Thursday, August 23, 2007

WCS Coalition Opposes Sirius' Experimental License

Not surprisely, the WCS Coalition opposes Sirius' experimental license application to test its farm of experimental repeaters in Las Vegas, even though the repeaters are all low powered. Sirius intends to test up to 10 repeaters operating at or under 2,000 Watt EiRP. It seems that the Coalition is back to its old tricks.

The full text of the experimental application is here. It is still pending.


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Sunday, August 19, 2007

FTC Appeals Whole Foods/Wild Oats Merger Decision

Most of you have probably read on Orbitcast or Sirius Buzz where a federal judge has ruled that the merger of Whole Foods and Wild Oats can go forward. Many believe that this decision bodes well for the merger between XM and Sirius.

We have been advised by a prominent DC lawyer to stick to building decks in the backyard rather than trying to interpret the law, so in keeping with that, we submit here what appears to be an appeal by the FTC to over turn the decision made in favor of the merger. The appeal is dated August 17. We will leave it to the lawyers to interpret the actual meaning:

Notice is hereby given that plaintiff the Federal Trade Commission appeals to the United States Court of Appeals for District of Columbia Circuit from an order of the United States District Court for the District of Columbia, entered August 16, 2007, denying plaintiff’s motion for a preliminary injunction in the captioned proceeding.

The original order seems to be no more that a chink in the armor of the FTC. We are unfamiliar with the arguments of the Whole Foods/Wild Oats merger, but it would seem to be quite a bit different from the merger of Sirius and XM. The most notable difference would be the barrier to entry. Although Whole Foods and Wild Oats may be large chains, there are most other choices for organic and specialty grocery products. The local Bi-Lo carries some organic foods. One can also purchase organic salad material from Sam's. Although these might not be direct competition, if the combined entity were to raise prices, places like Sam's and Bi-Lo might expand their selections. Then there is smaller competition like Garner's and the Fresh Market. They could simply expand there operations. Let's face it, all one needs is a good location, a market, and a good stock of the right products to get into the business. We like Whole Foods, despite the organic grocer just up the street that went out of business about the time Whole Foods came in. Whole Foods is a better place with more selection and lower prices. Whole Foods was a good substitute and it is only a minor inconvenience to travel a few extra miles. And Garner's is a reasonable substitute for Whole Foods. As long as we can get our Yerba Mate, we are okay.

Most of what the FTC does seems to be cloaked in secrecy. The process is not nearly as open as with the FCC. Perhaps some day the process will see the light of day. However, there is one exhibit that seems to outline the FTC's case. It is dated August 15, 2007 and is entitled Plaintiff’s Public Proposed Conclusions of Law". It is well worth the read for anyone that wants to understand the merger process. Here is the text of the document such as it is. We apologize in advance for the bad formating and conversion. We just don't have the time to fix it:

Exhibit 1–Plaintiff’s Public Proposed Conclusions of Law

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

Dated: August 15, 2007


JEFFREY SCHMIDT MICHAEL J. BLOOM
Director RICHARD B. DAGEN (D.C. Bar No. 388115)


THOMAS J. LANG (D.C. Bar No. 452398)
KENNETH L. GLAZER
CATHARINE M. MOSCATELLI (D.C. Bar No. 418510)
Deputy Director MICHAEL A. FRANCHAK

Bureau of Competition Federal Trade Commission
Federal Trade Commission 601 New Jersey Ave., N.W.
600 Pennsylvania Ave, N.W. Washington, DC 20001
Washington, DC 20580 (202) 326-2475 (direct dial)

(202) 326-2284 (facsimile)
WILLIAM BLUMENTHAL mjbloom@ftc.gov
General Counsel
Federal Trade Commission
600 Pennsylvania Ave, N.W.
Washington, DC 20580

TABLE OF CONTENTS


CONCLUSIONS OF LAW ............................................ -1


I. NATURE OF THE ACTION, JURISDICTION AND VENUE .................. -1


II. THE STANDARD FOR A PRELIMINARY INJUNCTION – SERIOUS AND
SUBSTANTIAL QUESTIONS GOING TO THE MERITS – IS MET HERE ...... -2


III. IN EVALUATING THE QUALITY OF THE EVIDENCE, THE COURT SHOULD
DISCOUNT DEFENDANTS’ MADE-FOR-LITIGATION EVIDENCE .......... -4


IV. PREMIUM NATURAL AND ORGANIC SUPERMARKETS IS A RELEVANT
PRODUCT MARKET.................................................. -5


V. THE RELEVANT GEOGRAPHIC MARKET IS LOCAL .................... -10


VI. THIS COMBINATION IS PRESUMPTIVELY ILLEGAL .................... -11


A. The Speculative Prospect of Repositioning Is Insufficient to Obviate the
Anticompetitive Effects of the Acquisition ........................... -13


B. Defendants Have Not Demonstrated That the Alleged Cost Savings from the
Transaction Will Counteract its Anticompetitive Effects ................ -14


C. The “Flailing Firm” Defense is Unavailable .......................... -16


VII. THE ACQUISITION WOULD RESULT IN A SIGNIFICANT LESSENING OF
COMPETITION ..................................................... -17


VIII. INJUNCTIVE RELIEF IS NECESSARY HERE ............................ -19


-ii



CONCLUSIONS OF LAW


I. NATURE OF THE ACTION, JURISDICTION AND VENUE
1. This is an action pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), by which
the Federal Trade Commission (“FTC” or “the Commission”) seeks a preliminary
injunction against the acquisition of Wild Oats by Whole Foods.

2. This Court has jurisdiction over the subject matter of this action, seeking preliminary
injunctive relief pending administrative adjudication of the underlying merits of whether
the acquisition violates the Clayton Act § 7, 15 U.S.C. § 18, or Federal Trade
Commission Act (“FTC Act”) § 5, 15 U.S.C. § 45. FTC Act § 13(b), 15 U.S.C. § 53(b).

3. This Court has jurisdiction over the persons of defendants. Wild Oats Answer ¶ ¶ 9, 10;
Whole Foods Answer ¶ 9, 10; see 15 U.S.C § 53(b).

4. The FTC is vested with authority and responsibility for enforcing, inter alia, Section 7 of
the Clayton Act, 15 U.S.C. § 18. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b),
authorizes the FTC to seek a preliminary injunction in order to enforce Section 7 of the
Clayton Act.

5. The proposed acquisition is a transaction subject to Section 7 of the Clayton Act, 15
U.S.C. § 18, and Section 5 of the FTC Act, 15 U.S.C. § 45.

6. At all times relevant herein, defendants Whole Foods Market, Inc. and Wild Oats
Markets, Inc. are each engaged in “commerce,” as defined in Section 4 of the FTC Act,
15 U.S.C. § 44 and Section 1 of the Clayton Act, 15 U.S.C. § 12. Wild Oats Answer ¶ ¶
9; Whole Foods Answer ¶ 9.

7. Venue is proper in this district under Section 13(b) of the FTC Act and 28 U.S.C.
§ 1391(c). See Whole Foods Answer ¶ 9.

8. The FTC has jurisdiction, pursuant to Section 11 of the Clayton Act, 15 U.S.C. § 21, to
bring administrative proceedings against the proposed merger challenged in this action.
The Commission has jurisdiction to issue a cease and desist order, after an administrative
hearing on the merits, against defendants Whole Foods and Wild Oats, if the Commission
determines that consummation of the proposed merger would violate Section 7 of the
Clayton Act. FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 45 (D.D.C. 1998).

9. This Court has jurisdiction, pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53 (b),
to issue a preliminary injunction against Whole Foods and Wild Oats, enjoining their
proposed merger.

II. THE STANDARD FOR A PRELIMINARY INJUNCTION – SERIOUS AND
SUBSTANTIAL QUESTIONS GOING TO THE MERITS – IS MET HERE

10. Section 13(b) of the FTC Act provides that a preliminary injunction may be granted
"upon a proper showing that, weighing the equities and considering the Commission's
likelihood of ultimate success, such action would be in the public interest."

11. Section 13(b) of the FTC Act imposes a two-part "public interest" standard for a court to
use in order to determine whether a preliminary injunction should be granted. FTC v.
H.J. Heinz Co., 246 F.3d 708, 714 (D.C. Cir. 2001); Cardinal Health, 12 F. Supp. 2d at
44.

