Saturday, January 24, 2009

Retail Memo - News & Analysis: Gelson's Chain Challenges Whole Foods' Subpoena For Trade Secrets; FTC Says No Like it said to New Seasons Market

FTC vs. Whole Foods Market, Inc. - and the Subpoenas

A U.S. Federal Trade Commission (FTC) Administrative Law Judge has denied a legal motion "For a protective order to quash or limit subpoena from Whole Foods Market, Inc." from the only other retail chain, Southern California-based Gelson's Market, out of the 93 natural and premium food and grocery retailing companies subpoenaed for various sorts of sales, financial and other trade secret information by Whole Foods Market in its battle against the FTC's legal case to overturn the 2007 Whole Foods-Wild Oats merger.

Basically the Gelson's legal motion/petition, like the one filed by Portland, Oregon's New Seasons Market, which also was denied by the FTC, asked the FTC to either kill the demands for proprietary information contained in the Whole Foods' subpoena completely and if not to then limit the demands, issuing a protective order which would allow the company to not submit some of the information demanded which it believes could harm it from a competitive standpoint.

Of particular concern to Gelson's are demands in the subpoena in which Whole Foods wants information from the 93 food retailing companies about their strategic growth plans in each of their respective markets. The FTC Administrative Law Judge ruled that Gelson's didn't show cause in its petition that such information would harm the company. Therefore he ruled against the grocery chain, ordering it to comply with the original terms of the subpoena.

As we've reported on previously, Portland, Oregon-based New Seasons Market, a nine-store natural foods chain was, until we recently discovered the Gelson's petition, the only one of the 93 retailers to challenge Whole Foods' subpoena with the FTC. New Seasons ultimately lost its legal challenge and was ordered by the FTC to comply with the subpoena. The Portland natural grocery chain failed to do so by the required date. However it reached a negotiated agreement with Whole Foods Market, Inc. and has now submitted the mutually agreed upon trade secret information.

Gelson's, which was one of more than half of the 93 retailers who didn't comply with Whole Foods' subpoena by its November 4, 2008 deadline, has been ordered by the FTC Administrative Law Judge to now do so post haste.

[You can read the full ruling at this link: Administrative Law Judge's Order on Non-party Gelson's Market's Motion for Protective Order or to Quash or Limit Subpoena from Whole Foods Market, Inc.]

The arguments to quash or limit the subpoenas made in the legal motions by lawyers for Gelson's and New Seasons were very similar.

What isn't similar though is that Gelson's is part of a publicly-owned and traded corporation, Arden Group, and therefore is a public supermarket chain, unlike New Seasons Market, which is a privately-held company. This means much of the information demanded in the Whole Foods Market subpoena -- sales and related financial data for example -- is already of public record by law. However, it's that non-public information such as plans to open new stores and the like, that Whole Foods' legal council says it must have, along with all the other information, from the 93 retailers. Privately-held companies like New Seasons aren't required by U.S. law to report there sales and profit information publicly like public companies are.

In addition to operating supermarkets under the Gelson's banner in Southern California, Arden Group also operates a few stores under the Arden-Mayfair banner in the region. In addition to its supermarket operations, holding company Arden Group has real estate and other related business interests.

There are 18 Gelson's supermarkets in Southern California. The stores sell a full range of food and groceries just like a regular supermarket does but put a major emphasis on selling specialty, gourmet, premium, ethnic and natural foods in an upscale store setting. [Learn more here.]

The central part of Whole Foods' argument as to why it's not a monopoly in what the FTC calls the "premium natural and organic retailing segment" in the 29 U.S. markets the regulator says it is is because the natural foods grocery chain not only competes with other natural foods class of trade retailers (like Portland's New Seasons Market) but with upscale supermarket chains such as Gelson's and numerous others across the U.S. that focus on the very same types of products Whole Foods does in its stores and are thus direct competitors.

