In parallel, same-day rulings, a federal and state court blocked The Kroger Company’s $24.6 billion proposed acquisition of the Albertsons Companies, Inc., relying on traditional antitrust analysis and evidence of head-to-head competition between the merging parties to support their conclusions.1 Following the twin unfavorable rulings against the merger, Albertsons swiftly moved to terminate the merger agreement and filed a lawsuit against Kroger for breach of contract and breach of the covenant of good faith and fair dealing.2
Both the U.S. District Court for the District of Oregon and King County Superior Court in Washington state handed the antitrust enforcers a sweeping victory on their consumer market claims, effectively permanently enjoining Kroger from its ambitious strategy to create a national grocery behemoth comprising nearly 5,000 retail stores. The Federal Trade Commission’s (FTC) novel labor market theory did not prevail under these set of facts, but the District of Oregon affirmed the viability of this theory, leaving it open for future enforcement actions.
The highly anticipated decisions come after over two years of regulatory investigation by the FTC and state Attorneys General and subsequent litigations in federal and state courts. The merger was announced on October 14, 2022.3 The Washington Attorney General filed the first complaint against the merger in Washington state court on January 15, 2024, and the Colorado Attorney General followed with a separate lawsuit in Colorado state court on February 14, 2024. Two weeks later, the FTC finally brought its own preliminary injunction challenge along with eight states and the District of Columbia in federal court. The FTC also concurrently filed an administrative complaint in its in-house court to permanently block the merger. This set off a relatively rare occurrence of four simultaneous litigations against one merger.
Traditional Supermarkets Market Definition Succeeds
Both the District of Oregon and Washington state court agreed with the plaintiffs’ narrow market definition encompassing “supermarkets,” where customers can “one-stop” shop to fulfill all grocery needs. Other grocery retailer types, which defendants argued should be in the market, have distinguishing characteristics that do not appeal to one-stop shoppers and/or cannot fulfill their needs. Examples of excluded retailer categories are limited assortment stores, which have “virtually no service” and a fraction of the SKUs of traditional grocery stores, and club stores, which have a membership model, bulk package sizes, lack of service offerings, and limited number of SKUs. Industry participants also recognize supermarkets as a distinct market.
The District of Oregon gave some credence to the defendants’ counterargument that grocery consumers have pivoted to “cross-shopping”—where customers visit multiple grocery store formats on the same day to fulfill different grocery needs—and price checking by traditional supermarkets against other retailer types. This, however, was not enough to indicate reasonable interchangeability between those retailers, such that the market definition should be broadened. Citing other opinions that reached similar conclusions, the District of Oregon reasoned that the fact that a shopper may make a monthly trip to a store such as Costco to stock up on smaller bulk purchases does not render a “Costco run” a reasonable substitute for a weekly one-stop visit to a supermarket.
The District of Oregon also confirmed that the FTC’s alternative large format stores market is appropriately defined, and the plaintiffs are not required to determine the exact product or geographic market at the preliminary injunction stage.
2023 Merger Guidelines Reinforced
Both courts found the 2023 Merger Guidelines persuasive, with the District of Oregon specifying that it saw no reason to reject the 2023 thresholds in favor of the lower 2010 Merger Guidelines while citing other recent decisions that endorsed the 2023 Merger Guidelines. Regardless of which Merger Guidelines are applied, both courts concluded that the proposed merger is presumptively unlawful.
Head-to-Head Evidence Prevailed over the Defense’s Focus on Non-Party Retailers
Against Kroger’s assertions of a “monomaniacal” focus on Walmart and other large retailers, both District of Oregon and Washington state gave great weight to the evidence of head-to-head competition between Kroger and Albertsons. Both serve as effective checks on each other’s pricing in markets where both chains operate banners, and they refer to each other as “primary” competitors. They also compete on non-price factors including fresh produce, back-end services, and private label products. In some markets, Kroger and Albertsons are the dominant or even only options, and there may not be another competitor like Walmart to apply pressure on them. Removing Albertsons from the equation means Kroger would be less constrained in pricing and offering promotions and services, which would hurt shoppers.
The Washington state court additionally concluded that coordinated effects are also likely because the defendants already monitor and respond to each other’s prices, and both companies have successfully led the market on increasing prices through “price probes.”
Battle of the Experts: Traditional Economic Analysis Prevails
All parties deployed robust economic analysis to support their arguments. The plaintiffs’ economics experts in both Washington and Oregon applied the long-standing hypothetical monopolist test (HMT) to determine whether its market was well-defined and the compensating marginal cost reduction (CMCR) method to analyze the likelihood that the removal of head-to-head competition would substantially lessen competition. The defendants’ economics expert argued that these traditional models do not adequately describe the effect on competition and instead applied the EGK model, which he defined as a “customer-based” approach that measures substitution through the evaluation of variables such as store formats, store locations, and demographics, the actual monopolist test (instead of the HMT), and the gross upward pricing pressure index (GUPPI) to account for both the upward pricing pressure exerted by the merger and the downward pricing pressure exerted by the proposed divestiture. The defendants’ expert did not define an alternative market.
