Wednesday, January 14, 2009

Retail Memo: Whole Foods Offers Carrot and Stick to Retailers That Have Yet to Comply to Subpoena For Trade Secret Data and Information

FTC v. Whole Foods Market - As the Subpoenas Turn

Whole Foods Market, Inc. is offering those retailers, including Portland, Oregon-based New Seasons Market, that have yet to respond to its subpoena for sales, financial, marketing and other proprietary company information regarding the Austin, Texas-based natural grocery chain's battle against the U.S. Federal Trade Commission (FTC), a bit of carrot and a bit of stick, Whole Foods' executive vice president Jim Sud and others essentially said during a press teleconference yesterday.

The carrot: During yesterday's teleconference with reporters and Bloggers, Sud said Whole Foods Market, Inc. has begun sending written requests to those remaining retailers, of the 93 or 94 the natural grocery chain subpoenaed months ago but have yet to comply, for their trade secrets which the natural grocery chain hopes will show that it isn't a monopolist in what the FTC calls the "premium natural and organic retailing segment," but rather that there's plenty of competition to go around. We reported on Monday that the natural grocery chain had started sending the letters out to those retailers that have not yet complied with its subpoena. The deadline to do so was November 4, 2008.

"This is not something we want to do. This is something we've been forced into because we're having to defend the merger in 29 separate markets,” Sud emphasised during the teleconference. This is something Whole Foods' co-president Walter Robb also has recently said is the case in previous discussions about the subpoenas.

In the letters to the subpoenaed retailers that haven't yet complied, Sud said "documents turned over to Whole Foods would be protected by a confidentiality order" agreed to by Whole Foods and the FTC. The order specifically bars Whole Foods Market, Inc. employees from reviewing the documents. It also bars the natural grocery chain's corporate general council form viewing the trade secret information, Sud said.

Only Whole Foods' outside legal council, which includes Lanny Davis, a partner at the Washington, D.C. office of the Orrick law firm and the the natural grocery chain's lead council in its legal battle with the FTC, and Paul Denis, a partner at the Washington, D.C. office of the Dechert law firm and the attorney who will argue the case at the April 6, 2009 FTC Administrative hearing/trail in which its possible the merger will be overturned at, will have access to the retailers' proprietary information, Sud said at yesterday's teleconference.

These assurances have previously been given to retailers like Portland's New Seasons Market, which fought the subpoena and lost, by Whole Foods Market, Inc. CEO John Mackey, co-president Walter Robb and the natural grocery chain's outside legal counsel. The assurances also are contained in the subpoena. However, New Season's Market CEO Brian Rohter has said he doesn't believe the assurances, and he has yet to provide the information demanded in the subpoena because in the past similar information his company submitted involving the FTC's challenge to Whole Foods' friendly acquisition of Wild Oats was posted on the FTC Web site. Additionally, he says some of that information was viewed by Whole Foods Market, Inc. employees.

Yesterday's press teleconference, along with the letters being sent to the retailer's that haven't complied with the subpoena to date, are designed by Whole Foods' to hopefully create greater comfort among the retailers so that they will submit the proprietary information to Whole Foods Market, Inc.'s outside legal counsel.

That is the aspect we are referring to as the "carrot" portion of the press teleconference.

The stick: At the same press teleconference yesterday, Whole Foods' lead outside legal counsel Lanny Davis, who appeared on CNN's Larry King show yesterday and today discussing his close friend Hillary Clinton's Senate hearing to be Secretary of State in the Obama Administration, said the company filed motions Tuesday (yesterday) to compel about two dozen companies, including New Seasons Market, that have refused to hand over proprietary information to submit the proprietary information demanded in the subpoena.

In the motioned filed by Whole Foods Market, Inc. yesterday, retailers who don't comply with the subpoena and submit the sales, financial, marketing and related proprietary information demanded in it, could be held in contempt of court and charged, along with being fined.

As we've previously reported, Whole Foods subpoenaed retailers in 29 U.S. markets where the FTC says a combined Whole Foods-Wild Oats now holds a monopoly in what the regulator calls the "premium natural and organic retailing segment."