12. Under this standard, this Court should: (1) determine the likelihood that the Commission
will ultimately succeed on the merits in its case under Section 7 of the Clayton Act, and
(2) balance the equities. Heinz, 246 F.3d at 714; FTC v. University Health, Inc., 938 F 2d
1206, 1217-18 (11th Cir. 1991). This standard differs from the traditional four-part test
for preliminary injunctive relief applicable to suits brought by private parties. 11A
Wright, Miller and Kane, Federal Practice and Procedure § 2948 at 131-33.

13. In this suit for preliminary relief, the Commission is not required to prove that, and the
Court is not required to make a final determination on whether, defendants' proposed
merger would violate Section 7 of the Clayton Act. Heinz Co., 246 F.3d at 714, citing
FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th Cir. 1976); Cardinal Health,
12 F. Supp. 2d at 45 . The determination of whether the acquisition actually violates the
antitrust laws is reserved for the Commission and is not before the Court. FTC v. Staples,
Inc., 970 F. Supp. 1066, 1071 (D.D.C. 1997). Nor is the Court required to resolve all
conflicts in the evidence, or to conduct an extensive analysis of all the antitrust issues.
Those matters are reserved to the Commission (subject to appellate review), upon
completion of administrative proceedings before the Commission, including a full trial on
the merits. In the instant proceeding, the Court's task is to make a preliminary
assessment of the proposed merger's effect on competition. FTC v. Alliant Techsystems,
808 F. Supp. 9, 19 (D.D.C. 1992).

14. The Commission satisfies its burden to show likelihood of success if it "raises 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
Commission in the first instance and ultimately by the Court of Appeals.” University
Health, 938 F.2d at 1218; FTC v. Warner Communications, 742 F.2d 1156, 1162 (9th
Cir. 1984) (quoting FTC v. National Tea Co., 603 F.2d 694, 698 (8th Cir. 1979)); Alliant
Techsystems, 808 F. Supp. at 19.

15. In deciding whether a significant showing has been made, doubts are to be resolved
against the transaction and in favor of a preliminary injunction. FTC v. Elders Grain,
868 F.2d 901, 906 (7th Cir. 1989) (citing Philadelphia Nat’l Bank, 374 U.S. 321, 362-63
(1962)).

16. Section 7 of the Clayton Act prohibits mergers that “may . . . substantially lessen
competition, or tend to create a monopoly.” 15 U.S.C. § 18.

17. Section 7 of the Clayton Act is concerned with preventing the creation or enhancement of
market power. FTC v. Proctor & Gamble Co., 386 U.S. 568, 577 (1967); United States
v. Archer-Daniels-Midlands, Corp., 866 F.2d 242, 246 (8th Cir. 1988), cert. denied, 493
U.S. 809 (1989). The lawfulness of an acquisition turns on the purchaser’s “potential for
creating, enhancing, or facilitating the exercise of market power -- the ability of one or
more firms to raise prices above competitive levels for a significant period of time.” Id.

18. The focus of Section 7 is on arresting anticompetitive mergers “in their incipiency”
(Brown Shoe Co. v. United States, 370 U.S. 294, 317 (1962)) and thus requires a
prediction as to the merger’s impact on future competition. Philadelphia Nat’l Bank, 374
U.S. at 362. Because Section 7 addresses the probable future effects of an acquisition, it
necessarily requires predictions and inherently “deals in probabilities, not certainties.”
Brown Shoe., 370 U.S. at 323. Accordingly, to establish a violation, the government
need show only a reasonable probability, not a certainty, that the proscribed
anticompetitive activity may occur. University Health, 938 F.2d at 1218; see Hospital
Corp. of Am. v. FTC, 807 F.2d 1381, 1389 (7th Cir. 1986), cert. denied, 481 U.S. 1038
(1987).

19. Analysis of the likely competitive effects of a merger requires determinations of (1) the
“line of commerce” or product market in which to assess the transaction; (2) the “section
of the country” or geographic market in which to assess the transaction; and (3) the
transaction's probable effect on competition in the product and geographic markets. See
United States v. Marine Bancorporation, 418 U.S. 602, 618-23 (1974); FTC v. Harbour
Group Investments, L.P., 1990-2 Trade Cas. (CCH) ¶ 69,247 at 64,914 n.3 (D.D.C.
1990).

20. Evidence establishing undue concentration in the relevant market makes out the
government’s prima facie case and gives rise to a presumption of unlawfulness.
Philadelphia Nat’l Bank, 374 U.S. at 363; Cardinal Health, 12 F. Supp. 2d at 52; see
also United States v. General Dynamics Corp., 415 U.S. 486, 497 (1974), quoting
Aluminum Co. of Am., 377 U.S. 271, 279 (1964) (“if concentration is already great, the
importance of preventing even slight increases in concentration is correspondingly
great.”).


III. IN EVALUATING THE QUALITY OF THE EVIDENCE, THE COURT SHOULD
DISCOUNT DEFENDANTS’ MADE-FOR-LITIGATION EVIDENCE

21. In defining markets, courts and the antitrust agencies normally look at all available
evidence, including in particular the ordinary course of business documents of the
merging parties, e.g., Warner Communications, 742 F.2d at 1163 (“record company
documents”); Cardinal Health, 12 F. Supp. 2d at 49; Staples, 970 F. Supp. at 1076; Olin
Corp., 113 F.T.C. 400, 597 (1990), aff’d sub nom. Olin Corp. v. FTC, 986 F.2d 1295 (9th
Cir. 1993), cert. denied, 510 U.S. 1110, 114 S. Ct. 1051 (1994); and on the testimony of
competitors and customers (including intermediate purchasers such as retailers). E.g.,
FTC v. PPG Indus., 798 F.2d 1500, 1504 (D.C. Cir. 1986) (“buyers’ and sellers’
perceptions”); Reynolds Metal Co. v. FTC, 309 F.2d 223, 228-29 (D.C. Cir. 1962);
Warner Communications, 742 F.2d at 1163; Borden v. FTC, 674 F.2d 498, 507-08 (6th
Cir. 1982) (“buyers for large supermarket chains and representatives of processed lemon
juice companies”).

22. Documents created by the merging parties prior to litigation are most probative as to the
likely competitive impact of a transaction. In Heinz, the DC Circuit noted that
“Heinz's own documents recognize the wholesale competition and
anticipate that the merger will end it. Indeed, those documents disclose
that Heinz considered three options to end the vigorous wholesale
competition with Beech-Nut: two involved innovative measures while the
third entailed the acquisition of Beech-Nut. Heinz chose the third, and
least pro-competitive, of the options.” 246 F.3d at 717 (citations to record
omitted).

23. Documents from the defendants’ own files -- exposing the “business reality” of “how the
market is perceived by those who strive to profit in it” -- support finding a PNOS product
market. PFF 33-40, 49-61, 333-336. Cf. FTC v. PPG Indus., 628 F. Supp. 881, 884 n.5
(D.D.C.), aff’d, 798 F.2d 1500 (D.C. Cir. 1986); Reynolds Metal, 309 F.2d at 228-29
(finding florist foil to be a product market separate from other types of aluminum foil
based on, inter alia, evidence in company documents); Community Publrs. v. Donrey
Corp., 892 F. Supp. 1146, 1153-54 (W. D. Ark. 1995) (when firms routinely concentrate
on some presumptively competitive products and ignore others, they may be providing a
practical assessment of the products that are inside or outside the relevant product
market); California v. American Stores, 697 F. Supp. 1125, 1129 (C.D. Cal. 1988)
(supermarkets), aff’d in part and rev'd on other grounds, 872 F.2d 837 (9th Cir. 1989),
rev'd on other grounds, 495 U.S. 271 (1990) (“[T]he State has presented evidence that
defendants’ own marketing documents focus on supermarket shoppers and competition
from other supermarkets and do not evaluate convenience stores, gasoline service
stations, etc. as competitors.”).

24. Defendants’ presentation of evidence that other retailers sell some organic or natural
products and believe they “compete” with premium natural and organic supermarkets
does not establish a broader market. The mere fact that two different classes of retail
vendors both sell a particular type of merchandise does not mean that they are in the
same product market. American Stores, 697 F. Supp at 1129 (“[e]ven if convenience
stores competitively price a few food items, such as bread and milk, in direct competition
with supermarkets, such is not sufficient to justify inclusion of all retail grocery sales
from whatever outlet in the relevant product market”).

