CORPORATE CRIME REPORTER
Whole
Foods, Lanny Davis, and the Attack on the FTC
23 Corporate Crime Reporter 3, January 21, 2009
Whole Foods has merged with Wild Oats.
The Federal Trade Commission says the merger was illegal.
The FTC wants to unwind the merger.
Whole Foods is fighting back hard.
It has hired Orrick partner Lanny Davis to beat back the FTC.
Davis practices not just law, but as he puts it – legal crisis communications.
What is that?
“Balancing the perspectives of litigators with the need to communicate effectively with the media and the public,” Davis says.
Translate – legal public relations.
So, for example, last week, Whole Foods held a press teleconference featuring Davis and Whole Foods vice president Jim Sud.
Sud and Davis sought to portray the Whole Foods/Wild Oats merger as a done deal and the FTC as an unfair and aggressive uber-cop seeking to bust up a good thing.
“The merger for all intents and purposes is complete,” Sud said. “In terms of IT, human resources, benefits, merchandising, retailing, product, distribution – every aspect of the business is fully integrated into Whole Foods Market. There is no more Wild Oats corporate structure. That has been completely integrated into Whole Foods Market.”
Davis is also working the halls of Congress, getting members of both houses to write to the FTC about an alleged abuse of Whole Foods due process rights.
“If you happen to wake up in the morning and you are subject to supervision by the Federal Trade Commission, if you get taken to federal court and the FTC loses, they can then take you to trial within the agency and ignore the federal court decision,” Davis during the press teleconference. “Then if they lose before the administrative law judge, they can ignore the administrative law judge – they can overrule them. That’s the way you exist if you are company that happens to be subject to the supervision of the FTC.”
“This is what drove [House Judiciary Committee chair] John Conyers to say – this is not fair to have two systems of justice,” Davis said. “The FTC should do what the Justice Department does and not have three bites of the apple.”
Few antitrust lawyers are willing to publically defend the FTC in this case.
One is David Balto.
Balto is a former FTC lawyer, now in private practice.
In July 2007, Balto penned an amicus brief on behalf of the American Antitrust Institute, Consumers Federation of American, and the Organization for Competitive Markets.
The brief supported the FTC’s action against the merger, arguing that the merger raised “a significant threat to competition, not only by diminishing current price competition but also in terms of potential competition and competition in choice in variety.”
The FTC says that Whole Foods poses a threat to competition in the premium, natural organic foods market.
Whole Foods is attempting to prove that it competes with the major supermarket chains – not just with super-hip, high priced, organic stores like Wild Oats.
But Balto predicts Lanny Davis’ public relations campaign on behalf of Whole Foods will fail. “I don't think the public relations campaign is going to have an effect,” Balto told Corporate Crime Reporter in an interview last week. “Ultimately, the facts will determine the outcome of this case.”
Balto says it is rare that there is explicit evidence of an intent to merge to prevent potential competition. But it exists in this case.
He quotes Whole Foods CEO John Mackey telling his board of directors:
“By buying them we will ... avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm our gross margins and profitability. OATS may not be able to defeat us but they can still hurt us. Furthermore, we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing national natural/organic food chain to rival us .... [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 that threat forever, or almost forever.”
While at the FTC, Balto worked on the Staples/Office Depot merger case.
He says Staples/Office Depot holds lessons for Whole Foods/Wild Oats.
“It is a nice analogy to Whole Foods/Wild Oats,” Balto said. “The Staples/Office Depot case demonstrated that its not just the products that make a relevant market. It is a method of distribution. People said – how in the world can office supply superstores be a relevant market? After all, only six percent of all office supplies are sold through office supply superstores. The court determined that it isn't just the products that are sold, but the environment in which the products are sold that is central to the definition of the relevant market.”
“What distinguished office supply superstores from any of the other places where office supplies were sold was that it offered the opportunity for one stop shopping where you can get a large variety of office supplies in a single location. That's why they were part of the relevant market but Wal-Mart, Target and mom and pop office supply stores were not.”
“That's a perfect analogy to Whole Foods/Wild Oats. The FTC is saying – it's not just the organic natural foods that are being sold, but it's this environment of selling this wide variety of goods in a single location with standards about how natural and organic the foods are produced, offering an optimal environment to shop and other aspects that confirm the relevant market.”
[For a complete transcript of the Interview with David Balto, see 23 Corporate Crime Reporter 3(13), print edition only.]
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