Friday, October 31, 2008

Whole Foods Faces Consumer Antitrust Class Action

Class Action Filed - A consumer antitrust class action lawsuit was filed against Whole Foods Market, Inc. earlier this week, alleging that it sold premium, natural, and organic produce at anti-competitive prices after its acquisition of Wild Oats, in violation of Section 7 of the Clayton Act (for an acquisition that substantially lessens competition and tends to create a monopoly), Section 2 of the Sherman Act (for monopolization), Section 1 of the Sherman Act (for entering into an agreement in restraint of trade), and Section 3 of the Clayton Act (for allegedly foreclosing competition in the relevant market). See Kottaras v. Whole Foods Market, Inc., No. 1:08-cv-1832-PLF (D.D.C. filed Oct. 27, 2008).

Although the named plaintiff in the lawsuit is a resident of Glendale, California, the case was filed in federal court in Washington, DC, as a related lawsuit to the Federal Trade Commission's action that opposed the merger. The Kottaras case follows the D.C. Circuit's recent decision finding that the merger between Whole Foods and Wild Oats was likely anti-competitive (previously discussed here).

Courts Had Permitted the Merger - Given the unusual proceedings that have unfolded in the FTC case, some would consider the Kottarras lawsuit unfair or unwarranted. The class action is based on the allegedly anti-competitive merger between Whole Foods and Wild Oats, which was only consummated after two courts denied injunctive relief. The FTC initially challenged the merger on June 5, 2007. The district court denied the FTC's request for a preliminary injunction on August 16, 2007, and the D.C. Circuit denied the FTC's motion for an injunction pending appeal on August 23, 2007. Thus, the merger had the implicit blessing of the district court and the D.C. Circuit, and Whole Foods reasonably anticipated that it would be allowed to proceed with the merger without facing antitrust liability.

Merger Likely Anti-Competitive - On the other hand, the complaint suggests that Whole Foods intended for the merger to be anti-competitive. For example, it quotes Whole Foods' CEO as stating:

[The merger] will self-evidently lessen competition in those markets that we are
competing with Wild Oats in when we are going to intend to close stores. Again,
isn't that true in any of the acquisitions that any of these guys do? One of the
motivations is to eliminate a competitor. I will not deny that. That is one of
the reasons why we are doing this deal. That is one of the reasons we are
willing to pay $18.50 for a company that has lost $60 million in the last six
years. If we can't eliminate those stores then Wild Oats, frankly, isn't worth
buying.

(Complaint ¶ 23). Moreover, the D.C. Circuit reversed the lower court's opinion on July 29, 2008, finding that the merger would likely be anti-competitive in certain markets.

Pricing - In the consumer class action, one of the key issues is whether there was a large jump in Whole Foods' pricing in the relevant markets after the merger. If so, such evidence may not only establish civil liability, but will help vindicate the D.C. Circuit's ruling reversing the lower court's denial of injunctive relief.

Related post: D.C. Circuit Reverses Ruling That Allowed Whole Foods' Merger with Wild Oats

Wednesday, October 29, 2008

FTC to Hold Workshops on Resale Price Maintenance



FTC Workshops - The FTC announced yesterday that it will hold a series of public workshops between January and March 2008 about how to distinguish between uses of resale price maintenance ("RPM") that benefit consumers and those that do not.

Topics - The FTC plans to hold four to six RPM workshops, and is accepting requests to participate and public comments until December 12. The FTC plans to address three general subjects:

  1. The legal, economic, and management principles relevant to applying Sections 1 of the Sherman Act and Section 5 of the FTC Act to RPM, including the ability to administer current or potential antitrust or other rules for applying these laws;

  2. The business circumstances regarding the use of RPM that the Commission should examine in the upcoming workshops, including examples of actual conduct; and

  3. Empirical studies or analyses that might provide better guidance and assistance to the business and legal communities regarding RPM enforcement issues.