25. Defendants’ business records and testimony reflect defendants’ intense efforts to
maintain a premium distinction that distinguishes their stores from conventional
supermarkets and other food retailers. PFF 44-142. Defendants’ numerous internal
documents show the interaction of their unique price and nonprice competition within the
market with disregard to participants in the larger market. PFF 337-366. Those
documents are far more probative of the “business reality” of the market than the
defendants’ self-serving, post-Complaint employee declarations.

26. Defendants’ made-for-litigation declarations are entitled to little weight to the extent they
are “in conflict with contemporaneous documents.” United States v. Gypsum Co., 333
U.S. 364, 396 (1948).
IV. PREMIUM NATURAL AND ORGANIC SUPERMARKETS IS A RELEVANT
PRODUCT MARKET

27. A relevant product market defines the product boundaries within which competition
meaningfully exists. United States v. Continental Can Co., 378 U.S. 441, 449 (1964).
“The outer boundaries of a product market are determined by the reasonable
interchangeability of use [by consumers] or the cross-elasticity of demand between the
product itself and substitutes for it.” Brown Shoe, 370 U.S. at 325; see also United States
v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395 (1956).

28.Although the Horizontal Merger Guidelines issued by the Federal Trade Commission and
the U.S. Department of Justice (“Merger Guidelines”) (PX01310) are not binding on the
courts, courts have considered them in determining the impact on competition of a
proposed acquisition. See PPG, 798 F.2d at 1503; University Health, 938 F.2d at 1211
n.12; Olin, 986 F.2d at 1299; FTC v. Swedish Match N. Am., Inc., 131 F. Supp. 2d. 151,
160, 168, n.11, n.12 (D.D.C. 2000); Cardinal Health, 12 F. Supp. 2d at 53 (measuring
market shares), 55-58 (analyzing entry), 61-62 (analyzing efficiencies).
29. The analytical framework set forth in the Merger Guidelines simulates the inquiry
regarding the reasonable interchangeability of use or cross-elasticity of demand by asking
whether a “hypothetical monopolist . . . would profitably impose at least a ‘small but
significant and nontransitory’ increase in price” (“SSNIP”). Merger Guidelines § 1.11
(PX01310). The Merger Guidelines approach is routinely applied by courts in their
market definition exercises. E.g., Cardinal Health, 12 F. Supp. 2d at 46 (“[T]he Court
must determine whether . . . there is reason to find that if the [d]efendants were to raise
prices after the proposed merger[], their customers would switch to alternative sources of
supply to defeat the price increase.”). Accord, Archer-Daniels-Midland Co., 866 F.2d at
246 (“[T]hese concepts help evaluate the extent competition constrains market power and
are, therefore, indirect measurements of a firm’s market power.”).

30. A one (1) percent SSNIP in certain product markets, such as here, is appropriate to use
for market definition purposes. The Merger Guidelines speak of a five (5) percent SSNIP
test but recognize that in some cases depending on the industry it is appropriate to use a
smaller percentage. Merger Guidelines § 1.11 (PX01310). Defendants’ own expert
economist acknowledges that for retail markets characterized by high volume of sales but
low profit margin per dollar of sales, a hypothetical price increase as low as 1% may be
appropriate. See Expert Report of David T. Scheffman, Ph.D.,¶ 114 (PX02066) (“Given
the relatively low net profit margins (e.g., income to sales) associated with supermarket
retailing, it is common to use a small hypothetical price increase, because a larger
increase in price would lead to implausibly large margins given what we know about
supermarket margins.”); David Scheffman, Comments at “Grocery Store Antitrust:
Historical Retrospective and Current Developments,” May 24, 2007, (PX00322); see also
Harris & Jorde, Market Definition in the Merger Guidelines: Implications for Antitrust
Enforcement, 71 Cal. L. Rev. 464, 482 (1983) (“In the high-volume grocery business . . .
net income typically represents 0.5% of sales, so a 5% increase in price would represent a
1000% increase in profit . . . . the managers of any recently merged grocery firm would
know better than to try to raise prices by 5% across the board.”); FTC Bureau of
Economics, “The Petroleum Industry, Mergers, Structural Change and Antitrust
Enforcement (August 2004),” (PX00330 at 22 & n.13) (“The FTC staff frequently has
used a one-cent-per gallon price increase in defining relevant markets for petroleum
mergers”).

31. Market definition is designed to distinguish close competitive constraints from those
more distant to assess whether the acquisition significantly reduces competition between
or among close constraints. See, e.g., 4 P. Areeda, H. Hovenkamp & J. Solow, Antitrust
Law ¶ 929c (rev. ed. 1998) (hereinafter “Areeda”)

32. The fact that a product has some constraining effect on another product or similar
functionality does not necessarily mean that they are in the same relevant market. In
markets where the products are differentiated (i.e., the products are not perfect substitutes
for one another), competition may be localized, meaning individual sellers compete more
directly with those competitors selling close substitutes. Staples, 970 F. Supp. at 1075
(“[T]he mere fact that a firm may be termed a competitor in the overall marketplace does
not necessarily require that it be included in the relevant product market for antitrust
purposes.”).

33. This Court in Staples observed: “[a]s other courts have noted, use of the term
“submarket” may be confusing. Whatever term is used – market, submarket, relevant
product market – the analysis is the same.” Staples, 970 F. Supp. at 1080 n.11 (citations
omitted).

34. Within the broad range of “reasonably interchangeable” products, “well-defined
submarkets may exist which, in themselves, constitute product markets for antitrust
purposes.” Brown Shoe, 370 U.S. at 325, citing E.I. du Pont de Nemours, 353 U.S. at
593-95; see Staples, 970 F. Supp. at 1075-81 (finding submarket of office supply
superstores within broader market of sale of office supplies). See also Merger Guidelines
§ 2.21 (PX01310); Murphy Report (PX02878 at 004).

35. Even firms enjoying monopoly power may be constrained in their pricing by other
products -- but that constraint does not mean that the firm lacks monopoly power. See
2A Areeda, Antitrust Law, ¶ 506a (2d Ed. 2002) (“As Judge Learned Hand put it,
“substitutes are available for almost all commodities, and to raise the price enough is to
evoke them.” [footnote omitted] But, as he further noted, the existence of substitutes
does not necessarily preclude “monopoly” power. It depends on how close the
substitutes are in the minds of buyers, on how many buyers consider them to be close,
and upon the price-output decisions of those producing the substitutes.”) paraphrasing
Aluminum Co. of Am., 148 F.2d 416, 426 (2d Cir. 1945). See Jonathan Baker, Unilateral
Competitive Effects Theories in Merger Analysis, 11 Antitrust L.J. 21, 24-25 (1997)
(imperfect substitutes in pharmacy networks and cable television insufficient to constrain
post-merger market power).

36. “[I]t is ordinarily quite difficult to measure cross-elasticities of supply and demand
accurately. Therefore, it is usually necessary to consider other factors that can serve as
useful surrogates for cross-elasticity data.” U.S. Anchor Mfg., Inc. v. Rule Indus., Inc.,
7 F.3d 986, 995 (11th Cir. 1993), quoting In re Int’l Tel. & Tel. Corp., 104 F.T.C. 280,
286 (FTC 1984). Since it can be quite difficult to measure cross-elasticity directly,
evidence of cross-elasticity may not be available and other evidence may be used as
surrogate. Swedish Match, 131 F. Supp. 2d at 160-61.

37. Because it is usually difficult to measure cross-elasticities of demand, courts also have
identified “practical indicia” of product market boundaries, such as
industry or public recognition of the submarket [or market] as a
separate economic entity, the product’s particular characteristics
and uses, unique production facilities, distinct customers,
sensitivity to price changes, and specialized vendors.

Brown Shoe, 370 U.S. at 325; see also Cardinal Health, 12 F. Supp. 2d at 46; Staples,
970 F. Supp. at 1075. These “practical indicia” are “evidentiary proxies for direct proof
of substitutability” among products. Rothery Storage & Van Co. v. Atlas Van Lines, 792
F.2d 210, 218 (D.C. Cir. 1986).

