as the mainstay of its case. Id. at 12. Because of the concentration in the supposed PNOS market, the FTC urged the district court to hold the merger “presumptively unlawful,” and this was its sole reason for blocking the merger. FTC‘s Proposed Conclusions of Law ¶¶ 57-63, 99-108. At oral argument, the FTC‘s counsel suggested it had other ideas about the anticompetitive effect of the merger even if its PNOS market definition is wrong; but the FTC never offered those ideas to the district court. It is incumbent on the parties to shape a case, and it was hardly an abuse of discretion for the district court to focus on the questions as the FTC presented them.
B
Thus, the FTC assumed the burden of raising some question of whether PNOS is a well-defined market. As the FTC presented its case, success turned on whether there exist core customers, committed to PNOS, for whom one should consider PNOS a relevant market. The district court assumed “the ‘marginal’ consumer, not the so-called ‘core’ or ‘committed’ consumer, must be the focus of any antitrust analysis.” Whole Foods, 502 F.Supp.2d at 17 (citing Horizontal Merger Guidelines, 57 Fed.Reg. 41,552 (1992)). To the contrary, core consumers can, in appropriate circumstances, be worthy of antitrust protection. See Horizontal Merger Guidelines § 1.12, 57 Fed.Reg. at 41,555 (explaining the possibility of price discrimination for “targeted buyers“). The district court‘s error of law led it to ignore FTC evidence that strongly suggested Whole Foods and Wild Oats compete for core consumers within a PNOS market, even if they also compete on individual products for marginal consumers in the broader market. See, e.g., Appellant‘s Br. 50, 53.
A market “must include all products reasonably interchangeable by consumers for the same purposes.” Microsoft, 253 F.3d at 52. Whether one product is reasonably interchangeable for another depends not only on the ease and speed with which customers can substitute it and the desirability of doing so, see id. at 53-54, but also on the cost of substitution, which depends most sensitively on the price of the products. A broad market may also contain relevant submarkets which themselves “constitute product markets for antitrust purposes.” Brown Shoe, 370 U.S. at 325, 82 S.Ct. 1502. “The boundaries of such a submarket may be determined by examining such practical
To facilitate this analysis, the Department of Justice and the FTC developed a technique called the SSNIP (“small but significant non-transitory increase in price“) test, which both Dr. Murphy and Dr. Scheffman used. In the SSNIP method, one asks whether a hypothetical monopolist controlling all suppliers in the proposed market could profit from a small price increase. Horizontal Merger Guidelines § 1.11, 57 Fed.Reg. at 41,560-61. If a small price increase would drive consumers to an alternative product, then that product must be reasonably substitutable for those in the proposed market and must therefore be part of the market, properly defined. Id.
Experts for the two sides disagreed about how to do the SSNIP of the proposed PNOS market. Dr. Scheffman used a method called critical loss analysis, in which he predicted the loss that would result when marginal customers shifted purchases to conventional supermarkets in response to a SSNIP.2 Whole Foods, 502 F.Supp.2d at 18. He concluded a hypothetical monopolist could not profit from a SSNIP, so that conventional supermarkets must be within the same market as PNOS. In contrast, Dr. Murphy disapproved of critical loss analysis generally, preferring a method called critical diversion that asked how many customers would be diverted to Whole Foods and how many to conventional supermarkets if a nearby Wild Oats closed. Whole Foods‘s internal planning documents indicated at least a majority of
In appropriate circumstances, core customers can be a proper subject of antitrust concern. In particular, when one or a few firms differentiate themselves by offering a particular package of goods or services, it is quite possible for there to be a central group of customers for whom “only [that package] will do.” United States v. Grinnell Corp., 384 U.S. 563, 574, 86 S.Ct. 1698, 16 L.Ed.2d 778 (1966); see also United States v. Phillipsburg Nat‘l Bank & Trust Co., 399 U.S. 350, 360, 90 S.Ct. 2035, 26 L.Ed.2d 658 (1970) (“[I]t is the cluster of products and services ... that as a matter of trade reality makes commercial banking a distinct” market.). What motivates antitrust concern for such customers is the possibility that “fringe competition” for individual products within a package may not protect customers who need the whole package from market power exercised by a sole supplier of the package. Grinnell, 384 U.S. at 574, 86 S.Ct. 1698.
Such customers may be captive to the sole supplier, which can then, by means of price discrimination, extract monopoly profits from them while competing for the business of marginal customers. Cf. Md. People‘s Counsel v. FERC, 761 F.2d 780, 786-87 (D.C.Cir.1985) (allowing natural gas pipelines to charge higher prices to
In short, a core group of particularly dedicated, “distinct customers,” paying “distinct prices,” may constitute a recognizable submarket, Brown Shoe, 370 U.S. at 325, 82 S.Ct. 1502, whether they are dedicated because they need a complete “cluster of products,” Phila. Nat‘l Bank, 374 U.S. at 356, 83 S.Ct. 1715, because their particular circumstances dictate that a product “is the only realistic choice,” SuperTurf, Inc. v. Monsanto Co., 660 F.2d 1275, 1278 (8th Cir.1981), or because they find a particular product “uniquely attractive,” Nat‘l Collegiate Athletic Ass‘n v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 112, 104 S.Ct. 2948, 82 L.Ed.2d 70 (1984). For example, the existence of core customers dedicated to office supply superstores, with their “unique combination of size, selection, depth[,] and breadth of inventory,” was an important factor distinguishing that submarket. FTC v. Staples, Inc., 970 F.Supp. 1066, 1078-79 (D.D.C.1997). As always in defining a market, we must “take into account the realities of competition.” Weiss v. York Hosp., 745 F.2d 786, 826 (3d Cir.1984). We look to the Brown Shoe indicia, among which the economic criteria are primary, see Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 219 n. 4 (D.C.Cir.1986).
The FTC‘s evidence delineated a PNOS submarket catering to a core group of customers who “have decided that natural and organic is important, lifestyle of health and ecological sustainability is important.” Whole Foods, 502 F.Supp.2d at 23 (citing Hr‘g Tr. 43-44, Aug. 1, 2007). It was undisputed that Whole Foods and Wild Oats provide higher levels of customer service than conventional supermarkets, a “unique environment,” and a particular focus on the “core values” these customers espoused. Id. The FTC connected these intangible properties with concrete aspects of the PNOS model, such as a much larger selection of natural and organic products, FTC‘s Proposed Findings of Fact ¶¶ 13-14 & 166 (noting Earth Fare, a PNOS, carries “more than 45,000 natural and organic SKUs“) and a much greater concentration of perishables than conventional supermarkets, id. ¶¶ 14-15 & 169-70 (“Over 60% of Wild Oats’ revenues” and “[n]early 70% of Whole Foods sales are natural or organic perishables.“). See also Whole Foods, 502 F.Supp.2d at 22-23 (citing defendants’ depositions as evidence of Whole Foods‘s and Wild Oats‘s focus on “high-quality perishables” and a large variety of products).
