1 1 UNITED STATES DISTRICT COURT 2 FOR THE DISTRICT OF COLUMBIA 3 -------------------------------X 4 FEDERAL TRADE COMMISSION Docket No. CA-07-1021 5 Plaintiff 6 v. P.M. SESSION 7 WHOLE FOODS MARKET, INC. et al, 8 Defendants, 9 -------------------------------X Washington, D.C. Tuesday, July 31, 2007 10 1:45 P.M. VOLUME I 11 TRANSCRIPT OF MOTION HEARING BEFORE THE HONORABLE PAUL L. FRIEDMAN 12 UNITED STATES DISTRICT JUDGE 13 APPEARANCES: 14 For the Plaintiff: FEDERAL TRADE COMMISSION Bureau of Competition 15 Michael Bloom, Esquire Thomas Brock, Esquire 16 Catharine M. Moscatelli, Esquire Matthew J. Reilly, Esquire 17 Thomas Lange, Esquire Michael Franchak, Esquire 18 600 Pennsylvania Avenue, N.W. Washington, D.C. 20580 19 (202) 326-2475 20 21 22 Court Reporter: Lisa Walker Griffith, RPR U.S. District Courthouse 23 Room 6409 Washington, D.C. 20001 24 (202) 354-3247 25 Proceedings recorded by mechanical stenography, transcript produced by computer. 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 APPEARANCES: (Cont'd.) 2 For the Defendants: VINSON & ELKINS LLP Alden L. Atkins, Esquire 3 John D. Taurman, Esquire 1455 Pennsylvania Ave., N.W. 4 Washington, D.C. 20004 (202) 639-6613 5 6 DECHERT, LLP Jeffrey W. Brennan, Esquire 7 Paul T. Denis, Esquire Paul H. Friedman, Esquire 8 James Fishkin, Esquire Michael D. Farber, Esquire 9 1771 I Street, N.W. Washington, D.C. 20006-2401 10 (202)261-3300 11 SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP 12 Clifford H. Aronson, Esquire Matthew Hendrickson, Esquire 13 Four Times Square New York, NY 10036 14 (212)735-3000 15 16 17 18 19 20 21 22 23 24 25 4 1 AFTERNOON SESSION 2 THE DEPUTY CLERK: This is the P.M. session of 3 Federal Trade Commission versus Whole Foods Market Inc., et. 4 al., Civil Action 07-1021. 5 THE COURT: By my calculations, the plaintiffs have 6 taken an hour, and the defendants have taken an hour and 43 7 minutes, although I may be off by a few minutes here and 8 there. I hope that my calculations are more or less 9 consistent with yours. 10 I guess the first question, I think this is the 11 first question, do we want to discuss the motion to strike, 12 Mr. Denis? 13 MR. DENIS: Yes, Your Honor. Paul Denis on behalf 14 of defendants. We have discussed and we're comfortable 15 standing with your ruling on the motion to strike. So there 16 will be no need for Dr. Murphy to come back tomorrow. 17 THE COURT: Well, in that case, Dr. Murphy -- the 18 motion to strike is granted for the reasons I said earlier 19 today. And we'll proceed on that basis. 20 So, anything anybody needs to raise before we start 21 with Dr. Scheffman? Okay. Ready for Dr. Scheffman? 22 MR. BRENNAN: Your Honor, Jeff Brennan from Dechert 23 on behalf of Whole Foods. We call Dr. David Scheffman. 24 DR. DAVID SCHEFFMAN, JR., DEFENSE WITNESS, SWORN 25 DIRECT EXAMINATION 5 1 BY MR. BRENNAN: 2 Q Good afternoon, Dr. Scheffman. Before you, in that 3 Redwell, would you please open that up and identify it for 4 us? 5 A Yes. 6 Q Do you see there your expert report that you submitted 7 in this case? 8 A Yes, two expert reports. 9 Q Okay. Is the first one the expert report of David T. 10 Scheffman, Ph.D.? 11 A Yes. 12 Q Okay. Would you turn to Page 140 of that first one, 13 please? 14 A Yes. 15 Q Is that, do you see your name and a signature there? 16 A Yes. 17 Q Is that your signature? 18 A It is. 19 Q Okay. Do you stand by the contents of your first expert 20 report as you sit here today? 21 A I have. I want to make one correction. 22 Q Okay. 23 A In Paragraph 114, there is a misquote. 24 Q What is that misquote? 25 A The misquote says that my text reads, "In the Staples 6 1 decision the judge noted the retail markets," da da da, that 2 was a misstatement as is clear from the footnote. That was 3 actually the statement of the FTC, not Judge Hogan in 4 Staples. 5 Q Okay. Any other changes? 6 THE COURT: That's Paragraph 114? 7 THE WITNESS: Yes. 8 BY MR. BRENNAN: 9 Q That would be at Page 38, Dr. Scheffman? 10 A Yes. I note it because somehow I didn't correct it 11 before, and Dr. Murphy's rebuttal report repeated that I had 12 said that that's what Judge Hogan said. I'm not criticizing 13 Dr. Murphy. He is just quoting what my report said. I just 14 want to be sure that was clear. 