The FTC's Federal Register notice also asks ten more specific questions, namely:

  1. How should the structure of the market and the market shares of participants be taken into account in analyzing RPM?
  2. Are there other specific market facts or circumstances that might have an impact on the likely competitive effects of RPM under the circumstances described? Without limiting the scope of this question, commenters are specifically invited to comment on the effect on marginal and inframarginal consumers.
  3. What are the business reasons (e.g., management, marketing, financial, etc.) for the use of RPM? Are there alternative business strategies available to achieve the same results? What factors, including any cost savings, entered the decision to use RPM to achieve the desired result?
  4. To what extent does uncertainty regarding the legality of RPM under state law affect the decision to use RPM?
  5. What are the likely procompetitive and anticompetitive effects of RPM under the circumstances described?
  6. What strategies might competitors use to respond to a loss of sales to a firm that uses RPM?
  7. Under what market conditions is the use of RPM likely either to promote or hinder market entry by other manufacturers or retailers?
  8. Are there industries where the use of RPM is prominent?
  9. Are there any original theoretical, analytical or empirical studies on the nature or competitive effects of RPM or alternatives to RPM that should be brought to the attention of the Commission?
  10. What tests or standards should courts or enforcement agencies use in assessing whether particular conduct violates Sections 1 or 5? Commenters are specifically requested to assess whether the test or standard applicable to a particular usage of RPM might vary based on particular market facts or circumstances. Additionally, are there particular market facts and circumstances where the approach established by the Court of Appeals for the District of Columbia Circuit in Polygram Holding, Inc. v. Fed. Trade Comm'n, 416 F. 3d (D.C. Cir. 2005), would or would not be appropriate?

As this blog has discussed previously, the law surrounding resale price maintenance has been unclear ever since the Supreme Court's decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007), which held that RPM was subject to the rule of reason rather than the per se rule.

FTC Reports - The FTC will almost certainly publish a report that summarizes issues presented and discussed during the resale price maintenance workshop. FTC reports can help shape the direction of the law, as a litigant may present portions of a report to support its case to a court, which may influence the court's decision. Industry constituents that have a vested interest in the subject matter of an FTC workshop typically retain antitrust counsel to actively participate in the workshop and "give voice" to the constituents throughout the workshop. With respect to resale price maintenance issues, large manufacturers and retailers will certainly be represented during the course of the workshop. For those interested in Kotchen & Low's perspective on resale price maintenance issues, please refer to related blog posts below.

Related posts: WSJ Examines Manufacturers' RPM Practices; FTC's Nine West Order Explores Resale Price Maintenance Under Leegin; State Resale Price Maintenance Laws and Leegin; Herman Miller Contends That Consent Decree Allows it to Continue Minimum Resale Pricing Policy; Developing Legally-Compliant Trade Promotion Management Programs.


Thursday, October 23, 2008

Slotting Allowances Anti-Competitive?

Yesterday, the Antitrust & Competition Policy Blog posted about a recent article by Oystein Foros and Hans Jarle Kind entitled “Do Slotting Allowances Harm Retail Competition?”

Slotting fees - paid by manufacturers to retailers for access to shelf space for their products – have increased significantly in recent years, at the same time that the grocery industry has seen increasing consolidation. The Foros & Kind article examines competing views over whether slotting fees are anti-competitive:

  • One view suggests that the fees are anti-competitive, as up-front payments in the form of slotting fees leads to a higher wholesale price. When retailers pay higher marginal product costs, they are less likely to discount aggressively, and they signal to competitors that they will be a soft competitor on price. This leads competitors to increase prices to end users.

  • The competing view suggests that slotting fees are pro-competitive because they help allocate limited shelf space and address the problem of asymmetric information.

Group Purchasing - Foros and Kind argue that these views fail because they don’t take into account the group purchasing practices that many retailers engage in through co-ops and other group purchasing arrangements, especially in Europe. While retailers band together in negotiating whole prices with retailers, they each set their own retail prices. Within the purchasing group, where each member of the group presumably knows what the purchasing terms are, Foros and Kind suggest that slotting fees are used to dampen competition between rival retailers.

FTC Concerns - In prior years, the Federal Trade Commission has expressed concerns about slotting fees and has convened hearings and published reports on slotting fees, including a 2003 report and a 2001 report. The FTC and antitrust practitioners have expressed two principal concerns involving slotting fees: (1) that the fees represent coordinated – and possibly even collusive – pricing by retailers, and (2) that the fees increase barriers to entry for the introduction of new, innovative products. The principal business rationale for slotting fees is that the fees help defray the cost and business risk of new product introduction – i.e., products that do not have a track record of sales volume. That is, the fees help compensate retailers for betting on the future success of new products with no historical sales volume by including the products in planograms and shelf sets.

