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FTC Fights Whole Foods Ruling

The agency will seek an injunction to stop the grocer's purchase of Wild Oats.
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Updated from 3:37 p.m. EDT

SAN FRANCISCO -- The Federal Trade Commission will appeal a federal judge's ruling rejecting its attempt to block a merger between

Whole Foods

(WFMI)

and its main rival,

Wild Oats

(OATS)

, on anti-competitive grounds.

U.S. District Court Judge Paul Friedman on Thursday

dismissed the FTC's argument that the $565 million merger would result in higher prices and diminished services for customers in the organic-food sector, in which Whole Foods and Wild Oats are dominant players. The FTC had been seeking a preliminary injunction to halt the transaction.

Mitch Katz, a spokesman for the FTC, says the agency is now appealing the decision to the U.S. Court of Appeals for the District of Columbia. It is also asking for an emergency stay from the appeals court to prevent the merger from moving forward.

Whole Foods and Wild Oats have agreed to hold off on any proceedings to close the deal until Monday at noon. If the appeals court does not issue the emergency stay before then, the two companies can begin to merge, making it much harder for the FTC to stop the deal.

Friedman's 93-page opinion is under seal because it contains confidential information about Whole Foods and Wild Oats, as well as other supermarket chains. But Whole Foods put out a statement on Friday supporting the judge's decision.

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"The opinion is firmly grounded in both the facts and the law, and provides a detailed analysis of 'what is really happening in the marketplace,'" the company said in the statement. "We are confident that the merger will be allowed to proceed, which will benefit the customers, vendor partners, shareholders and communities of Whole Foods Market and Wild Oats Markets."

Wild Oats also expects the deal to go through. "We're not worried about the appeal," says Wild Oats spokeswoman Sonja Tuitele.

Whole Foods and Wild Oats had vigorously fought against the FTC's claims that their combination would create a natural-foods monopoly. Both companies argued that enough traditional supermarkets, like

Safeway

(SWY)

and

Kroger

(KR) - Get Kroger Co. (KR) Report

have moved into organic and natural foods.

Mark Ostrau, co-chair of the antitrust and unfair competition group at Fenwick & West, a Silicon Valley-based law firm, says he was surprised by Friedman's ruling.

"I think the FTC has to appeal this because at this point, the courts are setting the bar extremely high for the government to challenge mergers that clearly have some problems," Ostrau says.

Ostrau acknowledges that traditional supermarkets have increasingly moved into the organics food sector and therefore pose some level of competition to Whole Foods and Wild Oats.

"This is not really black and white," Ostrau says. "There is some (competition) but is it enough to protect consumers from Whole Foods raising prices without any repercussions?"

Investors weren't too worried about the government's appeal. Shares of Whole Foods jumped $3.13, or 7.6%, to $44.30 Friday, while shares of Wild Oats surged $2.71, or 18%, to $17.92.