15 Q Okay. Any other changes to your expert report, Dr. 16 Scheffman? 17 A No. 18 Q Does your expert report also include Appendices A 19 through G? 20 A Yes. 21 Q Okay. Again, for the record, you submitted a second 22 report; is that right? 23 A Yes. 24 Q Is that the, is that the rebuttal expert report of David 25 T. Scheffman? 7 1 A Yes. 2 Q Okay, if you would turn to Page 45 of that document, 3 please? 4 A Yes. 5 Q And you see that your name is written there and a 6 signature? 7 A The copy I have does not have my signature. 8 Q Okay. 9 MR. BRENNAN: May I approach? 10 THE COURT: Yes. 11 BY MR. BRENNAN: 12 Q Dr. Scheffman, I'm showing you actually my copy of the 13 supplement of your second expert report. I'm turning to Page 14 45. Do you see your signature there? 15 A Yes, I do. 16 Q Is that your signature? 17 A Yes. 18 Q Did you indeed sign this report as indicated? 19 A I did. 20 Q Does the rebuttal report continue to reflect your 21 testimony as you sit here today, sir? 22 A Yes. 23 MR. BLOOM: Your Honor, Michael Bloom. Forgive my 24 tardiness on this, but I just wanted to make sure that, with 25 respect to your ruling, I don't need to state an exception in 8 1 order to preserve the issue? 2 THE COURT: No, you do not. That sort of went away 3 years ago, didn't it? 4 MR. BLOOM: I thought so, Your Honor, but better to 5 be safe. 6 THE COURT: The FTC clearly objects to my ruling. 7 MR. REILLY: Good afternoon, Your Honor, Matt 8 Reilly from the Federal Trade Commission. 9 CROSS EXAMINATION 10 BY MR. REILLY: 11 Q Good afternoon, Dr. Scheffman. 12 A Good afternoon, Mr. Reilly. 13 Q Nice to see you again. No response, Dr. Scheffman? 14 A You know, Matt, that I always enjoy seeing you. 15 Q You're under oath, Dr. Scheffman. 16 A That's the truth. 17 MR. REILLY: Your Honor, we've actually given to 18 you and to Dr. Scheffman a couple binders. That will be the 19 documents that we'll most likely show to Dr. Scheffman this 20 afternoon. In addition to the binders, these documents will 21 all be on the screens in the courtroom except for the one in 22 the back. None of the documents will be on the screen in the 23 back. 24 There are some confidentiality issues that I'm very 25 confident or at least quite confident that we can get around 9 1 them by maybe talking vaguely at times but having the 2 references on the screen so we won't have to clear the 3 courtroom. 4 THE COURT: Okay. So fundamentally, nothing that 5 comes on the screen should be shown on the public screens? 6 MR. REILLY: That's right. 7 THE COURT: Unless you say otherwise? 8 MR. REILLY: That's correct. 9 THE COURT: Okay. 10 THE WITNESS: Please be careful not to -- I have to 11 be careful obviously when you're questioning that I wouldn't 12 blurt out something confidential. I know I'm going to be 13 careful too. 14 MR. REILLY: Yeah. 15 CROSS EXAMINATION 16 BY MR. REILLY: 17 Q Dr. Scheffman, before we talk about what work you did on 18 this case, let's talk about what you didn't do before 19 reaching an opinion regarding this matter. 20 You didn't do any econometric analysis, correct? 21 A I did in my rebuttal report. I reviewed Dr. Murphy's 22 econometric analysis, and I had more to say about it than he 23 remembered this morning. 24 Q My question was, before reaching an opinion regarding 25 this merger, so that would apply to your first expert report. 10 1 Is that understood? 2 A Yes. 3 Q You didn't do any econometric analysis, correct? 4 A That's correct. 5 Q You didn't do any statistical analysis, correct? 6 A That's correct. 7 Q You didn't calculate any demand elasticities for Whole 8 Foods, Wild Oats or any of the premium natural and organic 9 supermarkets industry players, correct? 10 A Let me just say, I think I explained that in my 11 deposition, that's correct. But I reviewed literally, 12 literally dozens and dozens of mergers and, in a few 13 instances, we had data to do those sort of analysis. But we 14 usually do not have data to do analyses, very seldom have 15 data to do econometrics. And very seldom to somewhat less 16 seldom you have data in which you can do statistical 17 analyses. 18 Q Dr. Scheffman, you did not determine specifically who 19 was the closest substitute to Whole Foods, right? 