Further, the FTC documented exactly the kind of price discrimination that enables a firm to profit from core customers for whom it is the sole supplier. Dr. Murphy compared the margins of Whole Foods
Additionally, the FTC provided direct evidence that PNOS competition had a greater effect than conventional supermarkets on PNOS prices. Dr. Murphy showed the opening of a new Whole Foods in the vicinity of a Wild Oats caused Wild Oats‘s prices to drop, while entry by non-PNOS stores had no such effect. Similarly, the opening of Earth Fare stores (another PNOS) near Whole Foods stores caused Whole Foods‘s prices to drop immediately. The price effect continued, while decreasing, until the Earth Fare stores were forced to close.
Finally, evidence of consumer behavior supported the conclusion that PNOS serve a core consumer base. Whole Foods‘s internal projections, based on market experience, suggested that if a Wild Oats near a Whole Foods were to close, the majority (in some cases nearly all) of its customers would switch to the Whole Foods rather than to conventional supermarkets. Since Whole Foods‘s prices for perishables are higher than those of conventional supermarkets, such customers must not find shopping at the latter interchangeable with PNOS shopping. They are the core customers. Moreover, market research, including Dr. Scheffman‘s own studies, indicated 68% of Whole Foods customers are core customers who share the Whole Foods “core values.” FTC Proposed Findings of Fact ¶ 135.
Against this conclusion the defendants posed evidence that customers “cross-shop” between PNOS and other stores and that Whole Foods and Wild Oats check the prices of conventional supermarkets. Whole Foods, 502 F.Supp.2d at 30-32. But the fact that PNOS and ordinary supermarkets “are direct competitors in some submarkets ... is not the end of the inquiry,” United States v. Conn. Nat‘l Bank, 418 U.S. 656, 664 n. 3, 94 S.Ct. 2788, 41 L.Ed.2d 1016 (1974). Of course customers cross-shop; PNOS carry comprehensive inventories. The fact that a customer might buy a stick of gum at a supermarket or at a convenience store does not mean there is no definable groceries market. Here, cross-shopping is entirely consistent with the existence of a core group of PNOS customers. Indeed, Dr. Murphy explained that Whole Foods competes actively with conventional supermarkets for dry groceries sales, even though it ignores their prices for high-quality perishables.
In addition, the defendants relied on Dr. Scheffman‘s conclusion that there is no “clearly definable” core customer. Whole Foods, 502 F.Supp.2d at 28. However, this conclusion was inconsistent with Dr. Scheffman‘s own report and testimony. Market research had found that customers who shop at Whole Foods because they share the core values it champions constituted at least a majority of its customers. Scheffman Expert Report 56-57. Moreover, Dr. Scheffman acknowledged “there
In sum, 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, I cannot agree with the district court that the FTC would never be able to prove a PNOS submarket. This is not to say the FTC has in fact proved such a market, which is not necessary at this point. To obtain a preliminary injunction under
V
It remains to address the equities, which the district court did not reach, and see whether for some reason there is a balance against the FTC that would require a greater likelihood of success. The FTC urges us to carry out the rest of this determination, but “[w]e believe the proper course of action at this point is to remand to the district court, Chaplaincy of Full Gospel Churches v. England, 454 F.3d 290, 304 (D.C.Cir.2006).” Since the district court “expressly withheld consideration,” id. at 305, of the equities, we have not had the benefit of its findings. Although the equities in a
I appreciate that the district court expedited the proceeding as a courtesy to the defendants, who wanted to consummate their merger just thirty days after the hearing, Whole Foods, 502 F.Supp.2d at 4, but the court should have taken whatever time it needed to consider the FTC‘s evidence fully. For the reasons stated above, the district court‘s conclusion that the FTC showed no likelihood of success in an eventual § 7 case must be reversed and remanded for proceedings consistent with this opinion.
So ordered.
TATEL, Circuit Judge, concurring in the judgment.
I agree with my colleagues that the district court produced a thoughtful opinion under incredibly difficult circumstances, that this case presents a live controversy, and that the district court generally applied the correct standard in reviewing the Federal Trade Commission‘s request for a preliminary injunction. I also agree with Judge Brown that the district court nonetheless erred in concluding that the FTC failed to “raise[ ] questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and deter-
I
“Section 7 of the Clayton Act prohibits acquisitions, including mergers, ‘where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.‘” Id. at 713 (quoting 15 U.S.C. § 18). “Congress used the words ‘may be substantially to lessen competition,’ to indicate that its concern was with probabilities, not certainties.” Brown Shoe Co. v. United States, 370 U.S. 294, 323, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962).
When the FTC believes an acquisition violates section 7 and that enjoining the acquisition pending an investigation “would be in the interest of the public,” section 13(b) of the Federal Trade Commission Act authorizes the Commission to ask a federal district court to block the acquisition.
Critically, the district court‘s task is not “to determine whether the antitrust laws have been or are about to be violated. That adjudicatory function is vested in the FTC in the first instance.” Heinz, 246 F.3d at 714 (quoting FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th Cir. 1976)). As Judge Posner has explained:
One of the main reasons for creating the Federal Trade Commission and giving it concurrent jurisdiction to enforce the Clayton Act was that Congress distrusted judicial determination of antitrust questions. It thought the assistance of an administrative body would be helpful in resolving such questions and indeed expected the FTC to take the leading role in enforcing the Clayton Act....
Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1386 (7th Cir.1986).
The dissent accuses Judge Brown and me of “dilut[ing] the standard for preliminary injunction relief in antitrust merger cases, such that the FTC need not establish a likelihood of success on the merits.” Dissenting Op. at 1059 (internal quotation marks omitted). This is baffling
II
In this case the district court concluded that the FTC had failed to raise the “serious, substantial” questions necessary to show a likelihood of success on the merits. FTC v. Whole Foods Market, Inc., 502 F.Supp.2d 1, 49 (D.D.C.2007). Following the FTC‘s lead, the court focused on defining the product market in which Whole Foods and Wild Oats operate, saying:
[I]f the relevant product market is, as the FTC alleges, a product market of “premium natural and organic supermarkets” ..., there can be little doubt that the acquisition of the second largest firm in the market by the largest firm in the market will tend to harm competition in that market. If, on the other hand, the defendants are merely differentiated firms operating within the larger relevant product market of “supermarkets,” the proposed merger will not tend to harm competition.
Whole Foods, 502 F.Supp.2d at 8. Thus, the “‘case hinge[d]‘—almost entirely—‘on the proper definition of the relevant product market.‘” Id. (quoting FTC v. Staples, Inc., 970 F.Supp. 1066, 1073 (D.D.C. 1997)). And after reviewing the evidence, the district court concluded that “[t]here is no substantial likelihood that the FTC can prove its asserted product market and thus no likelihood that it can prove that the proposed merger may substantially lessen competition or tend to create a monopoly.” Id. at 49-50.
