Court revives U.S. case against Whole Foods deal

WASHINGTON (Reuters) - A U.S. appeals court revived a government antitrust case against Whole Foods Market Inc's (WFMI.O) purchase of rival Wild Oats Markets Inc, reversing on Tuesday a lower court decision that allowed the deal to proceed last year.

Whole Foods said it was disappointed by the decision and could seek a review by the full appeals court. Meanwhile, it would carry on "business as usual."

The U.S. Court of Appeals for the District of Columbia said a district court judge erred when he turned down a Federal Trade Commission request for an injunction to block the deal.

U.S. District Judge Paul Friedman "underestimated the FTC's likelihood of success on the merits" when he denied the agency's request, the three-judge appeals court panel said in its ruling. One of the judges dissented from the opinion.

The appeals court remanded the case back to Friedman for further proceedings.

Whole Foods shares fell for a time after the ruling was issued Tuesday morning but closed up 1.6 percent at $22.39 in trading on Nasdaq.

Rating agency Standard & Poor's said it did not see the ruling changing Whole Foods' daily operations or its continued integration of Wild Oats stores. Wild Oats had been effectively "deconstructed" since the acquisition, S&P said in a statement, with store divestments, closures and rebrandings.

Howard University law professor Andrew Gavil said it could take a long time for the FTC to get an injunction because of legal procedures, giving Whole Foods even more time to integrate the two companies.

"Given where things are in this case it's going to be very hard to really undo the merger and come up with an effective remedy," Gavil said.

Nevertheless, he said the ruling could be important for the FTC as it sets a precedent strengthening the agency's hand in seeking a preliminary injunction in future cases.

The FTC is seeking an administrative trial before the agency's five commissioners.

The director of the FTC's competition bureau, Jeffrey Schmidt, issued a statement on Tuesday saying agency officials looked forward to future proceedings before the district court, leading to a full trial on the merits before the commission.

ORGANIC GROCERY MARKET

Whole Foods first announced its plan to buy smaller rival Wild Oats in February 2007. The FTC sued to block the $565 million deal in June 2007, saying it would hobble competition in the market for natural and organic groceries.

Judge Friedman denied the FTC's request to block the deal in August of last year, concluding that the FTC had failed to prove the merger would hurt competition. The agency then asked the D.C. appeals court to stop the merger, but was turned down. The companies went ahead with their deal that same month.

The appeals court on Tuesday rejected Whole Foods' argument that the FTC appeal is irrelevant because the agency does not have the authority to undo a completed merger.

Federal courts "have the power to grant relief on the FTC's complaint, despite the merger's having taken place, ..." the court said.

The FTC had said the combination of Whole Foods and Wild Oats raised antitrust concerns in 21 geographical areas where the two chains were each other's closest competitors.

Whole Foods argued that its stores compete in a broader market against all supermarkets, not just organic grocery stores. The FTC disagreed, saying they compete in the premium, organic niche market.

The appeals court said judge Friedman had misconstrued a key legal point, leading him to give short-shrift to the FTC's main argument: that Whole Foods and Wild Oats were in a battle of their own over a distinct market for "core" organic grocery customers.

But the reversal drew a sharp dissent from one of the three judges on the panel, Appeals Court Judge Brett Kavanaugh, who accused his colleagues of trying to "unring the bell."

(Reporting by Peter Kaplan; Editing by Tim Dobbyn)