20 A No, as I explained in my report in rebuttal and my 21 deposition, it's actually complicated. We have to talk about 22 for who, which consumers. 23 Q Sitting here today, can you tell me who is the closest 24 substitute to Whole Foods, what store? 25 A For which consumer? 11 1 Q You already answered this question during your 2 deposition, Dr. Scheffman. So why don't you use the exact 3 same definition that you used when I asked that question in 4 your deposition? 5 A As I said in my deposition in the line of questioning, 6 what I show when Whole Foods enters is most all of the sales 7 by far by any measure do not come from Wild Oats when it 8 enters in an area where there is a Wild Oats. 9 So if you ask who was the "closest competitor," 10 which is a term that could mean something precise in 11 antitrust, and I don't mean it precise here, but clearly in 12 that sense, for most all of the sales that Whole Foods 13 achieves when it enters against Wild Oats, those dollars were 14 previously spent at, not at Wild Oats or not other PNOS, it 15 was spent, most of it, in regular, quote, regular 16 supermarkets, not PNOS supermarkets. 17 THE COURT: We have a different court reporter this 18 afternoon. PNOS is all caps, P-N-O-S. 19 BY MR. REILLY: 20 Q Dr. Scheffman, when I asked you, in areas where Whole 21 Foods and Wild Oats overlap, who is viewed as the closest 22 substitute for Whole Foods, you said, it's other. Is that 23 your testimony? 24 A In a general sense, as I just said, because most all of 25 the sales come from, did not come from Wild Oats as the 12 1 entry. That in a general sense, where those sales come from 2 was, quote, other. And that's what I stated. 3 I made it clear in my deposition, Mr. Reilly, that 4 I wasn't using closest competitor in a precise sense that 5 Dr. Murphy tries to do and which I disagree with. I was only 6 making clear, it depends on the consumer and we know from the 7 majority of consumers in sales, the sales came from other. 8 Q You do not calculate or estimate what percent of Whole 9 Foods customers view Wild Oats as the next best substitute; 10 is that correct? 11 A Let me say again. 12 Q Can you answer that question, Dr. Scheffman? 13 A I believe I -- can you read me my deposition? 14 Q Sure. Page 21, "Did you calculate an estimate or range 15 of what the actual percentage of Whole Foods customers are 16 who view Wild Oats as their next best substitute?" Okay, on 17 Page 131. And the answer was -- 18 THE COURT: Page 131 of what? 19 MR. REILLY: Of his deposition transcript. 20 MR. BRENNAN: Can we have a line too? 21 MR. REILLY: Twenty-two to 25. 22 BY MR. REILLY: 23 Q The answer is, "No. No one has as far as I know." 24 A Yeah, but I didn't calculate that precisely. As I said 25 before, we know, it's unequivocal from the data, that Whole 13 1 Foods, the sales and gains come overwhelmingly from other. 2 So that other, it depends on the consumer. But I'm saying 3 for most of the sales, it's other. 4 Q You do not attempt to calculate cross-price elasticities 5 for any firm in any geographic market; is that correct? 6 A Mr. Reilly, you -- very, very seldom can you estimate 7 cross elasticities in a merger because you don't have data 8 that you can do that, particularly at the firm level. You 9 can do it sometimes but very, very infrequently. 10 Q You didn't do it in this matter, did you, Dr. Scheffman? 11 A That's correct. 12 Q Dr. Scheffman, if I asked you, if Whole Foods increased 13 prices by one to two percent, how much of Whole Foods sales 14 would be diverted to Wild Oats, you do not know the answer to 15 that question, do you? 16 A What I said in my deposition was we don't have the data 17 to answer that question. And it's important that I explain 18 why that's true. We have lots and lots of data. You were 19 asking me if Whole Foods today raised the prices above what 20 it thought the prices should be to meet its competitive 21 environment, that would be a natural experiment, what the 22 economists call a natural experiment. 