I agree with the district court that this “‘case hinges‘—almost entirely—‘on the proper definition of the relevant product market,‘” for if a separate natural and organic market exists, “there can be little doubt that the acquisition of the second largest firm in the market by the largest firm in the market will tend to harm competition in that market.” Id. at 8 (quoting Staples, 970 F.Supp. at 1073). But I respectfully part ways with the district court when it comes to assessing the FTC‘s evidence in support of its contention that Whole Foods and Wild Oats occupy a distinct market. As the Supreme Court explained in Brown Shoe Co. v. United States: “The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.” 370 U.S. at 325, 82 S.Ct. 1502. In this case the FTC presented a great deal of credible evidence—either unmentioned or rejected by the district court—suggesting that Whole Foods and Wild Oats are not “reasonabl[y] interchangeab[le]” with conventional supermarkets and do not compete directly with them.
To begin with, the FTC‘s expert prepared a study showing that when a Whole Foods opened near an existing Wild Oats, it reduced sales at the Wild Oats store dramatically. See Expert Report of Kevin M. Murphy ¶¶ 48-49 & exhibit 3 (July 9, 2007) (“Murphy Report“). By contrast, when a conventional supermarket opened
The FTC also highlighted Whole Foods‘s own study—called “Project Goldmine“—showing what Wild Oats customers would likely do after the proposed merger in cities where Whole Foods planned to close Wild Oats stores. According to the study, the average Whole Foods store would capture most of the revenue from the closed Wild Oats store, even though virtually every city contained multiple conventional retailers closer to the shuttered Wild Oats store. See Murphy Report ¶ 70 & app. C; Rebuttal Expert Report of Kevin M. Murphy ¶¶ 31-32 (July 13, 2007) (“Murphy Rebuttal“). This high diversion ratio further suggests that many consumers consider conventional supermarkets inadequate substitutes for Wild Oats and Whole Foods. The district court cited the Project Goldmine study for the opposite conclusion, pointing only to cities in which Whole Foods expected to receive a low percentage of Wild Oats‘s business. Whole Foods, 502 F.Supp.2d at 34. These examples, however, do not undermine the study‘s broader conclusion that Whole Foods would capture most of the revenue from the closed Wild Oats, and the district court never mentioned the FTC expert‘s testimony that the diversion ratio estimated here “is at least four times the diversion ratio[ ] needed to make a price increase of 5% profitable for a joint owner of the two stores.” Murphy Rebuttal ¶ 32. The dissent also ignores this testimony, saying incorrectly that the Project Goldmine study “says nothing about whether Whole Foods could impose a five percent or more price increase.” Dissenting Op. at 1056.
Several industry studies predating the merger also suggest that Whole Foods and Wild Oats never truly competed with conventional supermarkets. For example, a study prepared for Whole Foods by an outside consultant concludes that “[Whole Foods] will not encounter significant, if any, competition from leading mainstream retailers[‘] (Safeway, Wal-Mart, Costco, etc.) entry into organics.” Tinderbox Consulting, Exploring Private Label Organic Brands 4. Another study concludes that “[w]hile th[e] same consumer shops” at both “mainstream grocers such as Safeway” and “large-format natural foods store[s] such as Wild Oats or Whole Foods Market,” “they tend to shop at each for different things (e.g., Wild Oats for fresh and specialty items, Safeway for canned and packaged goods).” THE HARTMAN GROUP, ORGANIC 2006, at ch. 8, p. 1 (May 1, 2006). In addition, Wild Oats‘s former CEO, Perry Odak, explained in a deposition why conventional stores have difficulty competing with Whole Foods and Wild Oats: if conventional stores offer a lot of organic products, they don‘t sell enough to their existing customer base, leaving the stores with spoiled products and reduced profits. But if conventional stores offer only a narrow range of organic products, customers with a high demand for organic items refuse to shop there. Thus, “the conventionals have a very difficult time getting into this business.” Investigation-
In addition to all this direct evidence that Whole Foods and Wild Oats occupy a separate market from conventional supermarkets, the FTC presented an enormous amount of evidence of “industry or public recognition” of the natural and organic market “as a separate economic entity“—one of the “practical indicia” the Supreme Court has said can be used to determine the boundaries of a distinct market. Brown Shoe, 370 U.S. at 325, 82 S.Ct. 1502. For example, dozens of record studies about the grocery store industry—including many prepared for Whole Foods or Wild Oats—distinguish between “traditional” or “conventional” grocery stores on the one hand and “natural food” or “organic” stores on the other. See, e.g., FOOD MKTG. INST., U.S. GROCERY SHOPPER TRENDS 2007, at 20-22 (2007). Moreover, record evidence indicates that the Whole Foods and Wild Oats CEOs both believed that their companies occupied a market separate from the conventional grocery store industry. In an email to his company‘s board, Whole Foods CEO John Mackey explained that “[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.” Email from John Mackey to John Elstrott et al. (Feb. 15, 2007). Echoing this point, former Wild Oats CEO Perry Odak said that “there‘s really only two players of any substance in the organic and all natural [market], and that‘s Whole Foods and Wild Oats.... [T]here‘s really nobody else in that particular space.” Odak Hearing 58. Executives from several conventional retailers agreed, explaining that Whole Foods and Wild Oats are not “conventional supermarkets” because “they focus on a premium organic type customer” and “don‘t sell a lot of the things that ... a lot of people buy.” Dep. of Rojon Diane Hasker 128-29 (July 10, 2007) (“Hasker Dep.“). As Judge Bork explained, this evidence of “industry or public recognition of the submarket as a separate economic’ unit matters because we assume that economic actors usually have accurate perceptions of economic realities.” Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 n. 4 (D.C.Cir.1986).
The FTC also presented strong evidence that Whole Foods and Wild Oats have “peculiar characteristics” distinguishing them from traditional supermarkets, another of the “practical indicia” the Supreme Court has said can be used to determine the boundaries of a distinct market. Brown Shoe, 370 U.S. at 325, 82 S.Ct. 1502. Most important, unlike traditional grocery stores, both Whole Foods and Wild Oats carry only natural or organic products. See http://www.wholefoodsmarket.com/products/index.html (“We carry natural and organic products ... unadulterated by artificial additives, sweeteners, colorings, and preservatives....“). Glossing over this distinction, the dissent says “the dividing line between ‘organic’ and conventional supermarkets has been blurred” because “[m]ost products that Whole Foods sells are not organic” while “conventional supermarkets” have begun selling more organic products. Dissenting Op. at 1054. But the FTC never defined its proposed market as “organic supermarkets,” it defined it as “premium natural and organic supermarkets.” And everything Whole Foods sells is natural and/or organic, while many of the things sold by traditional grocery stores are not. See, e.g., Hasker Dep. 130-34; http://www.wholefoodsmarket.com/products/unacceptablefoodingredients.html (explaining that Whole Foods refuses to carry any food item containing one of dozens of “un-
Insisting that all this evidence of a separate market is irrelevant, Whole Foods and the dissent argue that the FTC‘s case must fail because the record contains no evidence that Whole Foods or Wild Oats charged higher prices in cities where the other was absent—i.e., where one had a local monopoly on the asserted natural and organic market—than they did in cities where the other was present. This argument is both legally and factually incorrect.