38. One of the Brown Shoe indicia, public recognition of the market, includes within it the
basic notion that consumer preferences, i.e., demand for a product or service, no matter
how subjective or fickle, define a relevant market. Indeed, this goes to the heart of the
mechanics used by the Merger Guidelines to define markets. Merger Guidelines § 1.0
(PX01310) (“Market definition focuses solely on demand substitution factors – i.e.,
possible consumer responses.”).

39. Another one of the Brown Shoe indicia, distinct prices, recognizes that higher priced or
premium products or services may belong in separate relevant markets. See Rebel Oil
Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1436 (9th Cir. 1995) (“A price differential
between two products may reflect a low cross-elasticity of demand, if the higher priced
product offers additional service for which consumers are willing to pay a premium.”)

40. Relevant product markets often are defined with reference to the type of store at issue.
See Staples, 970 F. Supp. at 1074-77 (office superstores constitute a relevant product
market despite sale of many of the same products through other retail channels);
Photovest v. Fotomart, 606 F.2d 704 (7th Cir. 1979) (relevant market of “drive-thru retail
photo processing” based on consumer perception that drive-thru offered greater
convenience and service); American Stores, 872 F.2d at 840 (supermarkets comprised a
relevant submarket–exclusive of convenience stores, smaller independent grocery stores
and other food retailers–because supermarkets are the only retailers that meet consumers'
needs for variety); see also Columbia Broad. Sys., Inc. v. FTC, 414 F.2d 974 (7th Cir.
1969) (relevant market for records sold through mail-order subscription services).

41. Relevant product markets are often defined as a service or group of services. Merger
Guidelines § 1.0 (PX01310).

42. Numerous courts have held that a “cluster” of products and services may be a relevant
product market, based on the benefit to consumers accruing from the convenience of
purchasing complementary products from a single supplier. Supermarkets, department
stores, office superstores, commercial banks, and hospitals are a few examples. Staples,
970 F. Supp. at 1066 (office superstores); Philadelphia Nat'l Bank 374 U.S. at 356
(banking services); American Stores, 697 F. Supp. at 1129 (supermarkets); Hospital
Corp., 807 F.2d at 1389. See also United States v. Grinnell Corp., 384 U.S. 563, 572-73
(1966) (central station protective services for burglary protection, fire protection and
other services); General Indus. Corp. v. Hartz Mountain Corp., 810 F.2d 795, 805 (8th
Cir. 1987) (pet supplies); Alliant Techsystems, 808 F. Supp. at 20 (munitions systems); In
re Hospital Corp. of Am., 106 F.T.C. 361, 434-37, 465-66 (1985) (acute inpatient
hospital services), aff’d, 807 F.2d 1381 (7th Cir. 1986), cert. denied, 481 U.S. 1038

(1987).

43. Market definition is a fact-intensive exercise that turns on the marketplace realities in
each case. Precedent regarding methodology and economics is relevant, but market
definition remains a factual finding. See Weiss v. York Hosp., 745 F.2d 786, 825 (3d Cir.
1984) (“Market definition is question of fact . . . .”); General Indus., 810 F.2d at 805 (8th
Cir. 1987) (in defining a market, “the reality of the marketplace must serve as the
lodestar”).

44. The decisions in United States v. Oracle, 331 F. Supp. 2d 1098 (N.D. Cal. 2004), and
Staples, 970 F. Supp. at 1072–77, illustrate the fact-intensive inquiry required to define
an antitrust market. In Oracle, the court discussed several relevant factors: (1) the
merging firms’ products are differentiated from one another; (2) the merging firms’
products are close substitutes for each other; (3) other products are sufficiently different
from the merging firms’ products that a merger would make a small but significant and
non-transitory price increase profitable for the merging firms; and (4) repositioning by
the non-merging firms is unlikely. Id.; cf. Merger Guidelines, § 2.21 (PX01310);
Hovenkamp, Federal Antitrust Policy § 12.7a2 (1994). The Oracle legal analysis is
fundamentally the same as in Staples. While defendants in Staples, like the defendant in
Oracle, maintained that the market definition was “contrived” with no basis in law or
fact, Staples, 970 F. Supp. at 1073, this Court in Staples properly focused on the parties’
recognition of competition among superstores. The Oracle decision also emphasized the
difficulty of drawing lines between competitors in the software industry. Here, as in
Staples, the lines are much easier to discern. See, e.g., Staples, 970 F. Supp. at 1079
(“the unique combination of size, selection, depth and breadth of inventory offered by the
superstores distinguishes them from other retailers”).

45. The fact that conventional supermarkets carry some natural and organic products does
not by itself establish that conventional supermarkets and premium natural and organic
supermarkets belong in the same relevant product market. American Stores, 697 F. Supp
at 1129 (“[e]ven if convenience stores competitively price a few food items, such as
bread and milk, in direct competition with supermarkets, such is not sufficient to justify
inclusion of all retail grocery sales from whatever outlet in the relevant product market”).

46. Markets need not be defined with scientific precision. In Judge Posner's words,
defendants seek to engage the Court in “a hunt for the snark of delusive exactness.” Blue
Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1411 (7th Cir. 1995),
cert. denied, 516 U.S. 1184 (1996). Indeed, “[t]he tendency to see relevant market
definition as an all-or nothing proposition rather than as an array of estimates with no
market description being exactly right has led to the most serious errors in antitrust
enforcement.” Robert Pitofsky, New Definitions of Relevant Market and the Assault on
Antitrust, 90 Colum. L. Rev. 1805, 1812-13 (1990).


47. The proper focus in product market definition is not on whether other retailers sell some
of the same products or believe that they “compete” in a very broad sense, but whether a
sufficient number of consumers would defect to these alternatives to make a small but
significant price increase by the PNOS stores unprofitable. U.S. Anchor Mfg., 7 F.3d at
995.

48. Evidence shows premium natural and organic supermarkets are constrained by each other
in ways in which they are not constrained by any other retailers. Conventional
supermarkets and mass merchants cannot effectively constrain premium natural and
organic supermarkets because they cannot replicate the blend of characteristics of the
premium natural and organic supermarkets. PFF 154-246, 323-336. The econometric
work preformed by Professor Murphy corroborates this conclusion. PFF 251, 254, 262,
293, 297.

49. The lynchpin for defendants' defense is that the product market includes conventional
supermarkets, and for this they highlight the one-day, non-statistical study from their
expert economist. PFF 420-421. However, this study has no more validity than a study
rejected by the D.C. Circuit in Heinz:
Moreover, the number of data points on the chart were few; they were limited to
launches in a single year. . . . Assessing such data's statistical significance in
establishing the proposition at issue. . . is thus highly speculative. The district
court did not even address the question of the data's statistical significance and the
appellees' counsel could offer no help at oral argument.

Heinz, 246 F.3d at 723. In contrast, the Commission’s case relies on contemporary
business documents and statistically sound economic analysis. PFF 33-40, 49-61, 247


332.

50. The operation of premium natural and organic supermarkets constitutes a relevant
product market under the antitrust laws and a “line of commerce” within the meaning of
Clayton Act § 7, 15 U.S.C. § 18.

V. THE RELEVANT GEOGRAPHIC MARKET IS LOCAL

51. Section 7 of the Clayton Act prohibits acquisitions that are likely to lessen competition in
“any section of the country,” otherwise known as a geographic market. Philadelphia
Nat'l Bank, 374 U.S. at 357.

52. The relevant geographic market is that geographic area "to which consumers can
practically turn for alternative sources of the product and in which the antitrust
defendant[s] face[] competition.” Staples, 970 F. Supp. at 1073 (quoting Morgenstern v.
Wilson, 29 F.3d 1291, 1296 (8th Cir. 1994), cert denied, 523 U.S. 1150 (1995)).

53. The relevant geographic market is the area that would be adversely affected by the
proposed acquisition. Philadelphia Nat’l Bank, 374 U.S. at 357.

54. The relevant geographic market must “correspond with the commercial realities of the
industry. . . .” Brown Shoe, 370 U.S. at 336.