23 We say, here is a situation where Whole Foods 24 raised their price and nothing else in the competitive 25 environment changed. Can we see what happened? And the 14 1 answer is, although we have lots of data, we do not have any, 2 in the data, natural experiments where we can say, here is 3 where -- and we do. 4 In some mergers, we've seen this, but we don't, in 5 the data, have situations where we can say, Whole Foods 6 raised their price here. None of the competitors did. 7 Everything else stayed the same. And that's the way, as an 8 economist, you would estimate cross elasticity. 9 Cross elasticity, so I can be clear, cross 10 elasticities assume, because they assume necessarily that 11 you're holding everything else constant. So, for example, 12 the cross elasticities go back to, I forget what case in the 13 law, that's one of the contributions of economists to 14 antitrust law. That analysis is what happens if for one 15 product or one company, the prices increase holding 16 everything constant. We don't have examples of that in the 17 data. 18 Q Critical loss adjusts arithmetic. Is that correct, Dr. 19 Scheffman? 20 A The actual critical loss number, as I say in the report 21 and hopefully explain clearly in the report, and as I've 22 written, is simply arithmetic. That part, there's a critical 23 loss test. The critical loss calculation is just arithmetic. 24 Q To have any meaning in the context of a merger analysis, 25 you have to know how actual loss compares to critical loss; 15 1 is that correct? 2 A Absolutely. 3 Q But, Dr. Scheffman, you did not calculate actual loss or 4 even estimate actual loss in this matter, did you? 5 A It's not true. I made the conclusions based on it. 6 Q Based on an estimate? 7 A Yes. 8 Q Could you please turn to your transcript, deposition 9 transcript at Page 88, Lines 21 and 23. 10 MR. BRENNAN: I just note that he is looking at a 11 confidential page to put the witness on note. 12 THE COURT: Okay. What lines did you say? 13 MR. REILLY: Transcript at 88, Lines 21 and 23. 14 BY MR. REILLY: 15 Q Actually the whole thing is confidential. I asked about 16 actual loss, how to compare for one percent price increase 17 more than ten percent price increase. You haven't had 18 estimated it. Did I read that correctly? 19 A I'm not trying to use up your time but I need to 20 explain. You asked me a number of questions like this. And 21 I said, at one point, is I can give you the explanation, but 22 it will be a somewhat lengthy explanation. And you said, 23 well let's go on. Okay. 24 I did, there was no basis for me to use critical 25 loss at all. Why would I use it if I didn't estimate an 16 1 actual loss? I didn't estimate it in a statistical sense. I 2 estimated it in a sense, and almost always in mergers, we use 3 the data and evidence we have in the investigation to 4 estimate actual loss. And I did, later in the deposition, as 5 you know, opine as to what the actual loss, you know, what it 6 was at least for different price increases. 7 I do in my report where, when I use, which is what 8 I think is appropriate, a five percent test, I conclude for 9 all the reasons that are in my first report that the actual 10 loss is considerably above, would be considerably above the 11 critical loss. 12 And finally, I know, I don't want to use your time, 13 unwarrantedly, the actual loss you're talking about is a 14 hypothetical. You usually cannot estimate, you know, from 15 data the actual loss because you're talking about something, 16 remember again, we're talking, as Dr. Murphy said, you're 17 talking about something that hasn't happened, the merger, the 18 hypothetical monopolist that would merge the PNOS and you 19 don't have that experiment. So, you're always estimating a 20 hypothetical. 21 Q Dr. Scheffman, my question was, did I read that 22 correctly? I think somewhere in there, did you give me an 23 answer to that? Did I read that statement in the transcript 24 correctly? I read it about ten minutes ago, I think. 25 A Mr. Reilly, I said later in the transcript that I 17 1 concluded that it was at least -- we shouldn't, we're getting 2 to, we already have here something that's, you know, has some 3 confidential information in it, underneath it. 4 But I would say, I did, as you know, I did later 5 say I had concluded it was at least dot, you know, a number 6 that I can't disclose. And that number was at least twice as 7 big as the critical loss. 8 Q When you gave me that estimate on actual loss, had that 9 estimate appeared anywhere in your actual report, that 10 precise estimate that you said dot? 11 A The critical loss test is, does the evidence, the 12 conclusion -- 13 Q Dr. Scheffman, my question was just simple. Did that 14 estimate that you don't want to say in this court for actual 15 loss appear -- 16 MR. REILLY: And, Your Honor, we're at transcript 17 at Page 89 where that number is, Line 10. 