As a legal matter, although evidence that a company charges more when other companies in the alleged market are absent certainly indicates that the companies operate in a distinct market, see, e.g., Staples, 970 F.Supp. at 1075-77, that is not the only way to prove a separate market. Indeed, Brown Shoe lists “distinct prices” as only one of a non-exhaustive list of seven “practical indicia” that may be examined to determine whether a separate market exists. 370 U.S. at 325, 82 S.Ct. 1502. Furthermore, even if the FTC could prove a section 7 violation only by showing evidence of higher prices in areas where a company had a local monopoly in an alleged market, the FTC need not prove a section 7 violation to obtain a preliminary injunction; rather, it need only raise “serious, substantial” questions as to the merger‘s legality. Heinz, 246 F.3d at 714. Thus, the dissent misses the mark when it cites the FTC‘s Horizontal Merger Guidelines to suggest that the Commission may obtain a preliminary injunction only by “mak[ing] a sufficient showing that the merged company could ... profitably impose a significant and nontransitory increase in price” of 5% or more. Dissenting Op. at 1052 (internal quotation marks omitted). Such evidence in a case like this, which turns entirely on market definition, would be enough to prove a section 7 violation in the FTC‘s administrative proceeding. See Hosp. Corp., 807 F.2d at 1389 (stating that “[a]ll that is necessary” to prove a section 7 case “is that the merger create an appreciable danger of [higher prices] in the future“). Yet our precedent clearly holds that to obtain a preliminary injunction “[t]he FTC is not required to establish that the proposed merger would in fact violate section 7 of the Clayton Act.” Heinz, 246 F.3d at 714. Moreover, the Merger Guidelines—which “are by no means to be considered binding on the court,” FTC v. PPG Indus., Inc., 798 F.2d 1500, 1503 n. 4 (D.C.Cir.1986)—specify how the FTC decides which cases to bring, “not ... how the Agency will conduct the litigation of cases that it decides to bring,” Horizontal Merger Guidelines § 0.1 (emphasis added); see also id. (“[T]he Guidelines do not attempt to assign the burden of proof, or the burden of coming forward with evidence, on any particular issue.“).
In any event, the FTC did present evidence indicating that Whole Foods and Wild Oats charged more when they were the only natural and organic supermarket present. The FTC‘s expert looked at prices Whole Foods charged in several of its North Carolina stores before and after entry of a regional natural food chain called Earth Fare. Before any Earth Fare stores opened, Whole Foods charged essentially the same prices at its five North Carolina stores, but when an Earth Fare opened near the Whole Foods in Chapel Hill, that store‘s prices dropped 5% below those at the other North Carolina Whole Foods. See Tr. of Mots. Hr‘g, Morning Session 125-30 (July 31, 2007); Supplemental Rebuttal Expert Report of Kevin M. Murphy ¶¶ 2-6 (July 16, 2007) (“Murphy Supp.“). Prices at that store remained lower than at the other Whole Foods in North Carolina for nearly a year,
The dissent raises two primary arguments against this pricing evidence. First, it relies on a study by Whole Foods‘s expert to conclude that Whole Foods‘s prices remain steady regardless of the presence or absence of a nearby Wild Oats, Dissenting Op. at 1053, calling this “all-but-dispositive price evidence,” id. at 1053. In fact, this study is all-but-meaningless price evidence because it examined Whole Foods‘s pricing on a single day several months after the company announced its intent to acquire Wild Oats; this gave the company every incentive to eliminate any price differences that may have previously existed between its stores based on the presence of a nearby Wild Oats, not only to avoid antitrust liability, but also because the company was no longer competing with Wild Oats. See Hosp. Corp., 807 F.2d at 1384 (“[E]vidence that is subject to manipulation by the party seeking to use it is entitled to little or no weight.“). Second, the dissent asserts that all Mackey‘s statements are irrelevant because—it claims—anticompetitive “intent is not an element of a § 7 claim.” Dissenting Op. at 1057. But the Supreme Court has clearly said that “evidence indicating the purpose of the merging parties, where available, is an aid in predicting the probable future conduct of the parties and thus the probable effects of the merger.” Brown Shoe, 370 U.S. at 329 n. 48, 82 S.Ct. 1502 (emphasis added); see also 4A PHILLIP E. AREEDA ET AL., ANTITRUST LAW ¶ 964a (2d ed. 2006) (“[E]vidence of anticompetitive intent cannot be disregarded.“).
To be sure, the pricing evidence here is unquestionably less compelling than the pricing evidence in some other cases, and perhaps this will make a difference in the Commission‘s ultimate evaluation of this merger. Cf. Staples, 970 F.Supp. at 1075-77 (showing price differences of up to 13% where competitors were absent). But at this preliminary, pre-hearing stage, the pricing evidence here, together with the other evidence described above, is certainly enough to raise “serious, substantial” questions that are “fair ground for thorough investigation, study, deliberation, and determination by the FTC.” Heinz, 246 F.3d at 714-15.
Attempting to make these serious questions disappear, Whole Foods points to evidence the district court cited in concluding that the FTC could never prove a separate natural and organic market. That evidence, however, fails to overcome the “serious, substantial” questions the FTC‘s evidence raises.
To begin with, the district court relied on a study by a Whole Foods expert concluding that the post-merger company would be unable to impose a statistically significant non-transitory increase in price
The district court next emphasized that when a new Whole Foods store opens, it takes business from conventional grocery stores, and even when an existing Wild Oats is nearby, most of the new Whole Foods store‘s revenue comes from customers who previously shopped at conventional stores. According to the district court, this led “to the inevitable conclusion that Whole Foods’ and Wild Oats’ main competitors are other supermarkets, not just each other.” Whole Foods, 502 F.Supp.2d at 21. As the FTC points out, however, “an innovative [product] can create a new product market for antitrust purposes” by “satisfy[ing] a previously-unsatisfied consumer demand.” Appellant‘s Opening Br. 50. To use the Commission‘s example, when the automobile was first invented, competing auto manufacturers obviously took customers primarily from companies selling horses and buggies, not from other auto manufacturers, but that hardly shows that cars and horse-drawn carriages should be treated as the same product market. That Whole Foods and Wild Oats have attracted many customers away from conventional grocery stores by offering extensive selections of natural and organic products thus tells us nothing about whether Whole Foods and Wild Oats should be treated as operating in the same market as conventional grocery stores. Indeed, courts have often found that sufficiently innovative retailers can constitute a distinct product market even when they take customers from existing retailers. See, e.g., Photovest Corp. v. Fotomat Corp., 606 F.2d 704, 712-14 (7th Cir.1979) (finding a distinct market of drive-up photo-processing companies even though such companies took photo-processing customers from drugstores, camera stores, and supermarkets); Staples, 970 F.Supp. at 1077 (finding a distinct market of office supply superstores even though such stores took sales primarily from mail-order
The district court also cited evidence that Whole Foods compares its prices to those at conventional stores, not just natural foods stores. But nearly all of the items on which Whole Foods checks prices are dry grocery items, even though nearly 70% of Whole Foods‘s revenue comes from perishables. Murphy Report ¶ 77. As Judge Brown‘s opinion explains, this suggests that any competition between Whole Foods and conventional retailers may be limited to a narrow range of products that play a minor role in Whole Foods‘s profitability. Op. at 1039.