55. As with product market, the geographic boundaries of a relevant market do not need to be
defined with precision. Cardinal Health, 12 F. Supp at 49, citing United States v.
Connecticut National Bank, 418 U.S. 656, 669 (1966); United States v. Pabst Brewing
Co., 384 U.S. 546, 549 (1966) (“[t]he geographic market need not be identified with
‘scientific precision’” or “by metes and bounds as a surveyor would lay off a plot of
ground.”). See also United States. v. General Dynamics Corp., 415 U.S. 486, 521 (1974)
(“the Government is not required to delineate § 7 markets by ‘metes and bounds.’”).

56. The FTC is likely to establish, after an administrative trial on the merits, that the relevant
geographic markets are 25 local areas: Albuquerque, NM; Boston, MA; Boulder, CO;
Hinsdale, IL (suburban Chicago); Evanston, IL (suburban Chicago); Cleveland, OH;
Denver, CO; Fairfield County, CT; West Hartford, CT; Henderson, NV; Kansas City-
Overland Park, KS; Las Vegas, NV; Los Angeles, CA; Louisville, KY; Naples, FL;
Nashville, TN; Omaha, NE; Miami Beach, FL; Palo Alto, CA; Pasadena, CA; Portland,
ME; Portland, OR; Reno, NV; Salt Lake City, UT; and St. Louis, MO. PFF 457-511.
VI.
THIS COMBINATION IS PRESUMPTIVELY ILLEGAL

57. Mergers that significantly increase market concentration are presumptively unlawful
because the fewer the competitors and the larger the respective market shares, the greater
the likelihood that a single firm or a group of firms could raise prices above competitive
levels. Philadelphia Nat’l Bank, 374 U.S. at 363; PPG, 798 F.2d at 1502-03; Cardinal
Health, 12 F. Supp. 2d at 52 (“under Section 7 of the Clayton Act, a prima facie case can
be made if the government establishes that the merged entities will have a significant
percentage of the relevant market–enabling them to raise prices above competitive
levels”); Hospital Corp., 807 F.2d at 1389; Merger Guidelines § 2.0 (PX01310).

58. The Supreme Court explained the rationale for this principle in U.S. v. General Dynamics
Corp., 415 U.S. 486, 497 (1974):
The effect of adopting this approach to a determination of a
“substantial” lessening of competition is to allow the Government
to rest its case on a showing of even small increases of market
share or market concentration in those industries or markets where
concentration is already great or has been recently increasing,
since “if concentration is already great, the importance of
preventing even slight increases in concentration is
correspondingly great.” Alcoa, 377 U.S. at 279, 84 S. Ct. 1283,

1289, citing Philadelphia Nat’l Bank, 374 U.S. at 365, n.42, 835 S.
Ct. 1715, 1743 n.42.

59. Concentration typically is measured using the Herfindahl-Hirschman Index (“HHI”).
The HHI is calculated by summing the squares of the market shares of each participant,
so as to give greater weight to the market shares of larger firms in accord with their
relative importance in competitive interactions. Merger Guidelines § 1.5 (PX01310).
Courts have adopted and relied on the HHI as a measure of market concentration. E.g.,
Cardinal Health, 12 F. Supp. 2d at 53-54; Staples, 970 F. Supp. at 1081-82; PPG, 798
F.2d at 1503; University Health, 938 F.2d at 1211 n.12 (HHI is “most prominent method”
of measuring market concentration); U.S. v. Ivaco, 704 F. Supp. 1409, 1419 (W.D. Mich.
1989).

60. Where the post-acquisition HHI exceeds 1800 points, it is “presumed that mergers
producing an increase in the HHI of more than 100 points are likely to create or enhance
market power or facilitate its exercise.” Merger Guidelines § 1.51 (PX01310). Courts
have adopted similar thresholds. See Cardinal Health, 12 F. Supp. 2d at 53.

61. Where a merger may result in a monopoly, the presumption of anticompetitive effects is
greatest. 3A Areeda, Antitrust Law ¶ 701c (rev. ed. 1998).

62. The FTC has established that the proposed merger will increase concentration in the
relevant markets significantly. The proposed merger will result in a premium natural and
organic supermarket monopoly in 17 local areas. PFF 463-511. In Portland, Oregon, the
number of premium natural and organic supermarket competitors will be reduced from
three to two, which is still an extraordinarily high concentration. PFF 498-499. Post-
merger, the concentration levels in these very highly concentrated markets jump to the
theoretical limit, an HHI of 10,000.

63. The FTC need only demonstrate an anticompetitive effect in one relevant geographic
market in which Defendants compete to prove a violation of Section 7. Pabst Brewing,
384 U.S. at 549 (“[t]he Government may introduce evidence which shows that as a result
of a merger competition may be substantially lessened throughout the country, or on the
other hand it may prove that competition may be substantially lessened only in one or
more sections or the country. In any event a violation of § 7 would be proved.”)
(emphasis added).

VI. EVIDENCE PRESENTED BY DEFENDANTS DOES NOT REBUT THE
PRESUMPTION OF LIKELY ANTICOMPETITIVE EFFECTS OF THE
MERGER

64. Once a prima facie violation is established, “the defendants must produce evidence that
‘shows that the market-share statistics [give] an inaccurate account of the [merger's]
probable effects on competition" in the relevant market.” Heinz, 246 F.3d at 715

(quoting United States v. Citizens & S. Nat'l Bank, 422 U.S. 86, 120 (1975)); Cardinal
Health, 12 F. Supp. 2d at 54. If defendants offer evidence to rebut the presumption from
concentration and market share, the burden returns to the Commission to prove that the
merger is likely to reduce competition. Heinz, 246 F.3d at 715. By proving that the
acquisition will increase concentration significantly in premium natural and organic
supermarkets, the burden of production shifts to the defendants to rebut this presumption
of anticompetitive harm. Marine Bancorporation, 418 U.S. at 631; Heinz, 246 F.3d
at 715.

65. In order “to meet this burden, the defendants must show that the market share statistics
“give an inaccurate prediction of the proposed acquisition’s probable effect on
competition.” Swedish Match, 131 F. Supp. 2d at 167, quoting Staples, 970 F. Supp.
at 1083.

66. Courts have examined evidence of ease of entry, Cardinal Health, 12 F. Supp. 2d at 5458;
United States v. United Tote, Inc., 768 F. Supp. 1064, 1071-82 (D. Del. 1991); see
Heinz, 246 F.3d at 715 n.7; and efficiencies, Heinz, id. at 720-22; Staples, 970 F. Supp.
at 1086-88; among other issues, in considering whether the market share statistics “give
an inaccurate prediction of the proposed acquisition’s probable effect on competition.”
Cardinal Health, 12 F. Supp. 2d at 54, quoting Staples, 970 F. Supp. at 1083.

67. High levels of concentration establish a strong prima facie case. “[T] he more compelling
the prima facie case, the more evidence the defendant must present to rebut it
successfully.” Heinz, 246 F.3d at 725, quoting Baker Hughes, 908 F.2d at 991. The
mergers to monopoly in most local markets create the strongest prima facie case.
68. Defendants have not produced significant evidence rebutting the presumption of
violation. Cardinal Health, 12 F. Supp. 2d at 54; Staples, 970 F. Supp. at 1083.

A. The Speculative Prospect of Repositioning Is Insufficient to Obviate the
Anticompetitive Effects of the Acquisition

69. The burden of production is on Defendants to demonstrate that entry would resolve the
competitive concerns raised by the government. In Cardinal Health, the court found that
defendants had failed to come forward with enough evidence of sufficiency of entry (and
of likelihood of entry) to rebut the presumption created by the high concentration levels.
Cardinal Health, 12 F. Supp. 2d at 58.

70. To rebut the presumption of anticompetitive effects, defendants’ evidence must show that
a firm would enter, and that “entry into the market would likely avert the anticompetitive
effects from the acquisition.” Staples, 970 F. Supp. at 1086 (quoting Baker Hughes, 908
F.2d at 989); see Swedish Match, 131 F. Supp. 2d at 170; Cardinal Health, 12 F. Supp.
2d at 55.

71. Entry must be “timely, likely and sufficient in its magnitude, character and scope to deter
or counteract the competitive effects” of a proposed transaction. Merger Guidelines
§ 3.0 (PX01310); see Cardinal Health, 12 F. Supp. 2d at 55-58. (adopting “timely, likely,
and sufficient” test). See also United Tote, 768 F. Supp. at 1082 (finding entry
insufficient to constrain anticompetitive price increase).