18 BY MR. REILLY: 19 Q Did that estimate for actual loss that is on Line 10 20 appear anywhere as an estimate of actual loss in your expert 21 report? 22 MR. BRENNAN: Your Honor, I just want to object to 23 the characterization. I don't think the witness says he 24 doesn't want to say it for reasons that might be implied by 25 the question. I think the witness is responding to my note 18 1 that these pages have been designated confidential. And the 2 number on the line, I think he's following my advice, not to 3 disclose that in open court. 4 BY MR. REILLY: 5 Q Dr. Scheffman, did this estimate of actual loss appear 6 anywhere in your report? 7 A No. 8 Q When I asked you what the actual loss was, you 9 responded, "When I say exceed or swamp, I'm saying more like 10 probably twice as much, say like maybe five percent." Did I 11 read that correctly? 12 A Mr. Reilly, we still shouldn't talk about any numbers. 13 Q I apologize for that, Dr. Scheffman. 14 A But yes. 15 Q There is no estimate of actual loss in your rebuttal 16 report, precise estimate; is that correct? 17 A That's correct. 18 Q There is no estimate of actual loss in approximately the 19 hundreds of pages you submitted as your report and 20 attachments. Is that correct? 21 A Yes. But I have a lot of discussion in my report and a 22 conclusion, which follows from that discussion of my 23 conclusions that the actual loss exceeds the critical loss. 24 Q Your actual loss estimate is not a statistical estimate; 25 is that correct? 19 1 A That's correct. 2 Q It's not an empirical estimate; is that correct? 3 A You're estimating a hypothetical, Mr. Reilly. You're 4 estimating a hypothetical so you usually, you sometimes can, 5 but you usually cannot estimate with statistical precision a 6 hypothetical thing that has not occurred. 7 Q You have no standard error of that estimate of actual 8 loss? 9 A That's correct. 10 Q You don't know the 95 percent confidence level for that 11 actual loss? 12 A That's correct. 13 Q Are you confident that another economist would take the 14 information that you relied on, replicate your analysis and 15 come up with a precise estimate of your actual loss? 16 A What you have to be precise about in critical loss, 17 because you're estimating, you're almost never going to have 18 a statistical analysis, if the number, if the critical loss 19 number is 20, what you need to know for the test is, does the 20 evidence indicate that the actual loss would be more than 20? 21 And I tried to explain in my report, based on, 22 among other things, that mountain of evidence in the market 23 research about cross-shopping and price sensitivity of Whole 24 Foods and Wild Oats, shoppers and many other things I tried 25 to explain in my report, that was the basis of my conclusion, 20 1 that for a five percent test, or a two percent test or a one 2 percent test, that was one of the bases that the actual loss 3 would exceed the critical loss. 4 Q Dr. Scheffman, you agree that, without properly defined 5 product and geographic market, it is not possible to produce 6 reliable analysis of potential competitive effects, correct? 7 THE COURT: Say that again. 8 MR. REILLY: Sure. 9 BY MR. REILLY: 10 Q Without properly defined product and geographic market, 11 it is not possible to produce reliable analysis of potential 12 competitive effects? 13 A I have written about that. I have given talks about it. 14 I've organized ABA sessions exactly on that topic. Yeah, 15 I've long said that, yeah. 16 Q You also agree that you have to define a market to 17 assess from a matter of economics the potential competitive 18 effects of a merger? 19 A Yes. 20 Q You also agree you couldn't reliably accept the 21 likelihood of competitive effects of the merger without 22 addressing in a fundamental way the market definition 23 question; is that correct? 