United States: FTC To Challenge Ice Cream Merger

On March 4, 2003, the Federal Trade Commission unanimously voted to authorize its staff to seek a preliminary injunction blocking a proposed $2.8 billion merger between two ice cream companies – Nestlé Holdings, Inc. and Dreyer’s Grand Ice Cream, Inc. According to the FTC, the merger would eliminate competition in the market for "super-premium" ice cream. The FTC identified Nestlé’s Häagen Dazs brand ice cream and Dreyer’s Dreamery, Godiva, and Starbucks brands as competing products in the purported market. Nestlé and Dreyer’s offer other well known ice cream products, such as Nestlé’s Drumsticks, Dole Fruit Bars and Nestlé Crunch Bar and Dreyer’s Edy’s brand ice cream and Whole Fruit brand sorbet, although the FTC apparently does not believe that these products compete in the super-premium segment.

The Director of the FTC’s Bureau of Competition, Joe Simons, remarked that the merger would reduce the number of competitors in the super-premium ice cream market from three to two. Unilever’s Ben & Jerry’s brand represents the only other significant competition in the super-premium segment. The FTC’s press release announcing the decision indicates that, together Nestlé, Dreyer’s, and Unilever account for 98% of sales in the segment, and Nestlé would control approximately 60% of super-premium ice cream sales if it acquires Dreyer’s. The FTC intends to argue that competition from Dreyer’s has persistently forced Nestlé to lower prices and engage in greater promotional activities, but the merger would eliminate this competition thereby resulting in higher prices and less product variation. The FTC staff apparently has taken the position that entry into the super-premium ice cream market is difficult.

To gain approval from the FTC, Dreyer’s reportedly has offered to divest the Godiva and Whole Fruit brands to a company that markets Eskimo Pies and frozen desserts under the Tropicana, WeightWatchers, and Betty Crocker trademarks. Michael Cowie, Assistant Director of the FTC’s Merger Litigation Task Force, however, cautioned that the FTC has not yet determined whether the proposal adequately addresses the FTC’s concerns. The FTC staff has not indicated when it would moved for a preliminary injunction, although Nestlé reportedly expects any litigation to be put "on hold" while the parties continue to negotiate a resolution with the FTC.

Based on previous antitrust actions in the ice cream industry, the FTC staff may face some difficulties in persuading a court that the merger will reduce competition in a "super-premium" ice cream market. In fact, in private antitrust litigation during the 1980’s, In re Super Premium Ice Cream Distribution Antitrust Litigation, a federal court in California rejected the argument that a separate market exists for super-premium ice cream. Rather, super-premium ice cream was found to compete in a much broader market against all grades of ice cream. Moreover, in contrast to the FTC’s apparent recent position regarding ease of entry into the super-premium ice cream segment, the appellate court in that previous litigation found that companies making other grades of ice cream could easily enter the super-premium segment by merely altering the ingredients in their ice creams. This finding, if adopted by a court in the present case, could make it extremely difficult for the FTC to show that the Nestlé/Dreyer’s merger would violate the antitrust laws. The decision to block this merger may be another sign that, in reviewing mergers, the FTC will engage in innovative economic thinking to define relatively narrow markets, which may not necessarily coincide with existing legal precedent, but which trigger competitive concerns. The agency took a similarly aggressive approach to market definition in the Staple/Office Depot merger back in 1997.

Kilpatrick Stockton antitrust partner Stan Gorinson represented Häagen-Dazs in In re Super Premium Ice Cream Distribution Antitrust Litigation.