This is an argument we've made since last summer -- long before Whole Foods' legal counsel came up with the idea of proving this by issuing subpoenas to the 93 retailers, a number of which are similar in format to Gelsons -- arguing that the FTC, in opposing the merger so strongly, has failed to understand the true nature of natural and premium food retailing in the U.S. today. That reality is that it is a multi-format, highly competitive business in which an increasingly variety of retailers are competing against Whole Foods for a share of the natural, organic and premium food category pie. [We suggest reading our January 15, 2009 analysis piece [Retail Memo: Natural-Organic Foods and U.S. Retail Marketplace Realities; Why the FTC's Case Against the Whole Foods-Wild Oats Merger is Pure Folly] for an overview of our argument.]

As we've also previously said, we completely understand and respect why New Seasons Market, and now Gelson's, challenged the subpoenas. Were we in their respective positions we likely would have done the same if unable to work out an agreement with Whole Foods.

Whole Foods' plan and strategy is to compile all of the data from these 93 retailers into a competitive analysis vis-a-vis itself in these 29 markets where the FTC says it holds a monopoly post merger in what the FTC has defined as the "premium natural and organic retailing segment." The retailer then plans to use this analysis to demonstrate at the scheduled April 6, 2009 FTC Administrative trial, where the fate of the merger will likely be decided, that it has more than enough competition -- from natural foods class of trade retailers, upscale/specialty supermarket chains and others -- in each of these markets.

The danger to Whole Foods though is that the burden of proof in the FTC Administrative trial is completely on the company. It must demonstrate to the Administrative Law Judge that the natural foods grocery chain isn't a monopoly, under FTC definitions no less, in every single one of the 29 markets. The Administrative Law Judge technically can rule against the entire merger if he believes Whole Foods has failed to prove its case in just one or two markets. That's a very difficult standard to meet.

As a result, without the proprietary information from the 93 retailers, at least two dozen of which have yet to comply with the subpoena as of early last week, according to Whole Foods' legal council Lanny Davis, the natural foods grocery chain can build a case to defend itself against the FTC's 29 market monopolist argument.

Therefore, as we've been writing about, this is why Whole Foods Market, Inc. is putting so much effort, including expensive legal talent, into obtaining the information from these 93 subpoenaed retailers. And the clock is running fast. April 6 is coming up very soon. Whole Foods still must obtain the information from these two dozen or so retailers, and must still compile all of the information into a legal brief before April 6.

On January 14, Whole Foods Market, Inc. took a number of steps designed to encourage those retailers who've yet to comply with its subpoena to do so. [Read about those measures at this link: Retail Memo: Whole Foods Offers Carrot and Stick to Retailers That Have Yet to Comply to Subpoena For Trade Secret Data and Information.]

It's our analysis that those measures, combined with the FTC's Administrative Law Judge's ruling against New Seasons' and Gelson's -- the only two of the 93 retailers we're thus far aware have challenged the subpoena -- will likely result in most of those remaining retailers' submitting the information demanded in the subpoena to Whole Foods' lawyers.

However, many of the retailers who have already submitted information, have self-edited some of the demands, those they believed were most proprietary to their respective business activity. Whole Foods Market also is attempting to get those retailers to submit the omitted information. That could be more difficult to achieve.

What is clear though is that Whole Foods wants and needs this information so badly it's willing to compromise, in the case of New Seasons market and perhaps others thus far, as well as to play hard play if needed.

The stakes are high. The unwinding of the merger could cost an already struggling Whole Foods much -- financially, in market share, and even possibly in terms of who has control of the company in the future. Stay tuned.

Reader Resource - Linkage:

Below is a bibliography of recent stories and posts published in Natural~Specialty Foods Memo (NSFM) on the FTC. v. Whole Foods Market, Inc. legal case and merger issue:

January, 2009:

January 23, 2008: Retail Memo: Three Judge Federal Appeals Court Panel Rules Against Whole Foods' FTC Lawsuit Today; What's Next?.... January 21, 2008: Retail Memo: An Argument in Favor of the FTC in FTC v. Whole Foods Market, Inc. -- Or At Least Against Whole Foods' Legal Tactics....

