NEWS ANALYSIS : Lucky Merger Case Tests Limits of Antitrust Law

Early last Tuesday, an American Stores executive sounded elated as he chatted with a supermarket competitor.

“It’s all over, and we’re really thrilled,” he said, confident that a federal judge in Los Angeles would soon erect an insurmountable hurdle for the state attorney general in his effort to block the planned merger of the company’s Lucky and Alpha Beta food chains.

Late in the afternoon, though, American Stores executives’ hopes were dashed when the judge drastically slashed a bond requirement in the case, making it feasible for California Atty. Gen. John K. Van de Kamp to pursue his antitrust case with the U.S. Supreme Court.

One year into American Stores’ battle with Van de Kamp, to say that the Salt Lake City-based supermarket and drug store operator miscalculated the extent of Van de Kamp’s zeal is a massive understatement.

The fight has consumed time, resources and millions of dollars and, supermarket analysts say, has cost American Stores momentum in gaining share in the hotly competitive California market. Moreover, American Stores contends, the delay in merging the chains has cost it $1.5 million a week in duplicate costs.

It has often seemed a high-stakes game of Ping-Pong, with each side savoring fleeting victories only to suffer setbacks as the case has bounced through ruling after ruling and appeal after appeal.

“Someone could write a book about what happens to a case when it gets caught up in the legal process,” one attorney involved in it groused recently.

Late last week, as American Stores pondered its next step, legal authorities were sharply divided in their views of whether the U.S. Supreme Court would vote to review the case and how the court battle might affect future merger attempts. While some see the long-running case dampening enthusiasm for mergers, others feel that the issues involved are narrow and technical and that the unusual circumstances are not likely to recur.

Given the Reagan Administration’s relaxed attitude toward acquisitions, many observers said American Stores was justified in assuming last summer that its merger would waltz through.

FTC Gives Approval

American Stores proceeded with its $2.5-billion acquisition of Lucky Stores in June, 1988, with the intention of merging Alpha Beta with Lucky and operating both under the Lucky banner.

Two months later, the Federal Trade Commission, which scrutinized the merger for possible anti-competitive effects, gave the go-ahead, with the proviso that 37 stores should be sold. (Between them, Lucky and Alpha Beta now have about 550 stores.)

Meanwhile, Vons, a big competitor, had just completed its purchase of Safeway’s Southern California stores after agreeing to an FTC demand that it sell 12 stores.

Enter Van de Kamp, the chief advocate for California’s consumers and a Democratic gubernatorial hopeful.

On Sept. 1, a day after the FTC approved the merger of Alpha Beta and Lucky, he challenged the plan on the grounds that the consolidation would reduce competition and raise food prices throughout the state. A year later, some see political motives in his actions.

“Because Van de Kamp is running for governor is why this case has moved as far as it has,” contended Jonathan H. Ziegler, a supermarket analyst with the Sutro & Co. brokerage house in San Francisco.

Moreover, Ziegler and other analysts see as fundamentally flawed Van de Kamp’s contention that the merger would result in higher prices.

“If you keep Alpha Beta and Lucky discrete, you are not going to reduce prices,” he said. “If you merge them, you will. (American Stores) is fighting a market share battle with handcuffs on.”

Review Is Likely

Beyond the basic question of competition, however, the case poses an opportunity for the Supreme Court to resolve an issue over which lower courts have disagreed: Can a private party--somebody other than the U.S. government--order divestiture after a merger has been completed instead of trying to stop it in the first place?

That issue so intrigued Supreme Court Justice Sandra Day O’Connor that two weeks ago she wrote a non-binding opinion stating that “given the conflict among the lower courts on this important and recurring issue and the need for uniform enforcement of federal antitrust laws, I think it fair to say that there is a reasonable probability” that the Supreme Court justices will review the case once they reconvene in October.

With his case, the attorney general hopes to overturn a 1975 decision by the U.S. 9th Circuit Court of Appeals in San Francisco. In International Telephone & Telegraph Corp. vs. General Telephone & Electronics Corp., the court ruled that, under the federal Clayton Antitrust Act, a private party could not win divestiture as a remedy. In other words, after a merger had gone through, it could not be undone.

In that case, ITT was challenging 17 years of acquisitions that it said gave General Telephone undue market power.

H. Chester (Chet) Horn, deputy attorney general, contended last week that the appeals court was influenced by potential difficulty of undoing deals that were several years old.

He added that other courts have disagreed with the 9th Circuit and have allowed divestiture. Moreover, he said, “the Supreme Court has also been clear and consistent in interpreting (the Clayton Act to say) that trial courts are empowered to order whatever injunctive relief they feel necessary to prevent or undo the antitrust harm which confronts them.”

Appealing Issue

In the Lucky/Alpha Beta case, both the U.S. District Court in Los Angeles and the 9th Circuit agree that the attorney general has provided ample evidence of “irreparable harm” to consumers if the merger goes through. But the 9th Circuit ruled that the attorney general’s effort to keep Lucky and Alpha Beta separate amounted to an indirect form of divestiture, which was not allowed.

Van de Kamp is appealing that issue to the U.S. Supreme Court.

“As I understand the case, it basically tests the limits of California antitrust law,” said Malcolm R. Pfunder, a Washington attorney who chairs the American Bar Assn.’s Clayton Act Committee.

Given the narrowness of the issue, Pfunder finds it unlikely that the Supreme Court will review the case, despite O’Connor’s opinion that it is worthy of consideration.

“It seems to me that the issue . . . is not necessarily a matter that requires resolution for antitrust law to continue to survive and function,” he said.

Even so, one expert on antitrust figures that the case could dampen merger mania.

“This case, in a sense, has already had far-reaching effects,” said Lawrence A. Sullivan, Earl Warren professor of public law at UC Berkeley and author of a 1977 book called “Antitrust.” “Even if the Supreme Court doesn’t review the case, it indicates that state enforcement is to be taken seriously, that people planning mergers are not home free when they clear the federal hurdle.”