Finally, the district court observed that more and more conventional stores are carrying natural and organic products, and that consumers who shop at Whole Foods and Wild Oats also shop at conventional stores. But as noted above, other record evidence suggests that although some conventional retailers are beginning to offer a limited range of popular organic products, they have difficulty competing with Whole Foods and Wild Oats. See Murphy Report ¶ 77. As Whole Foods CEO John Mackey put it: “[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.” Email from John Mackey to John Elstrott et al. (Feb. 15, 2007) (emphasis added). Other studies show that “[w]hile th[e] same consumer shops” at both “mainstream grocers such as Safeway” and “large-format natural foods store[s] such as Wild Oats or Whole Foods,” “they tend to shop at each for different things.” THE HARTMAN GROUP, ORGANIC 2006, at ch. 8, p. 1 (May 1, 2006); see also Photovest, 606 F.2d at 714 (“The law does not require an exclusive class of customers for each relevant submarket.“).
In sum, much of the evidence Whole Foods points to is either entirely unpersuasive or rebutted by credible evidence offered by the FTC. Of course, this is not to say that the FTC will necessarily be able to prove its asserted product market in an administrative proceeding: as the district court recognized, Whole Foods has a great deal of evidence on its side, evidence that may ultimately convince the Commission that no separate market exists. But at this preliminary stage, the FTC‘s evidence plainly establishes a reasonable probability that it will be able to prove its asserted market, and given that this “‘case hinges‘—almost entirely—‘on the proper definition of the relevant product market,‘” Whole Foods, 502 F.Supp.2d at 8 (quoting Staples, 970 F.Supp. at 1073), this is enough to raise “serious, substantial” questions meriting further investigation by the FTC. Heinz, 246 F.3d at 714.
III
Because we have decided that the FTC showed the requisite likelihood of success by raising serious and substantial questions about the merger‘s legality, all that remains is to “weigh the equities in order to decide whether enjoining the merger would be in the public interest.” Id. at 726. Although in some cases we have conducted this weighing ourselves, see, e.g., id. at 726-27, three factors lead me to agree with Judge Brown that the better course here is to remand to the district court for it to undertake this task. First, in cases in which we have weighed the equities, the district court had already done so, giving us the benefit of its factfinding and reasoning. See, e.g., id. Here, by contrast, the district court never reached the equities and the parties have not briefed the issue, leaving us without the evidence needed to decide this question. See Whole Foods, 502 F.Supp.2d at 50. Second, this case stands in a unique
Given the novel and significant task the district court faces on remand, I think it important to emphasize the principles that should guide its weighing of the equities. To begin with, as this court has held, “a likelihood of success finding weighs heavily in favor of a preliminary injunction blocking the acquisition,” Weyerhaeuser, 665 F.2d at 1085, “creat[ing] a presumption in favor of preliminary injunctive relief,” Heinz, 246 F.3d at 726. That said, the district court must still weigh the public and private equities “to decide whether enjoining the merger would be in the public interest.” Id. “The principal public equity weighing in favor of issuance of preliminary injunctive relief is the public interest in effective enforcement of the antitrust laws.” Id. That is, because “[a]dministrative experience shows that the Commission‘s inability to unscramble merged assets frequently prevents entry of an effective order of divestiture” after administrative proceedings, FTC v. Dean Foods Co., 384 U.S. 597, 607 n. 5, 86 S.Ct. 1738, 16 L.Ed.2d 802 (1966), the court must place great weight on the public interest in blocking a possibly anticompetitive merger before it is complete. Here, of course, the merger has already been consummated, although as the FTC points out, the process of combining the two companies is far from complete. Thus, the district court must consider the extent to which any of the remedial options mentioned above would make it easier for the FTC to separate Wild Oats and Whole Foods after the Commission‘s administrative proceeding (should it find a
In conducting this weighing, if Whole Foods can show no public equities in favor of allowing the merger to proceed immediately—such as increased employment or reduced prices—the district court should go no further, for “[w]hen the Commission demonstrates a likelihood of ultimate success, a countershowing of private equities alone [does] not suffice to justify denial of a preliminary injunction barring the merger.” Weyerhaeuser, 665 F.2d at 1083. But if Whole Foods can show some public equity favoring the merger, then the court should also consider private equities on Whole Foods‘s side of the ledger, such as whether it would allow an otherwise failing firm to survive. That said, “[w]hile it is
KAVANAUGH, Circuit Judge, dissenting.1
The Federal Trade Commission has sought a preliminary injunction to block the Whole Foods-Wild Oats merger as anticompetitive under
More than a year ago, after a lengthy evidentiary hearing and in an exhaustive and careful opinion, the District Court found that the record evidence overwhelmingly supports the following conclusions: Whole Foods competes against all supermarkets and not just so-called organic stores; the relevant market for evaluating this merger for antitrust purposes is all supermarkets; and the merger of Whole Foods and Wild Oats would not substantially lessen competition in a market that includes all supermarkets. The court therefore denied the FTC‘s motion for a preliminary injunction.
Also more than a year ago, a three-judge panel of this Court unanimously denied the FTC‘s request for an injunction pending appeal, thereby allowing the Whole Foods-Wild Oats deal to close. Since then, the merged entity has shut down, sold, or converted numerous Wild Oats stores and otherwise effectuated the merger through many changes in supplier contracts, leases, distribution, and the like.
The Court‘s splintered decision in this case seeks to unring the bell. In my judgment, this Court got it right a year ago in refusing to enjoin the merger, and there is no basis for a changed result now. Both a year ago and now, the same central question has been before the Court in determining whether to approve an injunction: whether the FTC demonstrated the necessary “likelihood of success” on its
The law does not allow the FTC to just snap its fingers and temporarily block a merger. Even at the preliminary injunction stage, the relevant statutory text and precedents expressly require that the FTC show a “likelihood of success on the merits.” FTC v. H.J. Heinz Co., 246 F.3d 708, 714 (D.C.Cir.2001); see also
By seeking to block a merger without a sufficient showing that so-called organic stores constitute a separate product market and that the merged entity could impose a significant and nontransitory price increase, the FTC‘s position—which Judge Brown and Judge Tatel largely accept—calls to mind the bad old days when mergers were viewed with suspicion regardless of their economic benefits. See generally ROBERT H. BORK, THE ANTITRUST PARADOX (1978). I would not turn back the clock. I agree with and would affirm the District Court‘s excellent decision denying the FTC‘s motion to enjoin the merger of Whole Foods and Wild Oats. See FTC v. Whole Foods Mkt., Inc., 502 F.Supp.2d 1 (D.D.C.2007).