72. Entry is timely only if a new entrant would have a significant market impact within two
years. Merger Guidelines § 3.2 (PX01310).

73. Entry is likely only if it would be profitable at premerger prices. Id. at § 3.3 (PX01310).

74. Entry is sufficient only if it would be on a large enough scale to replace the competition
that existed prior to the acquisition. Cardinal Health, 12 F. Supp. 2d at 58.

75. For entry to obviate concern about a merged entity’s market power, it must be so easy
that it “would likely avert anticompetitive effects from [the] acquisition.” Baker Hughes,
908 F.2d at 989; University Health, 938 F.2d at 1219-1220; Merger Guidelines § 3.0,
quoted with approval, Rebel Oil Co., 51 F.3d at 1440. Where entry is “difficult and
improbable,” that fact “largely eliminates the possibility that the reduced competition
caused by the merger will be ameliorated by new competition from outsiders and further
strengthens the FTC’s case.” Heinz, 246 F.3d at 717.

76. Conventional supermarkets, mass merchandisers, and other food retailers like Trader
Joe’s are unlikely to reposition to compete effectively with premium natural and organic
supermarkets. Repositioning would require them to dramatically change their operations:
1) by establishing a large, expensive distribution system to supply natural and organic
products; 2) by allocating substantially more selling space for perishables; and 3) by
focusing less on their customer base of price conscious shoppers in favor of customers
who can afford more value-priced natural and organic products. PFF 623-642.

77. The costs of entry into the market for premium natural and organic retailers are a
substantial deterrent. In order to compete effectively against a premium natural and
organic supermarket, a new entrant must locate and develop or buy a suitable site to open
a supermarket, establish a distribution system, and build its reputation and customer
loyalty. PFF 624, 625, 701. This endeavor would take more than two years.

78. It is defendants’ burden to rebut the presumption of illegality. University Health, 938
F.2d at 1213, 1218. The defendants have not satisfied this burden with respect to entry.
B. Defendants Have Not Demonstrated That the Alleged Cost Savings from the
Transaction Will Counteract its Anticompetitive Effects
79. To establish a valid efficiencies defense, Defendants’ claimed efficiencies must, as a
threshold matter, be “merger-specific” and “verifiable.” Merger Guidelines § 4

(PX01310).

80. Merger-specific means that the efficiencies must be “likely to be accomplished with the
proposed merger and unlikely to be accomplished in absence of either the proposed
merger or another means having comparable anticompetitive effects.” Merger
Guidelines § 4 (PX01310). The claimed efficiencies cannot be efficiencies that could “be
achieved by either company alone.” Heinz, 246 F.3d at 722.

81. The claimed efficiencies must also be verifiable. Merger Guidelines § 4 (PX01310).
Efficiencies must be subjected to “rigorous analysis” by the Court. Heinz, 246 F.3d at
720. This is because even “efficiencies projected reasonably and in good faith by the
merging firms may not be realized.” Merger Guidelines § 4 (PX01310). Moreover,
because “information relating to the efficiencies is uniquely in the possession of the
merging firms,” the merging firms carry the burden of proof on efficiencies and must
substantiate efficiency claims so that the Agency can verify by reasonable means the
likelihood and magnitude of each asserted efficiency, how and when each would be
achieved. . . how each would enhance the merging firm’s ability and incentive to
compete, and why each would be merger specific. Merger Guidelines § 4 (PX01310).

82. Even assuming the purported efficiencies from the acquisition were verifiable and merger
specific, the proffered efficiencies must “create a net economic benefit for the . . .
consumer” when balanced against the potential anticompetitive harm. United States v.
Rockford Memorial Corp., 717 F. Supp. 1251, 1291 (D. Ill. 1989); see Merger Guidelines
§ 4 (PX01310).

83. Efficiencies rarely, if ever, can justify a merger to monopoly. Cardinal Health, 12 F.
Supp. 2d at 63. As a general rule, “extraordinary efficiencies” will be required “where
the HHI is well above 1800 and the HHI increase is well above 100.” Heinz, 246 F.3d at
720 quoting 4A Areeda, Antitrust Law ¶ 971f, at 44.

84. Even if an efficiencies defense can be entertained, Defendants must show that the
“proven” efficiencies will be passed on and that they overwhelm any possible
anticompetitive effects of the merger. Cardinal Health, 12 F. Supp. 2d at 63; Staples,
970 F. Supp. at 1090-91.

85. Defendants failed to provide a rigorous analysis of the transaction’s efficiencies as
required by the Merger Guidelines. Instead of relying on verifiable estimations,
Defendants reached their purported benefits based on unverified assumptions and
PFF 771, 781.

86. Defendants’ estimated cost savings are unreliable. Although some cost savings are
likely, Defendants have failed to demonstrate that the merger will lead to any substantial
cost savings. Defendants’ projected general and administrative cost savings of
are not unverified but based on specified assumptions gleaned from
prior experience with acquisitions, therefore not calculated specifically for the current
transaction. PFF 787, 788.

87.The product cost savings that the defendants claim are largely speculative. Defendants
lack sufficient information to estimate any projected cost savings from renegotiating a
supplier contract, including if the contract can be negotiated. PFF 783, 782, 787.
88. Consequently, defendants’ showing here is the essence of the speculative and unverified
claims that courts have rejected out of hand in past cases. University Health, 938 F.2d at
1223.

89. Finally, defendants have failed to show that cost savings will be passed on, and produce a
significant economic benefit to consumers. United Tote, 768 F. Supp. at 1084-85
(efficiencies rejected because "there are no guarantees that these savings will be passed
on to the consuming public"); American Stores, 697 F. Supp. at 1132 (rejecting claim of
over $50 million in efficiencies since savings will not "invariably" be passed on to
consumers).

90. Thus, the merger-related efficiencies will not outweigh the substantial anticompetitive
effects of the merger and result in a more competitive market. University Health, 938
F.2d at 1222-23 (“significant economies and that these economies ultimately would
benefit competition, and hence, consumers.”); Ivaco, supra; United Tote, supra.

C. The “Flailing Firm” Defense is Unavailable

91. Courts recognize that the “flailing firm” doctrine is “probably the weakest ground of all
for justifying a merger.” University Health, 938 F.2d at 1221(citing Kaiser Aluminum &
Chem. Corp. v. FTC, 652 F.2d 1324, 1339 (7th Cir. 1981)).

92. A court should credit such a defense only in rare cases, when the defendant makes a
substantial showing that the acquired firm’s weakness, which cannot be resolved by any
competitive means, would cause that firm’s market share to fall to a level that would
undermine the government’s prima facie case. University Health, 938 F.2d at 1221.

93. In General Dynamics, the Supreme Court held that the reserves of one of the coal mining
parties to the merger “were either depleted or already committed by long-term contracts
with large customers, and that United Electric's power to affect the price of coal was thus
severely limited and steadily diminishing.” United States v. General Dynamics Corp.,
415 U.S. 486, 504-505 (1974). Similarly, in FTC v. Arch Coal, this Court held that
Triton, the mining company being acquired, was becoming “less and less of an active
competitor” because its coal reserves were becoming harder to mine and Triton’s North
Rochelle mine was due to exhaust its reserves in just seven and one half years. FTC v.
Arch Coal, Inc., 329 F. Supp. 2d 109, 156 (D.D.C. 2004). In contrast, Wild Oats faces no
such limitations of finite resources. PFF 720, 721, 725-740.

94. Moreover, in many other competitive dimensions, Triton – unlike Wild Oats – was
severely damaged or incapacitated as a competitor. First, Triton lost money in all but one
year of existence since its inception. Arch Coal, 329 F. Supp. 2d at 155. In contrast,
Wild Oats has usually delivered a net profit to its investors, and to the extent it has not,
its losses were largely due to non-cash accounting charges and not losses on operations.
PFF 728. Both Wild Oats’ recent performance and projected future performance
demonstrate a trend of continuous improvement. PFF 728, 729, 739, 740. Wild Oats has
consistently delivered a gross profit (i.e., its sales exceeded its cost of goods sold).

