Plaintiff Ekaterini Kottaras is a resident of Los Angeles County and a consumer of premium, natural, and organic products. She is a patron of Defendant Whole Foods Market, Inc. and also shopped at Wild Oats Markets before the two grocery chains merged. Believing this merger unlawfully raised prices on certain products, she brought this antitrust action against Whole Foods. She subsequently moved, under Federal Rule of Civil Procedure 23, to certify a class of Los Angeles County Whole Foods shoppers.
Now that the parties have both submitted briefs and offered expert testimony at a hearing on this Motion, the Court believes class certification is not appropriate here for three central reasons. First, an essential element of Plaintiff's case -- that is, injury to individual members of the class -- cannot be proven through classwide evidence; the action, accordingly, does not satisfy Rule 23(b)(3)'s requirement that common questions predominate over individual ones. Second, the proposed methodology of Plaintiff's expert is too vague for the Court to rigorously analyze. Finally, Plaintiff's alternative request for certification under Rule 23(b)(2) is easily rejected as equitable relief in this case is merely incidental to monetary damages.
On August 28, 2007, Whole Foods acquired Wild Oats, another retailer specializing in premium, natural, and organic foods. See Compl., ¶ 1. A couple of months before the merger was consummated, the Federal Trade Commission sought to enjoin it on the ground that it would create monopolies in eighteen cities where Whole Foods and Wild Oats were the only premium, natural, and organic supermarkets (PNOS). The FTC's motion for a preliminary injunction was denied by Judge Paul Friedman of this District because the FTC had not shown a likelihood of success on the merits. FTC v. Whole Foods Market, Inc., 502 F. Supp. 2d 1, 49-50 (D.D.C. 2007). His decision was based on a finding that the relevant product market was broader than PNOS and at least included "the retail sale of food and grocery items in supermarkets." Id. at 19; see also FTC v. Whole Foods Market, Inc., 548 F.3d 1028, 1033 (D.C. Cir. 2008) (stating that district court concluded that PNOS were not distinct market because they "compete within the broader market of grocery stores and supermarkets").
The D.C. Circuit reversed this decision and remanded the case, holding that the district court's decision to limit its market analysis to marginal customers was error. See Whole Foods, 548 F.3d at 1041. Because core consumers -- i.e., those who "demand exclusively a particular product or package of products" -- can constitute a submarket worthy of antitrust protection, the D.C. Circuit determined that the FTC may have "show[n] a likelihood of success sufficient, using the sliding scale, to balance any equities that might weigh against injunction." Id. In May 2009, following the remand, the FTC and Whole Foods entered into a consent agreement under which a Trustee of Whole Foods would divest itself of 32 locations, none of which was in Los Angeles County. See Decision and Order, available at http://www.ftc.gov/os/adjpro/d9324/090529wfdo.pdf (last visited Jan. 23, 2012). The FTC then voluntarily dismissed the case, and the action was terminated. See Civil Action No. 07-1021, ECF No. 192.
In January 2010, Plaintiff Kottaras brought this suit alleging that the merger foreclosed competition in the PNOS market solely in Los Angeles County, leading to supra-competitive prices there. See Compl. Specifically, she alleges that Whole Foods's acquisition of Wild Oats substantially lessened competition in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18 (Count I), created an unlawful monopoly in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2 (Count II), and constituted an unlawful agreement in restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 3 of the Clayton Act, 15 U.S.C. § 14 (Counts III and IV, respectively). See Compl., ¶ 2. Pursuant to Federal Rule of Civil Procedure 23, Plaintiff has now moved to certify a class of all persons who purchased "premium, natural, or organic products from Whole Foods supermarkets in California's Los Angeles County" between the date of the merger and the date of this Court's ruling. See Mot. at 1.
In support of her Motion, Plaintiff offers the report of her expert, Dr. Oral Capps, Jr., a professor of Agricultural Economics and Co-Director of the Agribusiness, Food, and Consumer Economics Research Center at Texas A&M University. See Mot., Exh. 1 (Expert Report of Dr. Capps), ¶ 1. Among other things, Capps was asked to determine "if, from an economic perspective, evidence that is predominantly common to members of the proposed class can be used to determine . if members of the proposed class were adversely impacted by the alleged illegal conduct of Whole Foods." Id., ¶ 8. Capps assumes, for purposes of his analysis, that "the merger between Whole Foods and Wild Oats . allowed Whole Foods to charge supra-competitive prices to the detriment of consumers." Id.
Capps concludes that both the existence of damages and the amount of damages -- two distinct but related matters -- can be determined using classwide evidence. According to Capps's report, damage occurs when a customer pays more for a product at Whole Foods than he would have paid but for the merger. See id., ¶ 53. With respect to proving the existence of damages, Capps relies primarily on the fact that Whole Foods's prices are uniform across Los Angeles County in any given week to opine that adverse impact can be shown with evidence common to the class. Id., ¶ 38-43. He suggests that by analyzing pricing data for each stock keeping unit (SKU) -- the units used to designate a specific size of a specific brand of a specific product -- he will be able to show that members of the class were injured by the merger. Id., ¶ 48. Based on the fact that the experts in the FTC's challenge of the merger considered the effect of competition on pricing, Capps states that "it seems reasonable to believe any anticompetitive impact of the merger would take the form of increased register prices." Id., ¶ 46; see also id., ¶47.