Price Discrimination - While substantial attention has been devoted to assessing the antitrust implications of slotting fees, commentators and the government often focus on the relatively simple antitrust issues associated with slotting – i.e., whether the fees are a result of collusion or impede entry of new products – but fail to grapple with a much more complicated issue: whether slotting fees give rise to price discrimination concerns under the Robinson Patman Act. Not all retailers and wholesalers charge slotting fees. Price discrimination concerns arise when a vendor pays slotting fees to one retailer, but not the retailer’s competitor. If the vendor does not reduce its product pricing to the retailer’s competitor by the amount of the slotting fee given to the retailer, paying the retailer’s slotting fee may violate the Robinson-Patman Act. For this reason, we believe that, in assessing the legality of slotting fees under the antitrust laws, the fees must be considered along with other discounts and allowances vendors give retailers and wholesalers.

Pricing Issues - The complicated and often opaque nature of pricing – both retail and wholesale – creates opportunities for antitrust and fraud violations. Kotchen & Low LLP is currently representing a class of state and local governmental entities who paid fraudulently inflated wholesale prices, and is representing classes of grocery retailers and manufacturers who were overcharged for services because of an antitrust conspiracy. In each case, the potential damages are substantial, underscoring the need for vigilance – both by sellers in ensuring their pricing practices comply with the law, and by purchasers in ensuring that they are not paying unlawfully inflated prices. If you have concerns about pricing practices, you should consider contacting an attorney.

Thursday, October 16, 2008

Ninth Circuit Denies Rehearing in Theme Promotions v. News America

The Ninth Circuit issued an order on October 10 denying a motion for rehearing and a suggestion for rehearing en banc in Theme Promotions, Inc. v. News America Marketing, a case I previously discussed here and here.

The denial of the motion for rehearing means that the ruling against News America will likely stand. While News America could file a petition for a writ of certiorari with the Supreme Court, such a cert. petition would be a long shot, not only because the Court grants only a small fraction of such petitions, but also because the case does not appear to present any issues worthy of the Court's consideration.

Related posts: Ninth Circuit Affirms Theme Promotions Award Against News America Marketing; Oral Argument in Theme Promotions v. News.

Monday, October 6, 2008

American Antitrust Institute Issues Transition Report on Competition Policy


AAI Report: The American Antitrust Institute issued a 415-page report on Monday titled "The Next Antitrust Agenda: The American Antitrust Institute's Transition Report on Competition Policy to the 44th President of the United States."

The report offers suggestions to the next administration on legislation and enforcement priorities. It includes chapters about various substantive areas of antitrust laws, including cartels, monopoly, buyer power, and merger policy. For cartels, the report encourages consideration of "offering bounties to whistleblowers, as is already the case for qui tam civil suits," an idea that I have previously advocated here.

There are also chapters devoted to specific industries, including Agriculture, for which the report recommends increased enforcement of merger and conduct rules. Other industries addressed are media, health care, and energy.

Election May Affect Enforcement: How closely the next administration follows the recommendations will depend in part on which candidate prevails in the upcoming election. The Bush administration has been criticized for its lax enforcement of the antitrust laws, and Senator McCain has a long record of support for deregulation.

In its October issue, Inside Counsel examined what the 2008 election means to the in-house bar. While Republicans tend to favor imposing more limitations on the potential liability of corporate defendants who have engaged in tortious activity than Democrats, the magazine suggested that neither Senator McCain nor Senator Obama will take strong positions on the issue, and that Obama may favor corporate defendants more than most Democrats.

Related posts: Incentives and Disincentives for Insiders to Expose Unlawful Cartels; Considerations for Individuals Who Refuse to Participate in Illegal Business Practices.

Sunday, October 5, 2008

Judge Deanell Tacha Honored with Distinguished Service to Justice Award

On Friday, I was home in Lawrence, Kansas to participate in a ceremony in which the 26th Annual Edward J. Devitt Distinguished Service to Justice Award was presented to Tenth Circuit Judge Deanell Reece Tacha.