I
A
In considering whether the merged entity could increase prices, courts of course recognize that “future behavior must be
This approach was applied sensibly by Judge Hogan in his thorough and leading opinion in FTC v. Staples, Inc., 970 F.Supp. 1066 (D.D.C.1997). There, Judge Hogan found that office products sold by an office superstore were functionally interchangeable with office products sold at other types of stores, but he nonetheless found that office-supply superstores constituted a distinct product market. One key fact led Judge Hogan to that conclusion: In areas where Staples was the only office superstore, it was able to set prices significantly higher than in areas where it competed with other office superstores (Office Depot and OfficeMax). See id. at 1075-76. For example, the FTC presented “compelling evidence” that Staples‘s prices were 13 percent higher in areas where no office-superstore competitors were present. Id. Judge Hogan ultimately concluded that “[t]his evidence all suggests that office superstore prices are affected primarily by other office superstores and not by non-superstore competitors.” Id. at 1077 (emphasis added). For that reason, the Court enjoined the merger of Staples and Office Depot.
B
Consistent with the statute, the Executive Branch‘s Merger Guidelines, and Judge Hogan‘s convincing opinion in Staples, the District Court here carefully analyzed the economics of supermarkets, including so-called organic supermarkets. The court considered whether Whole Foods charged higher prices in areas without Wild Oats than in areas with Wild Oats. After an evidentiary hearing and based on a painstaking review of the evidence in the record, the court concluded that “Whole Foods prices are essentially the same at all of its stores in a region, regardless of whether there is a Wild Oats store nearby.” FTC v. Whole Foods Mkt., Inc., 502 F.Supp.2d 1, 22 (D.D.C.2007). That factual conclusion was supported by substantial evidence offered by Dr. Scheffman, Whole Foods‘s expert, and by the lack of any credible evidence to the contrary.
Dr. Scheffman analyzed Whole Foods‘s actual prices across stores and concluded that “there is no evidence that [Whole Foods] and [Wild Oats] price higher” where they face no competition from so-called organic supermarkets compared with where they do face such competition. Scheffman Expert Report ¶ 292, at 113. At a regional level, his studies revealed that only a “very small percentage” of products vary in price within a region, indicating that “prices are set across broad geographic areas.” Id. ¶ 300, at 116. He also analyzed prices at the individual store level, examining how many products sold at a specific store have prices that differ from the most common price in the region. He found that “differences in prices across stores are generally very small (less than one half of one percent) and there is no systematic pattern as to the presence or absence of [organic-supermarket] competition.” Id. ¶ 305, at 116.
Moreover, the record evidence in this case does not show that Whole Foods changed its prices in any significant way in response to exit from an area by Wild Oats. In the four cases where Wild Oats exited and a Whole Foods store remained, there is no evidence in the record that Whole Foods then raised prices. Nor was there any evidence of price increases after Whole Foods took over two Wild Oats stores.
The facts here contrast starkly with Staples, where Staples charged significantly different prices based on the presence or
In the absence of any evidence in the record that Whole Foods was able to (or did) set higher prices when Wild Oats exited or was absent, the District Court correctly concluded that Whole Foods competes in a market composed of all supermarkets, meaning that “all supermarkets” is the relevant product market and that the Whole Foods-Wild Oats merger will not substantially lessen competition in that product market.
In addition to the all-but-dispositive price evidence,2 the District Court identified other factors further demonstrating that the relevant market consists of all supermarkets.
The record shows that Whole Foods makes site selection decisions based on all supermarkets and checks prices against all supermarkets, not only so-called organic supermarkets. As Dr. Scheffman concluded, Whole Foods “price checks a broad set of competitors ... nationally, regionally and locally.” Whole Foods, 502 F.Supp.2d at 86 (quoting Scheffman Expert Report ¶ 224). This “demonstrates that [Whole Foods] views itself as competing with a broad range of supermarkets and that these supermarkets, in fact, constrain the prices charged by [Whole Foods].” Id. Those other supermarkets include conventional supermarkets such as Safeway, Albertson‘s, Wegman‘s, HEB, and Harris Teeter, as well as so-called organic supermarkets like Wild Oats. Id. ¶¶ 225-26, at 86-87. As Professors Areeda and Hovenkamp have explained, a “broad-market finding gains some support from long-standing documents indicating that A or B producers regard the other product as a close competitor.” 2B AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 562a, at 372. The point here is simple: Whole Foods would not examine the locations of and price check conventional grocery stores if it were not a competitor of those stores. Whole Foods does not price check Sports Authority; Whole Foods does price check Safeway.
The record also demonstrates that conventional supermarkets and so-called organic supermarkets are aggressively competing to attract customers from one another. After reviewing a wide variety of industry information and trade journals, Dr. Scheffman concluded that “‘other’ supermarkets are competing vigorously for the purchases made by shoppers at [Whole Foods] and [Wild Oats].” Scheffman Expert Report ¶ 212, at 77. Whole Foods “recognizes the fact that it has to appeal to a significantly broader group of consumers than organic and natural focused consumers.” Id. ¶ 279, at 108. The record shows that Whole Foods has made progress: Most products that Whole Foods sells are not organic. Conversely, conventional supermarkets have shifted towards “emphasizing fresh, ‘natural’ and organic” products. Id. ¶ 215, at 80. “[M]ost of the major chains and others are expanding into private label organic and natural products.” Id. ¶ 220, at 85; see also id. ¶ 219, at 83-85 (listing changes in other supermarkets).
So the dividing line between “organic” and conventional supermarkets has blurred. As the District Court aptly put it, the “train has already left the station.”
The District Court‘s summary of the evidence warrants extensive quotation:
In sum, while all supermarket retailers, including Whole Foods, attempt to differentiate themselves in some way in order to attract customers, they nevertheless compete, and compete vigorously, with each other. The evidence before the Court demonstrates that conventional or more traditional supermarkets today compete for the customers who shop at Whole Foods and Wild Oats, particularly the large number of cross-shopping customers—or customers at the margin—with a growing interest in natural and organic foods. Post-merger, all of these competing alternatives will remain. Based upon the evidence presented, the Court concludes that many customers could and would readily shift more of their purchases to any of the increasingly available substitute sources of natural and organic foods. The Court therefore concludes that the FTC has not met its burden to prove that “premium natural and organic supermarkets” is the relevant product market in this case for antitrust purposes.
II
In an attempt to save its merger case despite its inability to meet the test reflected in the Merger Guidelines and applied in Staples, the FTC cites marginally relevant evidence and advances a scattershot of flawed arguments.
First, the FTC says that so-called organic supermarkets like Whole Foods and Wild Oats constitute their own product market because they are characterized by factors that differentiate them from conventional supermarkets. Those factors include intangible qualities such as customer service and tangible factors such as a focus on perishables.