Favoring established antitrust economic analysis used by the plaintiffs’ experts, both courts rejected the defendants’ EGK model, actual monopolist test, and GUPPI analysis (which relied on the EGK inputs). The courts reasoned that the EGK test does not predict the changes that would occur due to a change in the market and fails to account for other factors that may explain pricing in real-world monopolies (such as supply and demand), which differ across geographic markets.
Efficiencies and Procompetitive Arguments Rejected
Across all antitrust lawsuits against the merger, Kroger vehemently urged the courts to consider its $1 billion investment pledge to cut prices post-merger and the deal’s role in conquering the “existential threat” posed by “global behemoths”4 Walmart, Amazon, and Costco. But both the District of Oregon and Washington state courts remained skeptical of Kroger’s “unenforceable” $1 billion price investment promise and found the procompetitive arguments of needing to combine to compete against large competitors to be unavailing. The Washington court emphasized that mergers can be anticompetitive “even when other, stronger competitors remain in the market.”5 The District of Oregon similarly reasoned that “[t]he overarching goals of antitrust law are not met, however, by permitting an otherwise unlawful merger in order to permit firms to compete with an industry giant.”6 Additionally, neither court found a credible threat of entry or expansion by competitors to mitigate the anticompetitive effects of the merger.
C&S—Too Likely to Fail
To allay regulators’ concerns about the transaction in the midst of their investigations, in September 2023, the merging parties announced a plan to divest 413 stores, eight distribution centers, two offices, certain banners, and five private label brands across 17 states and the District of Columbia to C&S Wholesale Grocers, LLC (C&S).7 Regulators found this remedy inadequate and ultimately opted to block the merger. Kroger followed up with a new divestiture plan in April 2024 after the merger challenges had already been filed. The updated divestiture plan raised the store count to 579 stores (a 166-store increase from the initial plan) across 18 states and the District of Columbia and added some additional banners to be sold to C&S.8 Across three trials, Kroger proceeded to litigate this fix, emphasizing C&S’s capital, wholesaler experience, and the experienced leadership it will acquire from Albertsons.
But that was insufficient to sway both Oregon and Washington judges, who sided with the plaintiffs in finding the divestiture proposal an inadequate remedy for the loss of competition from the merger. C&S is a wholesale grocery supplier with a troubled past when it comes to operating grocery stores. The wholesaler has closed underperforming stores and sold others to independent operators, and it has never operated at the scale the divestiture would require. It would not be able to sufficiently replace the competition lost with Albertsons’s removal from the market. Both courts alluded to Kroger setting up C&S to fail by not giving C&S the capabilities it needs to compete, such as data analytics, pricing, loyalty data, etc., and by selecting weaker assets like the QFC and Haggen banners to sell while retaining stronger banners like Safeway. The courts also rejected the Transition Services Agreement (TSA) under which Kroger would support C&S in integrating new stores and assets for up to four years. According to both courts, the TSA would leave C&S overly reliant on Kroger post-merger and would not create a truly independent entity capable of competing against the combined firm. The hiring of Albertsons’s talent would not mitigate these significant risks.
FTC’s Labor Theory Still Viable
Unique to the FTC’s challenge, the District of Oregon weighed in on an unprecedented attempt by the FTC to challenge the merger on the basis of competitive harm in the market of union grocery labor. The FTC claimed the merger of two of the largest employers of union grocery workers in the United States would result in a substantially lessening of competition and that post-merger, the combined firm will have more bargaining leverage against unions and will have removed a key employer that unions use as leverage in “whipsaw strikes” during collective bargaining negotiations.
Citing a lack of sufficient evidence (in particular, as to market concentration) and guidance on how it should assess the economic effects under the labor theory, the court did not find in favor of the FTC on this claim. However, the court still endorsed the FTC’s claim that labor markets are cognizable antitrust markets. The court found that union grocery labor could be a plausible antitrust market as union workers have distinct wages and benefits, seniority accrual, and access to specialized jobs only available to union members. The court also suggested that collective bargaining agreement coverage areas could be the relevant geographic markets to assess harm. Although the District of Oregon ruling suggests there may be a path for enforcers to continue testing labor competition claims, bringing such claims remains challenging and will need to be supported by rigorous economic analysis.