Natural~Specialty Foods Memo (NSFM) argues that the FTC's segment definition is fiction because in the U.S. today natural and organic food and grocery retailing is a multi-format, highly competitive enterprise. It includes numerous fast-growing regional natural foods chains like Sunflower Farmers Market, Sprouts Farmers Market, Mrs. Green's, Earth Fare, New Seasons Market, Natural Grocers by Vitamin Cottage, thousands of natural foods independents and co-ops, supermarket chains (ranging from giants Kroger Co. and Safeway to scores of big regional chains and hundreds of smaller independents) and mass merchandisers like Wal-Mart, Target, Costco and others, and even online retailers like

We suggest the "premium and organic retailing segment" is basically a fiction. It does not describe the reality of natural and organic products retailing in the U.S. today. Therefore, it's our analysis that the FTC's objection to a combined Whole Foods-Wild Oats is built on this fiction and as such is wrong and a waste of taxpayers money and U.S. federal government resources, particularly in the current climate in which other branches of the federal government are spending hundreds of billions of dollars of taxpayer money to bail out companies like Citi-Corp, which compared to Whole Foods are giants.

One merely just needs to look at the empirical evidence of Whole Foods-Wild Oats today -- a drop in net income of about 42% in the last quarter, Whole Foods' stock share price has dropped by 75% in the last year, the company fired over 100 headquarters employees in the fall of 2008 to conserve cash, it sold 17% of the company for $465 million a few weeks ago because it badly needs the cash, the current economic recession is resulting in lost sales, lower customer counts and reduce shopper market basket sizes in Whole Foods stores -- to see that not only isn't it a monopoly, it's a struggling retailer in big trouble.

The press teleconference yesterday, the letters to the retailers regarding the subpoenas and the court filing by Whole Foods Market, Inc. related to those subpoenas, comes on the heels of a move by the FTC to halt further integration of Whole Foods and Wild Oats, as we reported on Monday.

According to a brief filed Monday in the U.S. District Court for the District of Columbia by Matthew Reilly, assistant director of the FTC’s Bureau of Competition, the FTC is proposing an immediate stay of integration (no more converting of Wild oats stores to Whole Foods) as interim relief while the federal court case is pending and is asking Judge Paul Friedman to order Whole Foods to rebrand all former Wild Oats stores.

Whole Foods is fighting back against this move by the FTC. It says the merger is essentially complete, and it is, and that having to "put the toothpaste back in the tube," as legal Counsel Lanny Davis describes the process, would be extremely onerous, and pretty much impossible, since there no longer exists a Wild Oats entity. In other words, there's no tube to put the toothpaste back into.

For example, during yesterdays press teleconference, Whole Foods' co-president Walter Robb said about all that remains in the merger in terms of integration is hanging about six Whole Foods store signs on former Wild Oats stores. The rest are finished, Robb said in response to the FTC's request to judge Friedman to halt the process and to force the natural grocery chain to remove recently (in the six months to a year) installed Whole Foods signs off about 100 converted former Wild Oats stores and put the Wild Oats signs back up. (We wonder if the old Wild Oats signs even still exist. If not will the FTC ask Treasury Secretary Hank Paulsen to give Whole Foods some money out of what is left of the $700 billion financial institution bailout money so it can purchase new signs? It's only fair, isn't it?)

Robb also addressed what he said is the extreme importance of Whole Foods' outside legal council obtaining the proprietary information from the remaining retailers, those out of the 93-94 that haven't complied to date. Robb said Whole Foods Market, Inc. must prove that in each of those 29 markets where the FTC says the natural grocery chain holds a monopoly that it isn't the case. Rather, that competition is robust in each of those contested markets. "If we fail in even one market the case is lost," he said yesterday.

The FTC wants Judge Friedman to rule on its motion to halt the integration, rebrand about 100 stores back from Whole Foods to Wild Oats, along with a couple other issues contained in the motion, before he rules on Whole Foods' lawsuit, in which the company is asking the judge to remove the FTC from jurisdiction over the merger and to return it to his federal court for a final hearing and decision. Should Judge Friedman rule in Whole Foods' favor, that would legally stop the April 6 FTC hearing on the fate of the deal. However, the FTC can appeal the ruling, should it favor Whole Foods, in federal appeals court.

The next step in this legal saga should be for Judge Friedman to rule on a number of motions, both from Whole Foods and the FTC, including the latest one to stop the integration and rebrand the stores, as well as ruling on Whole Foods' lawsuit against the FTC, plus ruling on additional motions the FTC has filed in the case.

Meanwhile, all of the retailers that have yet to comply with the subpoena should receive the letter from Whole Foods by the end of this week. It will be interesting to see if the combination assurance carrot and legal stick turn non-compliance into compliance.

The natural grocery chain's outside legal team is in a race to get this information because they have to analyze it all, compile it, and figure out how to use it to make its case that the combined Whole Foods-Wild Oats is not a monopoly in those 29 U.S. markets by the scheduled April 6, 2009 FTC Administrative hearing. The clock is ticking in terms of the long passed deadline that the legal team wanted to have this data by. Stay tuned.

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