Speakers at the award ceremony included Kansas Governor Kathleen Sebelius, Supreme Court Justice Samuel Alito, Judge Carolyn King of the Fifth Circuit, Chief Judge Robert Henry of the Tenth Circuit, Judge John Lungstrum of the District of Kansas, Judge Sarah Barker of the Southern District of Indiana, John Tacha, and me.

The Devitt Award honors Article III judges whose careers have been exemplary. Judge Tacha has been a judge on the U.S. Tenth Circuit Court of Appeals since 1985, served on the U.S. Sentencing Commission, chaired the Judicial Division of the ABA, chaired the U.S. Judicial Conference Committee on the Judicial Brach, was President of the American Inns of Court, chaired the Appellate Judges Conference, was a member of the ABA Commission on Women in the Profession, was president of the Kansas University Alumni Association, and has been active in numerous other professional, civic, philanthropic, and cultural organizations.

During the ceremony, I remarked on how inspirational Judge Tacha was, and I read a poem written in honor of the occasion by Kansas Poet Laureate Denise Low:

For a Kansas Judge

For The Honorable Deanell Tacha

Central Plains wind stops for no woman
nor beast—not the cattle nor the sparrows.
Sometimes it carries straight-line rain
and sometimes glistening prisms of mist.
Pawnees and Spanish fought in the winds
and Cheyennes and American soldiers.

West winds blew through council fires
and brick court houses on town squares.
Gravity tugs the wind into whorls, never
easing its grip. These laws do not vary.

Each community learns the same lessons:
how sun returns after winter, how kindness
fosters survival, how the stories circle,
how law holds even the sky in order.

While all of the speakers at the ceremony were very impressive, Judge Henry's speech stood out for its humor, and John Tacha's for his warm personal insights into his wife's accomplishments. The crowd was impressive as well, with numerous judges on hand, along with a number of attorneys, professors, politicians, current and former law clerks, and other persons of note.

An article about the ceremony from the Lawrence Journal World and video of Judge Tacha's acceptance speech is available here.

Wednesday, October 1, 2008

Penn Traffic Settles with SEC Over Premature Recognition of Vendor Allowances



SEC Complaint: The Securities and Exchange Commission ("SEC") filed and settled a complaint against Penn Traffic grocery stores for improperly overstating revenues.

In a complaint filed on September 30, the SEC alleged that Penn Traffic prematurely recognized income from promotional allowances such as slotting fees, rebates, and other vendor allowances, resulting in significantly overstated earnings reports. From 2001 to 2003, Penn Traffic recorded revenue related to promotional allowances before it "earned" the revenue by performing the agreed upon merchandising programs.

The SEC also alleged a separate accounting scheme in which a Penn Traffic subsidiary, Penny Curtis, created fraudulent accounting entries and adjustments in order to meet sales targets set by Penn Traffic.

The SEC announced that Penn Traffic agreed to settle the charges by consenting to the entry of a permanent injunction against violations of certain securities laws, and to certain oversight by an independent examiner. The SEC's case against two executives involved in the alleged wrongdoing is ongoing.

Pressure to Boost Earnings: Penn Traffic filed for bankruptcy in 2003, and there was likely substantial pressure on businesspeople to meet financial targets during the 2001 to 2003 time frame at issue. Prematurely recognizing revenues for one quarter would create a deficit in the following quarter, creating additional pressure to use such unlawful accounting techniques for future quarters.

Similar to Penn Traffic, wholesalers and retailers – including Ahold, K-Mart, Nash Finch, and Fleming (before it filed for bankruptcy) – have faced SEC inquiries and class action lawsuits with respect to the accounting treatment of slotting fees, promotional allowances, and other vendor allowances.

Accounting of Trade Funds: Accounting treatment of trade funds/vendor allowances has evolved since the early 2000s for all industry stakeholders, including manufacturers, wholesalers, and retailers. The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board has provided industry guidance as to how to account for trade funds/vendor allowances. Industry stakeholders should review the EITF's guidelines on the accounting of trade funds/vendor allowances, including, for example, EITF Abstract Issue No. 9 ("Accounting for Consideration Given by a Vendor to a Customer") and EITF Abstract Issue No. 02-16 ("Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor").

Related post: Channel-Stuffing Lawsuit Settled for $137.5 M.

 

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