This argument reflects the key error that permeates the FTC‘s approach to this case. Those factors demonstrate only product differentiation, and product differentiation does not mean different product markets. “For antitrust purposes, we apply the differentiated label to products that are distinguishable in the minds of buyers but not so different as to belong in separate markets.” 2B PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 563a, at 385 (3d ed.2007). As the District Court noted, supermarkets including so-called organic supermarkets differentiate themselves by emphasizing specific benefits or characteristics to attract customers to their stores. See FTC v. Whole Foods Mkt., Inc., 502 F.Supp.2d 1, 24-26 (D.D.C.2007). They may differentiate
The key to distinguishing product differentiation from separate product markets lies in price information. As Professors Areeda and Hovenkamp have stated, differentiated sellers “generally compete with one another sufficiently” that the prices of one are “greatly constrained” by the prices of others. 2B AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 563a, at 384. To distinguish differentiation from separate product markets, courts thus must “ask whether one seller could maximize profit” by charging “more than the competitive price” without “losing too much patronage to other sellers.” Id. ¶ 563a, at 385. Here, in other words, could so-called organic supermarkets maximize profit by charging more than a competitive price without losing too much patronage to conventional supermarkets? Based on the evidence regarding Whole Foods‘s pricing practices, the District Court correctly found that the answer to that question is no. So-called organic supermarkets are engaged in product differentiation; they do not constitute a product market separate from all supermarkets.
Second, the FTC points to internal Whole Foods studies and other evidence showing that if a Wild Oats near a Whole Foods were to close, most of the Wild Oats customers would shift to Whole Foods. But that says nothing about whether Whole Foods could impose a five percent or more price increase and still retain those customers (and its other customers), which is the relevant antitrust question. In other words, the fact that many Wild Oats customers would shift to Whole Foods does not mean that those customers would stay with Whole Foods, as opposed to shifting to conventional supermarkets, if Whole Foods significantly raised its prices. And even if one could infer that all of those former Wild Oats customers would so prefer Whole Foods that they would shop there even in the face of significant price increases, that would not show whether Whole Foods could raise prices without driving out a sufficient number of other customers as to make the price increases unprofitable. In sum, this argument is a diversion from the economic analysis that must be conducted in antitrust cases like this. The District Court properly found that the expert evidence in the record leads to the conclusion that Whole Foods could not profitably impose such a significant price increase.4
Third, the FTC cites comments by Whole Foods CEO John Mackey as evi-
Fourth, the FTC says that a study by its expert, Dr. Murphy, demonstrates that Whole Foods‘s profit margins decreased in geographic areas where it competed against Wild Oats. But the relevant inquiry under the Merger Guidelines is prices. And Dr. Murphy did not determine whether Whole Foods prices ever differed as a result of competition from Wild Oats.
Moreover, there was only a slight difference between Whole Foods margins when Wild Oats was in the same area and when it was not. The overall difference was 0.7 percent, which Dr. Murphy himself recognized was not statistically significant. The FTC‘s evidence on margins is wafer-thin and does not suffice to show that organic stores constitute their own product market.
Fifth, the FTC points to evidence that Whole Foods‘s entry into a particular area, unlike the entry of conventional supermarkets, caused Wild Oats to lower its prices. Dr. Murphy‘s reliance on Wild Oats‘s reaction to Whole Foods‘s entry is questionable. Dr. Murphy based his entire analysis on a meager two events, hardly a large sample size. In addition, Dr. Murphy‘s analysis did not control for the reaction of conventional supermarkets to Whole Foods‘s entry. In other words, he assumed that the relevant product market was so-called organic supermarkets (the point he was trying to prove) and therefore assumed that all changes in Wild Oats‘s prices were directly caused by Whole Foods‘s entry. But if conventional supermarkets also lowered prices to compete with Whole Foods when Whole Foods entered, Wild Oats‘s price decreases may well have been due to the overall reduction in prices by all supermarkets in the area. If that were true, the relevant product market would obviously be all supermarkets, not just so-called organic supermarkets. Dr. Murphy‘s analysis never confronted that possibility or the complexity of how competition works in this market; his analysis appears to have assumed the conclusion and reasoned backwards from there.
The bottom line is that, as the District Court found, there is no evidence in the record suggesting that Whole Foods priced differently based on the presence or absence of a Wild Oats store in the area. That is a conspicuous—and all but dispositive—omission in Dr. Murphy‘s analysis and in the FTC‘s case.
Sixth, the FTC cites the openings of three Earth Fare stores near Whole Foods stores in North Carolina, which caused decreases in Whole Foods‘s prices in those areas. But soon after those entries, Whole Foods‘s prices returned to normal levels. So the record hardly shows the sort of “nontransitory” price changes that are the touchstone of product-market definition. See Horizontal Merger Guidelines § 1.11. A price increase ordinarily must last “for the foreseeable future,” id., considered by some to be more than a year, to qualify as “nontransitory.” See 2B AREEDA & HOVENKAMP, ANTITRUST LAW ¶ 537a, at 290. Moreover, the entry of a Safeway store in Boulder, Colorado, had a similar short-term impact on Whole Foods, indicating that whatever inference should be drawn from the Earth Fare entries cannot be limited to so-called organic supermarkets but rather applies to conventional supermarkets.
The FTC‘s reference to Earth Fare mistakenly focuses on a few isolated trees instead of the very large forest indicating a competitive market consisting of all supermarkets. In short, I fail to see how Whole Foods‘s temporary price changes to compete against three Earth Fare stores in North Carolina could possibly be a hook to block this nationwide merger of Whole Foods and Wild Oats.
III
A
The opinions of Judge Brown and Judge Tatel rest on two legal points with which I respectfully but strongly disagree.
First, the Court‘s decision resuscitates the loose antitrust standards of Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), the 1960s-era relic. See, e.g., Brown Op. at 1039 (“We look to the Brown Shoe indicia....“); Tatel Op. at 1046 (”Brown Shoe lists ‘distinct prices’ as only one of a non-exhaustive list of seven ‘practical indicia’ that may be examined to determine whether a separate market exists.“) (citation omitted). This is a problem because Brown Shoe‘s brand of free-wheeling antitrust analysis has not stood the test of time. See, e.g., EINER ELHAUGE & DAMIEN GERADIN, GLOBAL ANTITRUST LAW AND ECONOMICS 874 (2007) (“Modern practice takes a much more rigorous approach to market definition [than Brown Shoe]“); 4 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 913a, at 62 (2d ed. 2006) (“One alternative that we do not recommend is a return to Brown Shoe‘s language of ‘submarkets‘“).