With respect to the amount of damages, Capps proposes to create an econometric model to isolate the effect of the merger on the prices of products sold by Whole Foods. See Class Certification Hearing Transcript (Trans.) at 16-22. Using a regression analysis that controls for other factors that may affect prices, Capps states that he can determine how much of the overcharge for a particular product was due to the merger. See Capps Expert Report, ¶ 59. Multiplying the per-unit amount of overcharge due to the merger by the number of units sold during the relevant period will provide the total overcharge to members of the proposed class for that particular item. Id. This regression analysis would have to be repeated for the thousands of products that account for most or all of Whole Foods's sales. Id. Then the overcharge for all products would be combined to determine the total adverse impact of the merger on members of the proposed class. Id. At his deposition, Capps stated that the total would be divided "'by the aggregate measure of customer count [to get] a dollar figure per member of the class,'" though Plaintiff now denies that Capps intends to use that method to calculate individual damages. Trans. at 75-76 (quoting Capps Dep. at 93); Reply at 12 (arguing Defendant mischaracterizes Plaintiff's expert by stating that he "would simply ascribe the same overcharge injury to all class members, regardless of whether a particular class member actually bought the specific item that was the subject of the overcharge").
Capps's position, unsurprisingly, is not shared by Whole Foods's expert, Dr. Janusz Ordover. Ordover, a professor of economics at New York University and former Deputy Assistant Attorney General for Economics at the Antitrust Division of the U.S. Department of Justice, believes that injury to individual class members cannot be proven using common evidence. See Trans. at 111. This conclusion is based on two central premises. First, Whole Foods shoppers buy "highly differentiated baskets of products," a fact that Capps acknowledges. See Opp., Exh. A (Expert Report of Dr. Ordover), ¶ 11; Capps Dep. at 64-65, 88-89. Second, Ordover's study of price-change information across all legacy Whole Foods stores operating in Los Angeles County showed that price movements after the merger were heterogeneous, and "the majority of the products sold at Whole Foods have decreased in price" in the post-merger period. Ordover Expert Report, ¶ 29 (emphasis in original). In light of these facts, Ordover concludes that determining which of Whole Foods's customers was harmed by the merger would require an individualized inquiry into "the items actually purchased by each consumer and the changes in price of each item." Id., ¶ 36. Ordover believes Capps's proposed methodology is flawed because it cannot reliably "determin[e] the fact of impact or damages suffered by individual consumers" and because it ignores products that dropped in price as a result of the merger. Id., ¶ 11.
In order to evaluate the competing experts' positions on class certification and explore the issues raised by each side, the Court held a hearing on December 7, 2011, limited to the direct and cross-examination of Capps and Ordover. The Court also heard brief oral argument from counsel as to the legal significance of the testimony presented.
To certify a class under Rule 23, Plaintiff must show that the proposed class satisfies all four requirements of Rule 23(a) and one of the three Rule 23(b) requirements. See Fed. R. Civ. P. 23(a)-(b); see also Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2548, 2551 (2011). Rule 23(a) states that a class may only be certified if (1) the class is so numerous that joinder of all members is impracticable ("numerosity"), (2) there are questions of law or fact common to the class ("commonality"), (3) the claims or defenses of the representative are typical of those of the class ("typicality"), and (4) the class representative will fairly and adequately protect the interests of the class ("adequacy of representation"). The moving party must show, in addition, either that (1) the prosecution of separate actions by or against individual members of the class would create a risk of inconsistent adjudications, (2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole, or (3) questions of law or fact common to the members of the class predominate over any questions affecting only individual members. See Fed. R. Civ. P. 23(b)(1)-(3).
In deciding whether to certify a class under Rule 23, a district court must undertake a "rigorous analysis" of whether the requirements of the Rule have been satisfied. General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 161 (1982). "Rule 23 does not set forth a mere pleading standard." Wal-Mart, 131 S. Ct. at 2551. Rather, the party seeking class certification bears the burden of "affirmatively demonstrat[ing] his compliance with the Rule -- that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc." Id. (emphasis in original). The Court's analysis of whether a class may be certified "frequently . entail[s] some overlap with the merits of the plaintiff's underlying claim," requiring the Court to "probe behind the pleadings before coming to rest on the certification question." Id.; see also Falcon, 457 U.S. at 160 ("'[T]he class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action.'" (internal citation omitted)). Because a decision on class certification "'requires a thorough examination of the factual and legal allegations,' [Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154,] 166 [(3rd Cir. 2001)], the court's rigorous analysis may include a 'preliminary inquiry into the ...