January 19, 2009: Retail Memo: Concerned With Fast-Looming FTC Hearing Date Whole Foods Re-Files Lawsuit Taking it Directly to Washington, D.C. Federal Appeals Court....January 19, 2009: Retail Memo - Breaking News: Portland's New Seasons Market and Whole Foods Market, Inc. Reach Agreement; New Seasons Will Provide Trade Secrets....

January 16, 2009: Read Memo: Colorado Newspaper Columnist Joins NSFM's 'Whole Foods Market Isn't A Monopoly' Bandwagon....Friday, January 16, 2009: Retail Memo - Exclusive: Supermarket Industry Investor Ron Burkle Looking For A Seat On Whole Foods Market's Board of Directors....Thursday, January 15, 2009: Retail Memo: Natural-Organic Foods and U.S. Retail Marketplace Realities; Why the FTC's Case Against the Whole Foods-Wild Oats Merger is Pure Folly....

Thursday, January 15, 2009: Retail Memo: Fresh & Wholesome Market Fears Not A Whole Foods Market Monopoly; In Fact Part of its Competitive Strategy is to Be the Anti-Whole FoodsRetail Memo: Whole Foods Offers Carrot and Stick to Retailers That Have Yet to Comply to Subpoena For Trade Secret Data and Information....

Monday, January 12, 2009: Retail Memo - Breaking News: Whole Foods Press Conference Tomorrow; Objective: Get Retailers to Comply With Subpoena; Need: Urgent....Monday, January 12, 2009: Retail Memo: FTC Asks Judge to Force Whole Foods to Put Most of the Wild Oats' Genie Back in the Bottle Pending A Resolution of its Merger Challenge.

December, 2008:

December 29, 2008: Retail Memo - Breaking News: New Seasons Market Doesn't Turn Over Trade Secrets to Whole Foods Market Despite Deadline to Do So Being Today....December 29, 2008: Independent Grocer Memo: Natural-Organic, Local, Fresh and Premium Keys to Pacific Northwest USA's Haggen Foods; Now Adding Value....December 28, 2008: Retail Memo: Web Site and Blog-Driven Viral Boycott of Whole Foods Market Stores in Portland, Oregon Region Going On; Could it Intensify?....December 28, 2008: Retail Memo: Tomorrow Deadline For Portland, Oregon's New Seasons Market to Turn Over Trade Secrets to Whole Foods Market's Legal Counsel....

December 24, 2008: Christmas Eve Memo 2008: 'Twas the Night Before Christmas' - FTC v. Whole Foods Market, Inc. Version....December 24, 2008: Independent Grocer Memo: From Mrs. Gooch's to the Auto Body Business, Then Back to Retail, Chris Kysar is On A Healthy Organic Foods Retailing Roll....December 24, 2008: Retail Memo: It's 'Deja Vu All Over Again' - Judge Paul Friedman to Whole Foods Market, FTC: 'What's My Role Here?'....

December 23, 2008: Retail Memo: FTC Postpones Scheduled February 16 Administrative Hearing on Whole Foods-Wild Oats Deal Break-Up Until April 6, 2009....December 23, 2008: Independent Grocer Memo: National Grocers' Association Asks President-Elect Obama to Look Out For Independent Grocers When He takes Office in January....December 22, 2008: Retail Memo: Only Slightly More Than Half the 93 Natural Foods Retailers Issued Subpoenas By Whole Foods in its Case against the FTC Have Complied....

December 22, 2008: Retail Memo: Whole Foods Market Wants to Depose and Obtain Internal E-Mails From FTC Commissioner, Suggesting Possible Conflict of Interest Situation....December 22, 2008: Retail Memo: At Hearing Today Judge Tells FTC to Provide Road Map of How Whole Foods Could Take About Merged Companies Should Ruling Go In its Favor....December 19, 2008: Retail Memo: Whole Foods' Lobbying Effort Baring More Fruit - House Committee Leaders Send Letter to FTC Chair Similar to One Sent By Senate Leaders....