95. Second, Triton’s mining costs at its North Rochelle mine (one of only two) exceeded the
coal’s market value. Arch Coal, 329 F. Supp. 2d at 155. Because of Triton’s mining
costs, it was “wholly indifferent to competitors’ production levels or their likely
uncommitted tonnage in pricing its North Rochelle coal.” Arch Coal, 329 F. Supp. 2d at
147. In contrast, Wild Oats matches Whole Foods prices both historically and
prospectively. Wild Oats is not indifferent to its competitors’ activities, nor is it a high-
price competitor. PFF 527, 528, 532, 545-548, 523, 519, 522, 517.

96. Third, Triton could not obtain bank financing and did not have an adequate credit rating
to obtain even junk bond financing, a prerequisite for expansion. Arch Coal, 329 F.
Supp. 2d at 156. Here, Wild Oats has opportunities for further financing, including
in an unused credit facility that it believes it can expand to . PFF
730, 731, 738, 768. Wild Oats’ current plans are to continue to expand. PFF 731, 741


745.

97. Fourth, Triton made unsuccessful good faith efforts to elicit reasonable alternative offers
from “every potential purchaser worldwide” in addition to its acquirer, Arch, and the
Court found that it had “no realistic prospects for other buyers.” Arch Coal, 329 F. Supp.
2d at 157. See Merger Guidelines ¶ 5.1 (PX01310). Here, there is no evidence that Wild
Oats has been shopped to other possible purchasers and that there are no other companies
willing to purchase Wild Oats.

98. The “flailing firm” cases cited by Defendants are inapplicable to Wild Oats. See, e.g.,
United States v. Int’l Harvester Co., 564 F.2d 769, 775-76 (7th Cir. 1977) (precarious
financial condition and suppliers refusing to ship); FTC v. Nat’l Tea Co., 603 F.2d 694,
699 n.7 (8th Cir. 1979) (firm likely to leave the market absent the acquisition); United
States v. Consol. Foods Corp., 455 F. Supp. 108, 116 (E.D. Pa. 1978) (36% sales
decline).

VII. THE ACQUISITION WOULD RESULT IN A SIGNIFICANT LESSENING OF
COMPETITION

99. Closing a store, like a reduction in quantity, is tantamount to a price increase. In
Cardinal Health, 12 F. Supp. 2d at 63, this Court noted in issuing its preliminary
injunction preventing the merger of prescription drug wholesalers that “the driving force
behind removing excess capacity in the market was to ease pricing pressures and return
prices to ‘rational levels.’” Id. See also PPG, 798 F.2d at 1503 (a reduction in output
yielded supracompetitive prices); Antitrust Law Developments 87 (5th Ed. 2002)
(“Because the laws of supply and demand indicate an agreement to limit output is
tantamount to an agreement to fix price, courts have also applied the per se rule to an
agreement to limit production or set quotas . . .” (citing cases)); FTC v. Bass Bros.
Enters., 1984-1 Trade Cas. (CCH) ¶ 66,401 at *37-*38 (N.D. Ohio 1984) (reduction in
supply is anticompetitive).

100. Defendants have ignored facts that contradict their efficiency claims. While Whole
Foods asserts efficiencies from the improved profitability and quality of the acquired
Wild Oats stores, it plans to close Wild Oats stores. PFF 590, 466, 471,
473, 475, 478-480, 484, 486, 489, 491, 493, 495, 497, 499, 504, 506, 509, 511.

101. Whole Foods’ proffered explanation for acquiring Wild Oats as a preemptive acquisition
that would keep it out of the hands of other companies is not a cognizable efficiency
claim and cannot outweigh the anticompetitive effects of the proposed transaction. PFF
594-600. See In re B.F. Goodrich Co., Dkt No. 9159, Federal Trade Comm’n, 110
F.T.C. 207 (1988) (“Although Goodrich believed that Diamond duplicated rather than
complemented its own PVC capabilities, with "only a suggestion of synergy," it viewed
the acquisition as “an attractive defense against acquisition [of Diamond] by another
PVC producer.”) (emphasis added).

102. Defendants’ Whole Foods’ post merger plans to close Wild Oats stores will lessen
competition because the output of goods and services presently available in the stores
will be reduced. FTC v. Bass Bros. Enters., 1984-1 Trade Cas. (CCH) ¶ 66,041 at 68,614
(N.D. Ohio 1984) (postmerger plans to shut down acquired plants would diminish
productive capacity and lessen competition). Defendants rely on U.S. v. Long Island
Jewish Medical Center, 983 F.Supp 121, 149 (E.D.N.Y. 1997), where contrary to here, a
well-documented decreasing demand marked by “increasing empty hospital beds” might
justify closing a facility post merger. By contrast, it is undisputed that demand is
increasing here.

103. The proposed merger between Whole Foods and Wild Oats would also eliminate
significant future competition between the two firms. PFF 582-584, 500-511. Absent the
merger the firms would enter each other’s markets and that would lead to a
deconcentration of the market. Staples, 970 F. Supp. at1073 & n.6; Marine
Bancorporation, 418 U.S. at 631, 633; FTC v. Proctor & Gamble Co., 386 U.S. 568, 581
(1967).

104. Whole Foods and Wild Oats are current, actual competitors in premium natural and
organic supermarkets. PFF 464. The acquisition would eliminate that current, actual
competition as well as future competition. PFF 464, 500.

105. In a market with few players and no significant likelihood of entry, a merger that
eliminates one of a small number of players is a matter of great concern. Heinz, 246 F.3d
at 717 & n.13. Whole Foods and Wild Oats are the only two premium natural and
organic supermarkets currently competing in 17 relevant geographic markets. PFF 464.

106. The acquisition would result in the elimination of an aggressive competitor (Wild Oats)
in a highly concentrated market, which increases the risk that prices will rise after the
acquisition. FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1345 (4th Cir. 1976)
(enjoining merger when merging firms have been “aggressive competitors in the past,”
opening up stores in each other’s markets and increasing sales by greater than the
industry sales average).

107. Because it would eliminate competition from Wild Oats, the merger is likely to increase
the merged firm’s ability to raise prices charged in premium natural and organic
supermarkets unilaterally. Swedish Match, 131 F. Supp. 2d. at 168-69; United Tote, 768
F. Supp. at 1071 (rejecting argument that merger would not reduce competition in light of
finding that merging firms were direct, significant competitors).
108. “[T]he fact that prices might be lower than current prices after the merger does not mean
that the merger will not have an anti-competitive effect. Consumers would still be hurt if
prices after the merger did not fall as far as they would have absent the merger.” Staples,
970 F. Supp. at 1092.

VIII. INJUNCTIVE RELIEF IS NECESSARY HERE

109. The Commission has satisfied its burden in this proceeding of showing likely ultimate
success on the merits. After the conclusion of an administrative proceeding, this
transaction is likely to be found to violate Section 7 of the Clayton Act.

110. The FTC has met its burden of showing that it has “raise[d] 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 Commission in the first
instance and ultimately by the Court of Appeals.” University Health, 938 F.2d at 1218.

111. The FTC’s showing of likelihood of success creates a presumption in favor of
preliminary injunctive relief. Heinz, 246 F.3d at 726. A full-stop injunction is presumed
to be the appropriate remedy and the defendants “face a difficult task in justifying
anything less than a full stop injunction.” PPG, 798 F.2d at 1506-07 (emphasis added).

112. 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. citing University
Health, 938 F.2d at 1225.

113. While it is proper to consider private equities in deciding whether to enjoin a particular
transaction, the court “must” afford such private concerns “little weight, lest we
undermine section 13(b)’s purpose of protecting the public-at-large, rather than the
individual private competitors.” Heinz, 246 F.3d at 726, citing University Health, 938
F.2d at 1225 (citation omitted); cf. FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1083 (D.C.
Cir. 1981) (“Private equities do not outweigh effective enforcement of the antitrust laws.
When the Commission demonstrates a likelihood of ultimate success, a countershowing
of private equities alone would not suffice to justify denial of a preliminary injunction
barring the merger.”).

114. Consideration of private equities is especially unavailing where it can be shown that if
the merger were allowed to proceed – permitting closings of portions of the acquired
operations and making it impossible as a practical matter to undo the merger –
subsequent administrative and judicial proceedings on the merits “will not matter.”
Heinz, 246 F.3d at 726 (noting the planned closing of a manufacturing facility and certain
distribution channels as well as product relabelings).

