Will grocers’ merger stand?

The purchase of Wild Oats Markets Inc. by rival organic foods purveyor Whole Foods Market Inc. turned a bit wilder than anticipated on Tuesday when a federal appeals court overturned a lower-court ruling that allowed the merger to go through.

The ruling comes almost a year after Whole Foods in Austin, Texas, purchased the 110-store Wild Oats chain for $565 million and brings up questions about whether it would be possible to unwind the merger so long after the fact.

When the two companies announced plans to merge in early 2007, the Federal Trade Commission moved to block the deal, arguing that it would give Whole Foods too much of the market for natural and organic foods and could raise prices for shoppers.

The federal district court ruled against the agency, saying it had not made a case for delaying the merger.

But a three-judge panel of the U.S. Court of Appeals in Washington said that was the wrong decision and sent the case back to the U.S. District Court for the District of Columbia for further consideration.

The ruling was a surprise to antitrust experts, said Mike Cowie, a former FTC assistant commissioner, who is now a partner at Howrey law firm in Washington.

“This is an extraordinary situation for both the district court and the FTC,” Cowie said. “No one can be sure about what happens now.” It’s very difficult in cases such as this to “unscramble the eggs,” he said.

Whole Foods, for example, could be forced to divest a number of stores to a buyer that would be willing to operate them as an independent business, he said. That’s happened with companies in the software industry and other sectors. And the precedent was acknowledged in the court’s opinion.

“The courts have the power to grant relief on the FTC’s complaint, despite the merger’s having taken place, and the case is therefore not moot,” Judge Janice Rogers Brown, a former member of the California Supreme Court, wrote in the 2-1 appellate court decision.

Specifically the three-judge panel said the lower court erred when it ruled that the FTC’s definition of what constituted the market for natural and organic foods was too narrow. The FTC wanted a preliminary injunction to stop the takeover while it argued its position in court.

“The court should have taken whatever time it needed to consider the FTC’s evidence fully,” Brown wrote.

The FTC agreed. “We are pleased by today’s decision of the appeals court in the Whole Foods matter and are looking forward to future proceedings before the district court, leading to a full trial on the merits before the commission,” Jeffrey Schmidt, director of the FTC’s Bureau of Competition, said Tuesday.

Whole Foods said it was “disappointed with this decision as customers” and employees “have already received many benefits from this merger.” The company’s shares closed at $22.39 on Tuesday, up 36 cents.

The company said it was evaluating its legal options and it noted that “the decision acknowledges that neither the court nor the FTC has found the merger to be unlawful. . . . We await the U.S. District Court’s response so this issue can be resolved.”

Most of the time, the FTC would not pursue a case such as this because the bar becomes very high once a merger has closed, said Ronald Wick, an antitrust expert and partner at law firm Baker Hostetler in Washington. Federal regulators typically don’t want to put a lot of time and money into it if they believe they have little chance to win, he said.

Previously, the FTC said it was continuing its appeal because Whole Foods continued to operate many stores under the Wild Oats name, making it easier to reverse at least part of the deal.

Whole Foods, however, has now rebranded most of the Wild Oats stores, sold 35 more and closed 12. There are still 15 that use the Wild Oats name but Whole Foods said they would be converted in the coming weeks.

The buyers of the stores that were sold off could not be compelled to return them to Whole Foods to fold into a reconstituted Wild Oats, Wick said.

Other factors also have changed since the deal has closed. In Southern California, for example, the competition in the natural and organic foods market is increasing.

Two small organic and natural food chains, Sprouts Farmers Markets and Henry’s Farmers Market -- the 35-store former Wild Oats unit sold by Whole Foods -- are adding stores, thus diluting Whole Foods’ market concentration.

And traditional grocers and retailers including Safeway Inc., which operates as Vons and Pavilions in Southern California, and retail giant Wal-Mart Stores Inc. continue to expand their selection of organic goods.

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jerry.hirsch@latimes.com