An Acrimonious Parting
The day after both District of Oregon and Washington state opinions were issued, Albertsons terminated its merger agreement with Kroger and simultaneously filed a lawsuit against Kroger in the Delaware Court of Chancery for breach of the merger agreement.9 Albertsons alleges Kroger failed to exercise “best efforts” and to take “any and all actions” to secure regulatory clearance of the companies’ proposed merger. Albertsons claims Kroger refused to divest necessary assets to gain antitrust approval, ignored regulators’ concerns about the proposed divestiture, rejected stronger divestiture buyers in favor of C&S, and failed to cooperate with Albertsons. Albertsons seeks to recover a $600 million termination fee plus the costs and expenses accrued in connection with obtaining regulatory approvals. Kroger responded that Albertsons claims are baseless, without merit, and an attempt to deflect responsibility after Albertsons has been notified of its breach of contract.10
Albertsons’s allegations and Kroger’s response are reminiscent of Anthem’s and Cigna’s lawsuits against each other after a federal court blocked their proposed merger on antitrust grounds in 2017. Both companies accused the other of sabotaging the merger and sought billions of dollars in damages, with Cigna also seeking a $1.8 billion termination fee from Anthem.11 The Delaware Court of Chancery sided with neither party, and the lawsuit ended in a draw with neither side paying damages.12 Cigna’s appeal to recover the termination fee was also denied.13
It remains to be seen how Albertsons’s lawsuit will play out, but Anthem/Cigna’s “corporate soap opera” shows the importance of careful planning and involvement of antitrust counsel during merger negotiations.
[1] Opinion & Order, FTC v. The Kroger Co., No. 3:24-cv-00347-AN (D. Or. Dec. 10, 2024); Findings of Fact and Conclusions of Law, Washington v. The Kroger Co., No. 24-2-00977-9 (King Cty. Sup. Ct. Dec. 10, 2024).
[2] Press Release, Albertsons Files Lawsuit Against Kroger for Breach of Merger Agreement, Albertsons (Dec. 11, 2024), https://www.albertsonscompanies.com/newsroom/press-releases/news-details/2024/Albertsons-Files-Lawsuit-Against-Kroger-for-Breach-of-Merger-Agreement/default.aspx.
[3] Press Release, Kroger and Albertsons Companies Announce Definitive Merger Agreement, Albertsons (Oct. 14, 2022), https://www.albertsonscompanies.com/newsroom/press-releases/news-details/2022/Kroger-and-Albertsons-Companies-Announce-Definitive-Merger-Agreement/default.aspx.
[4] Marian Zboraj, KROGER IN COURT: Grocery Merger Allows Better Competition With Global Behemoths, Progressive Grocer (Aug. 28, 2024), https://progressivegrocer.com/kroger-court-grocery-merger-allows-better-competition-global-behemoths.
[5] Findings of Fact and Conclusions of Law at ¶ 394, supra note 2.
[6] Opinion & Order at 70, supra note 1.
[7] The Kroger Co., Kroger and Albertsons Companies Announce Comprehensive Divestiture Plan with C&S Wholesale Grocers, LLC in Connection with Proposed Merger, PR Newswire (Sept. 8, 2023), https://cdn.prod.website-files.com/63128e32f4c52f8fbaea44ef/651db90984d836e6d59618d7_Kroger%20and%20Albertsons%20Companies%20Announce%20Comprehensive%20Divestiture%20Plan.pdf.
[8] The Kroger Co., Kroger, Albertsons Companies and C&S Wholesale Grocers, LLC Announce an Updated and Expanded Divestiture Plan, www.Kroger.com (Apr. 22, 2024), https://ir.kroger.com/news/news-details/2024/Kroger-Albertsons-Companies-and-CS-Wholesale-Grocers-LLC-Announce-an-Updated-and-Expanded-Divestiture-Plan/default.aspx.
[9] Complaint, Albertsons Cos., Inc. v. The Kroger Co., C.A. No. 2024-1276-LWW (Del. Ch. Dec. 14, 2024).
[10] The Kroger Co., Kroger Statement Responding to Albertsons’ Baseless Lawsuit, PR Newswire (Dec. 11, 2024), https://www.prnewswire.com/news-releases/kroger-statement-responding-to-albertsons-baseless-lawsuit-302329137.html.
[11] Nate Raymond & Brendan Pierson, Delaware Top Court Rejects Cigna’s $1.8 Billion Fee Bid over Failed Anthem Merger, Reuters (May 3, 2021), https://www.reuters.com/legal/litigation/delaware-top-court-rejects-cignas-18-billion-fee-bid-over-failed-anthem-merger-2021-05-28/.
[12] In re Anthem-Cigna Merger Litig., No. 2017-0114-JTL (Del. Ch. Aug. 31, 2020).
[13] Cigna Corp. v. Anthem, Inc., et al., No. 364, 2020 (Del. May 3, 2021).