115. The acquisition of Wild Oats by Whole Foods would eliminate the Commission’s ability
to enter full and effective relief upon completion of an administrative proceeding. Upon
consummation of the merger, Whole Foods now
operated by Wild Oats. PFF 590, 466, 471, 473, 475, 478-480, 484, 486, 489, 491, 493,
495, 497, 499, 504, 506, 509, 511. Thus,“[i]f the merger is ultimately found to violate
section 7 of the Clayton Act, it will be too late to preserve competition if no preliminary
injunction is issued.” See Heinz, 246 F.3d at 726. Therefore, the need for a preliminary
injunction to preserve the Commission’s authority under 15 U.S.C. § 45, is never
stronger than in this case. Cf. id.

116. Defendants did not offer any evidence to support a finding that Whole Foods’ acquisition
of Wild Oats could not be consummated were an injunction to issue, other than a single
unsubstantiated sentence in a footnote in their opening brief. Defendants’ Joint
Memorandum dated July 20, 2007, at 3 n.1, see Heinz, 246 F.3d at 726. Therefore, if the
Court enjoins the acquisition and it is ultimately determined that the acquisition would
not violate the antitrust laws, the advantages of the transaction can be reclaimed by a
renewed transaction. Cf. id.

117. Under section 13(b), the Court may presume that the public interest will be served by an
injunction from the Commission’s showing of a likelihood of success on the ultimate
merits. Heinz, 246 F.3d at 713-15; PPG, 798 F.2d at 1500.

118. Weighing the relevant equities and considering the FTC’s likelihood of ultimate success,
it is in the public interest that the Court enter a preliminary injunction enjoining the
acquisition pending completion of the FTC’s administrative proceeding.

Respectfully submitted,

Dated: August 15, 2007

/s/ Michael J. Bloom
JEFFREY SCHMIDT MICHAEL J. BLOOM
Director RICHARD B. DAGEN (D.C. Bar No. 388115)
THOMAS J. LANG (D.C. Bar No. 452398)
KENNETH L. GLAZER CATHARINE M. MOSCATELLI (D.C. Bar No. 418510)
Deputy Director MICHAEL A. FRANCHAK
Bureau of Competition Federal Trade Commission
Federal Trade Commission 601 New Jersey Ave., N.W.
600 Pennsylvania Ave, N.W. Washington, DC 20001
Washington, DC 20580 (202) 326-2475 (direct dial)
(202) 326-2284 (facsimile)
WILLIAM BLUMENTHAL mjbloom@ftc.gov
General Counsel
Federal Trade Commission
600 Pennsylvania Ave, N.W.
Washington, DC 20580

-21



CERTIFICATE OF SERVICE

This 15th day of August, 2007, I certify that I caused to be served a copy of the foregoing
papers on the following counsel:

Paul T. Denis, Esq.
Dechert LLP
1775 I Street
Washington, DC 20006-2401

(202) 261-3430
Paul.denis@dechert.com

Alden L. Atkins, Esq.
Vinson & Elkins
The Willard Office Building
1455 Pennsylvania Ave., N.W.
Suite 600
Washington, D.C. 20004-1008

(202) 639-6613
Aatkins@VELaw.com

Clifford H. Aronson, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036

(212) 735-3000
Caronson@Skadden.com

Attorneys for Defendants

Dated: August 15, 2007 /s/ Eric M. Sprague
Eric M. Sprague
Attorney for Plaintiff

Other useful links:

Request for Temporary Restraining Order June 06, 2007
The FTC Complaint June 27, 2007
Whole Foods Answer to Complaint
Wild Oats Answer to Complaint
Memorandum in Opposition to Protective Order



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Tuesday, August 14, 2007

It's All About Me

Nextwave had its comments on the Notice of Proposed Rulemaking published today. Nextwave is part of the WCS Coalition and is the entity that ultimately acquired the wcs bandwidth from WCS Wireless that XM attempted to acquire without success.

Nextwave informs the Commission that it is of equal or more regulatory importance than some silly rule change:

"NextWave, a 2.3 GHz Wireless Communications Service ("WCS") licensee, wishes to underscore that it is of equal or more regulatory importance, for a greater number of FCC licensees, that the Commission devote its limited time and effort on adopting final technical ruls governing: (1) operation of SDARS terrestrial repeaters by XM and Sirius; and (2) operation of WCS systems in teh adjacent WCS spectrum."

NextWave goes on to point out that the above Notice of Proposed Rulemaking has been going on for over ten years, while the one related to the merger is only a few months old.

The members of the WCS Coalition are a snippy bunch. It's all about them.

NextWave inadvertently supports XM's and Sirius' position referring to the language preventing the control of both SDARS licenses by a single entity as "policy" as opposed to a rule. Hopefully, XM will send them a thank you note.


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Monday, August 13, 2007

NAB Suppresses Toyota

As noted on Orbitcast, back on August 08, NAB included Toyota as among the groups that opposed the merger:





















Today, Toyota quietly disappears from the list:





















In our opinion, NAB owes Toyota an apology. Toyota has not clearly stated one way or the other whether or not it supports the merger. Toyota seems to be cautiously optimistic about it, but falls well short of endorsing or rejecting the merger.

NAB also owes Rockwell Collins, Slacker, ICO, and the Aircraft Owners and Pilots Association apologies. To our knowledge, none of these have opposed the merger. The footnotes simply say that they expressed concerns, which is true; however, most if not all simply requested that conditions be placed on the merger. That is quite a bit differ from being opposed to the merger.

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NPR Opposes Waiver and Repeal of Rule

NPR had published today the strongest arguments yet against the waiver or repeal of the rule that prevents the control of both satellite radio licenses by a single entity. This will likely be XM's and Sirius' greatest challenge to retaining the rule to overcome.

NPR establishes legal precedence for interpreting the rule as binding to both the SDARS and the Commission, not simply a policy statement that XM and Sirius would have it interpreted. Further, NPR makes the point that it is not a waiver that XM and Sirius seeks, but a repeal of the rule, since it would not have any future applicability.

NPR is by no means anti-satellite radio. It makes excellent points about the success of satellite radio. It attributes much of this success--such as the quadrupling of channels-- to competition between XM and Sirius. These points are difficult to argue against.

XM and Sirius have their work cut out for them to explain this way.



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Sunday, August 12, 2007

US Electronics Weighs in on the Merger

Last Friday, August 10, 2007, US Electronics (USE) had its latest comments on the merger published. USE has had numerous exparte meetings with the Commission and has commented before, but this is by far the most extensive comment, totaling 93 pages, including exhibits. USE never comes out against the merger; however, it suggests that conditions be placed on the merger, notably that there should be "open network access". It doesn't want to be shut out of the market. Clearly, USE is looking after its self interest, but it also brings up several valid consumer concerns. USE makes some very important points and is at the same time very fair-minded. Although USE does not come out against the merger, they shoot down most of XM's and Sirius' arguments for the merger.

USE comments appear to be well researched and bring the unique perspective of a designer, developer, and distributor of satellite radio. USE makes a number of assertions that we have no way of verifying, such as Sirius giving sole distributor rights to Directed Electronics (DCI) and XM giving sole distributor rights to AudioVox. The conclusion is that if there is a merger, then there will be a sole distributor of satellite radios. A sole distributor, according to USE, would stifle innovation, which would harm the public interest. USE references a recent DEI presentation where DEI 'referred to itself as Sirius' "[e]xclusive retail hardware partner"' as proof of its assertion that Sirius has selected DEI as its sole distributor.

USE cites Hush-a-Phone and Carterfone as precedents for an "open access network".

USE makes the points that once merged, subsidies can be used to prevent others from entering the manufacturing business. Or, there may be no subsidies, raising the cost to consumers. Also, there will be no incentive to give subsidies to retailers in order to make the selling of satellite radios profitable, again raising the cost of hardware to consumers.

USE also notes its lawsuit against Sirius, stating that the "performance of its agreement with Sirius was interdicted by Sirius' determination to use a single supplier for its network's satellite receivers, Directed Electronics, Inc."

The meat of USE's comments is here:




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