Federal Trade Commission v. Whole Foods Market, Inc.
2008 U.S. App. LEXIS 28108, 548 F.3d 1028, 383 U.S. App. D.C. 341 (2008)
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Rule of Law:
A relevant product submarket can exist for antitrust purposes, even if its products also compete in a broader market, when a core group of distinct customers demands that specific package of products. Antitrust analysis should not be limited solely to the behavior of 'marginal' consumers who are willing to switch to other products.
Facts:
- Whole Foods Market, Inc. and Wild Oats Markets, Inc. were the two largest operators of grocery stores defined by the FTC as 'premium, natural, and organic supermarkets' (PNOS).
- In February 2007, Whole Foods announced its plan to acquire Wild Oats.
- Whole Foods' CEO, John Mackey, sent internal emails stating that a purpose of the merger was to eliminate its primary competitor, Wild Oats.
- Internal documents from both Whole Foods and Wild Oats showed they extensively monitored each other's prices and business strategies.
- Conversely, documents from both companies also showed they monitored the prices of conventional supermarkets.
- Executives from conventional supermarkets provided deposition testimony that they considered Whole Foods and Wild Oats to be significant competitors.
- Market research indicated that a majority of Whole Foods customers were 'core' customers who shared the company's 'core values' regarding natural and organic lifestyles.
Procedural Posture:
- The FTC investigated the proposed merger after being notified under the Hart-Scott-Rodino Act.
- The FTC filed a complaint in the U.S. District Court for the District of Columbia, seeking a temporary restraining order and a preliminary injunction to block the merger.
- After an evidentiary hearing, the district court (a trial court) denied the FTC's motion for a preliminary injunction.
- The FTC appealed the denial to the U.S. Court of Appeals for the D.C. Circuit and filed an emergency motion for an injunction pending appeal.
- The Court of Appeals denied the injunction pending appeal, allowing the merger to proceed.
- Whole Foods and Wild Oats consummated their merger on August 28, 2007.
- The FTC's appeal of the district court's denial of the preliminary injunction then proceeded before the U.S. Court of Appeals for the D.C. Circuit.
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Issue:
Did the district court err in denying a preliminary injunction by concluding the FTC failed to show a likelihood of success on its claim that 'premium, natural, and organic supermarkets' (PNOS) constitute a distinct product submarket for antitrust analysis?
Opinions:
Majority - Brown, Circuit Judge
Yes. The district court erred because it applied an incorrect legal standard, and the FTC demonstrated a sufficient likelihood of success on the merits. The district court mistakenly assumed that antitrust analysis must focus exclusively on 'marginal' consumers who might switch to conventional supermarkets in response to a price increase. This was a legal error because a submarket can be defined by a core group of dedicated customers for whom other products are not reasonably interchangeable. The FTC presented substantial evidence of such a core customer base for PNOS, showing that these customers prioritize a specific 'lifestyle' and product package. Furthermore, the FTC provided economic evidence of price discrimination—showing Whole Foods' margins were significantly lower for perishable goods in areas where it competed with Wild Oats, but not for dry goods where it competed with all supermarkets. This evidence, which the district court ignored, was sufficient to raise serious questions about the merger's anticompetitive effects and meet the standard for a preliminary injunction.
Concurring - Tatel, Circuit Judge
Yes. The district court erred because the FTC raised questions going to the merits that were 'so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation.' The district court improperly overlooked or rejected credible evidence supporting the existence of a distinct PNOS market. This included studies showing a new Whole Foods store dramatically reduced sales at a nearby Wild Oats, while the entry of a conventional supermarket did not. It also included Whole Foods' internal 'Project Goldmine' study, which predicted high customer diversion from closed Wild Oats stores to Whole Foods, even with closer conventional options available. This evidence, combined with industry recognition and CEO statements, was sufficient to meet the lenient standard for a section 13(b) preliminary injunction, which does not require the FTC to definitively prove its case at this stage.
Dissenting - Kavanaugh, Circuit Judge
No. The district court correctly denied the preliminary injunction because the FTC failed to show a likelihood of success on the merits. The relevant product market is all supermarkets, not a niche PNOS submarket. The FTC failed to produce the most critical evidence required for modern antitrust analysis: proof that Whole Foods charged higher prices in areas where it did not compete with Wild Oats. The majority's reliance on qualitative factors revives the outdated and flawed 'practical indicia' test from Brown Shoe, abandoning rigorous economic principles. The evidence of CEO comments and cross-shopping demonstrates only product differentiation within a single market, not the existence of separate markets. The FTC's position calls to mind 'the bad old days' of antitrust, where mergers were viewed with suspicion regardless of their actual economic effects.
Analysis:
This fractured decision highlights the ongoing tension in antitrust law between modern economic analysis focused on price effects (favored by the dissent) and the more qualitative 'practical indicia' approach from Brown Shoe (revived by the opinions for the judgment). By finding that a 'core' group of customers can define a submarket, the court opened the door for antitrust challenges to mergers in highly differentiated product markets, even without direct evidence of price impact on 'marginal' consumers. Because there was no majority opinion, the case's precedential value is limited, creating uncertainty for how future courts should weigh evidence of 'core' versus 'marginal' consumer behavior in market definition.
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