December 18, 2008: Retail Memo: 'This Isn't Over Yet' - New Seasons Market CEO On Judge's Decision the Natural Gorcer Must Turn Over Trade Secrets to Whole Foods Market.... December 18, 2008: Retail Memo: The 'Whole Primary Source Scoop' -- FTC and U.S. Federal Court Documents on the FTC v. Whole Foods Market, Inc. Case....December 17, 2008: Breaking News: Judge Orders New Seasons Market to Comply With Whole Foods' Subpoena and Submit Sales Data, Financial Records and Other Trade Secrets....

December 16, 2008: Retail Memo: Whole Foods, Wild Oats and Boulder, CO...And the Rocky Mountain News' Editorial Take On FTC v. Whole Foods Market, Inc....December, 15, 2008: Retail Memo: Eight Members of U.S. Senate Judiciary Committee Send Letter to FTC Chairman Regarding FTC's Legal Case Against Wild Oats' Acquisition....December, 13, 2008: Retail Memo - Analysis & Commentary: More On FTC v. Whole Foods Market, Inc. and Whole Foods Market, Inc. v. FTC....

December 9, 2008: Organics Category Memo: Wither Organics? Organic Food & Grocery Category Sales Down; But Double-Digit Growth Still Likley With Mass Market Lift....December 9, 2008: Retail Memo: Whole Foods Markets' 'Whole Legal Paycheck:' Three Top Washington, D.C. Law Firms Teaming Up On The Natural Grocery Chain's FTC Lawsuit....December 9, 2008: Retail Memo: Whole Foods Market CEO John Mackey and Team Launch First Aggressive Attack Against the FTC's Legal Case at Press Conference This Morning....

December 8, 2008: Retail Memo: Mr. Mackey (and the Whole Foods Market Troops) Goes to Washington....December 8, 2008: Retail Memo: Breaking News - Whole Foods Market, Inc. Files Lawsuit Against the FTC; Argues the Regulator Violated the Company's Due Process Rights....December 7, 2008: Retail Memo: New Seasons Market CEO Brian Rohter and Whole Foods Market Co-President Walter Robb Discuss and Debate the Subpoena Issue Online....

December 7, 2008: Retail Memo: New Seasons Market CEO Brian Rohter Speaks Out Again Today on the Whole Foods Market, Inc. Subpoena of His Company's Data....December 7, 2008: Retail Memo: Whole Foods Market Retains Top Washington D.C. lawyers and Politically-Connected Lobbyists to Plead its Case Against the FTC....December 6, 2008: Retail Memo: Fast-Growing and Scrappy Sunflower Farmers Market Ventures Deep in the Heart of (Whole Foods Country) Texas....

December 3, 2008: Retail Memo: More on the Whole Foods Market-New Seasons Market Subpoena Issue; FTC Holding Firm For February, 2009 Hearing....December 2, 2008: Retail Memo: Whole Foods Market, Inc. Closes $425 Sale of Stock to Private Equity Firm; Adds Members of the Firm to its Board of Directors....December 2, 2008: Retail Memo: Portland, Oregon-Based New Seasons Market CEO Brian Rohter Responds to Whole Foods Market's Paige Brady....

December 2, 2008: Retail Memo: Whole Foods' Paige Brady Responds to Yesterday's New Seasons Market Piece; Lots of E-Mails; Issue Heats Up On the New Seasons Market Blog....December 1, 2008: Retail Memo: Whole Foods Wants A Court-Mandated Financial Records Dump from Portland-based New Seasons Market; it Says For its Battle Against the FTC.

Natural~Specialty Foods Memo (NSFM) Archives

FTC v. Whole Foods - Linkage from the NSFM archives:

Click here, here and here for stories about the FTC-Whole Foods issue from our archives, including pieces about mass market and natural foods class of trade retail competitors.

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