As demonstrated in this Court‘s most recent merger case, the practical indicia test of Brown Shoe no longer guides courts’ merger analyses because it does
The Court‘s revival of the loose Brown Shoe standard threatens to reverse this trend and to upend modern merger practice.5
Second, the opinions of Judge Brown and Judge Tatel both dilute the standard for preliminary injunction relief in antitrust merger cases, such that the FTC apparently need not establish a “likelihood of success on the merits.” Heinz, 246 F.3d at 714. In particular, Judge Brown and Judge Tatel rely heavily on their belief that: “In this circuit, the standard for likelihood of success on the merits is met if the FTC has raised questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination by the FTC in the first instance and ultimately by the Court of Appeals.” Tatel Op. at 1042 (internal quotations and citations omitted); see also id. at 1042; Brown Op. at 1035 (indicating that “the FTC will usually be able to obtain a preliminary injunction blocking a merger” by satisfying the same test).
In applying this watered-down test for issuing a preliminary injunction in FTC merger cases, Judge Brown and Judge Tatel rely on language contained in our opinion in Heinz. However, Heinz only assumed this particular gloss on the “likelihood of success on the merits” requirement for preliminary injunctions based on
This “serious questions” standard is inconsistent with the relevant statutory text. The statute unambiguously requires that courts consider “the Commission‘s likelihood of ultimate success” when the FTC seeks to preliminarily enjoin a merger.
There is a significant difference, moreover, between the relaxed “serious questions” standard applied by Judge Brown and Judge Tatel and the traditional likelihood of success standard—as the Supreme Court explained just a few months ago in Munaf v. Geren, — U.S. —, 128 S.Ct. 2207, 171 L.Ed.2d 1 (2008), rev‘g sub nom. Omar v. Harvey, 479 F.3d 1 (D.C.Cir.2007). To be sure, that case did not involve a merger; but the Supreme Court there did address the general likelihood-of-success preliminary injunction standard—the same standard that is expressly articulated in
But the Supreme Court unanimously rejected that lesser “serious questions” standard as too weak and not equivalent to the “likelihood of success” necessary for a preliminary injunction to issue. See Munaf, 128 S.Ct. at 2219 (“We begin with the basics.... [A] party seeking a preliminary injunction must demonstrate, among other things, ‘a likelihood of success on the merits.‘“) (citations omitted); see also Winter v. NRDC, — U.S. —, 129 S.Ct. 365, 374, 172 L.Ed.2d 249 (2008) (“A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits“) (citing Munaf, 128 S.Ct. at 2218-19). And the Supreme Court directly criticized the approach of the District Court and this Court in the Omar litigation: “one searches the opinions below in vain for any mention of a likelihood of success as to the merits.” Munaf, 128 S.Ct. at 2219.
The Court in this case repeats the same mistake made in Omar of watering down the preliminary injunction standard. Both Judge Brown and Judge Tatel approve the FTC‘s request for preliminary injunction without making the essential “likelihood of success” finding that is required by the statutory text and Supreme Court precedent. See Brown Op. at 1035, 1041; Tatel Op. at 1041-42, 1042-43. To the extent the “serious questions” standard they apply was ever appropriate for preliminary injunction merger cases, the combination of the clear statutory text in
In short, the approach of Judge Brown and Judge Tatel revives the moribund Brown Shoe practical indicia test and applies an overly lax preliminary injunction standard for merger cases. I respectfully disagree on both counts. In my judgment, the FTC may obtain a preliminary injunction only by establishing a likelihood of success—namely, a likelihood that, among other things, the merged entity would possess market power and could profitably impose a significant and nontransitory price increase.8
B
In reaching her conclusion, Judge Brown also relies on a distinction between marginal consumers and core consumers. See, e.g., Brown Op. at 1041 (“In sum, 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.“). But the FTC never once referred to, much less relied on, the distinction between marginal and core consumers in 86 pages of briefing or at oral argument. The terms “marginal consumer” and “core consumer” are nowhere to be found in its briefs.
In any event, I respectfully disagree with Judge Brown‘s emphasis on core customers. For a business to exert market power as a result of a merger, it must be able to increase prices (usually by five percent or more) while retaining enough customers to make that price increase profitable. See 2B PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 501, at 109 (3d ed. 2007) (“A defendant firm has market power if it can raise price without a total loss of sales.“). If too many “marginal” customers are turned off by a price hike, then the hike will be unprofitable even if a large group of die-hard “core” customers remain active clients. Therefore, a focus on core customers alone cannot resolve a merger case. The question here is whether Whole Foods could increase prices by five percent or more without losing so many marginal customers as to make the price increase unprofitable. See id. ¶ 536, at 284. As discussed above, the FTC has not come close to making that showing. Moreover, there is no support in the law for that singular focus on the core customer. Indeed, if that approach took root, it would have serious repercussions because virtually every merger involves some core customers who would stick with the company regardless of a significant price increase. So under this “core customer” approach, many heretofore permissible mergers presumably could be blocked as anticompetitive. That cannot be the law, and it is not the law.
In a related vein, Judge Brown repeatedly suggests that Whole Foods and Wild Oats engage in “price discrimination“—more specifically, Judge Brown asserts that organic supermarkets “discriminate on price between their core and marginal customers, thus treating the former as a distinct market.” Brown Op. at 1041. But this assertion has no factual support in the record. For antitrust purposes, price discrimination normally involves one seller charging different prices to different customers for the same prod-
IV
In the end, the FTC‘s case is weak and seems a relic of a bygone era when antitrust law was divorced from basic economic principles. The record does not show that Whole Foods priced differently based on the presence or absence of Wild Oats in the same area. The reason for that and the conclusion that follows from that are the same: Whole Foods competes in an extraordinarily competitive market that includes all supermarkets, not just so-called organic supermarkets. The merged entity thus could not exercise market power such that it could profitably impose a significant and nontransitory price increase. Therefore, there is no sound legal basis to block this merger.
The issues presented in this case are important to antitrust regulators and practitioners, to potentially merging companies, and ultimately to the overall economy. The splintered panel opinions will create enormous uncertainty, debate, and litigation over the meaning and effect of this decision. And to the extent common principles and holdings are derived from the opinions of Judge Brown and Judge Tatel, those principles will authorize the FTC to obtain preliminary injunctions and block mergers based on a watered-down preliminary injunction standard and without sufficient regard for the economic principles that have undergirded modern antitrust law. That will give the FTC far greater power to block mergers than the statutory text or Supreme Court precedents permit.
* * *
I respectfully dissent.
GINSBURG, Circuit Judge, with whom Chief Judge SENTELLE joins, concurring in the denial of rehearing en banc:
I concur in the denial of rehearing en banc because, there being no opinion for the Court, that judgment sets no precedent beyond the precise facts of this case. See King v. Palmer, 950 F.2d 771, 783 (D.C.Cir.1991) (en banc) (“without implicit agreement” among a majority of the judges “we are left without a controlling opinion“).
Bridgette FEEMSTER, et al., Appellees/Cross-Appellants
v.
BSA LIMITED PARTNERSHIP, Appellant/Cross-Appellee.
Nos. 07-7156, 07-7166.
United States Court of Appeals, District of Columbia Circuit.
Argued Sept. 16, 2008.
Decided Nov. 14, 2008.
Rehearing En Banc Denied Jan. 16, 2009.