24 A Yes. 25 THE COURT: You mean both geographic and product 21 1 market, Dr. Scheffman? 2 THE WITNESS: Yes. 3 BY MR. REILLY: 4 Q Notwithstanding your belief that you must define a 5 relevant product market, you did not define a relevant 6 product market in this case, did you? 7 A I'm going to try to be brief. I will be brief. First, 8 as you know, later in the transcript I explained why I did 9 not. But this is really a fundamental issue. As I say in my 10 rebuttal report, Dr. Murphy actually assumes the market in 11 his analysis. And the reason for that is, Mr. Reilly, is he 12 doesn't take into account, as the discussion this morning, 13 what's happening to the prices and advertising and other 14 things of the competitors which are not in his market. 15 That's very important. 16 So, you're ignoring, if you look at, if you look at 17 two competitors and they're interacting with one another, if 18 the evidence indicates that they are, whatever the 19 interaction is, that doesn't prove that's the market. What 20 you need to do is look at, it's consistent with it being 21 perhaps a market. But you have to look at what is happening 22 outside your market -- you can't start where Dr., I've given 23 lots of talks about this. You can't start where Dr. Murphy 24 starts. He is assuming the conclusion. 25 THE COURT: Let me ask you this. I'm not sure I'll 22 1 be able to find it right away. But somewhere in the merger 2 guidelines, it says that, in doing a part of this analysis, 3 you start with the narrowest possible market and you move out 4 from there. 5 So, are you saying that Dr. Murphy started with the 6 narrowest possible market and never considered factors that 7 might mean that the narrowest possible market is the right 8 market? Let me put it this way. How does your criticism of 9 what Dr. Murphy did relate to what the merger guidelines say, 10 the proper way is to ask some of these questions. You 11 understand? 12 THE WITNESS: Yeah, it's perfectly appropriate to 13 start, given the FTC's complaint and what Dr. Murphy did, to 14 start with the narrowest market. That would be, 15 overwhelmingly, Whole Foods and Wild Oats where they compete. 16 Now, the issue is -- and the problem in doing effects, this 17 is really important, and it's fundamental to my criticism of 18 using effects to determine market. 19 If you look at effect, if you look only at effects 20 for the evidence, like A competes with B, that doesn't prove 21 it's the market. Because you might find, if you looked out 22 broader, as there is lots of evidence in this case, A and B 23 are also competing with C, D, E, F and G. 24 And you have to take that into account. Now, what 25 Dr. Murphy did is he looked at entry events, which have their 23 1 own problems which he may ask me about or not, but he looked 2 at whether someone entered or not. He did not look, as he 3 said in his deposition and I understand this morning, what 4 did the competitors outside his market do? 5 That's really fundamental to remember most all of 6 the Whole Foods sales, when they entered against Wild Oats, 7 there is no dispute about this, most all of the sales didn't 8 come from Wild Oats. Would those other, would those other 9 that where else it came from, would they be laying down and 10 not doing anything about it? Well, of course not. And 11 Dr. Murphy in his deposition indicated, well, yeah, probably 12 they would react. That's really important as to the market 13 definition. 14 So, effects focusing on -- there's nothing wrong at 15 all looking at does A compete with B and does it matter. But 16 you have to control, you have to be sure that, when you take 17 into account C, D, E, F and G, your answer doesn't change. 18 And what I explained in my report is the market 19 research data here is so striking that there is so much 20 cross-shopping by Whole Foods and Wild Oats customers, not 21 with each other, that they most of them spend most of their 22 money elsewhere, they're clearly shifting back and forth 23 between non PNOS and PNOS. You have to take that into 24 account in the market definition. 25 THE COURT: I'm probably interrupting Mr. Reilly's 24 1 flow. 2 MR. REILLY: Please, go ahead, Your Honor. 3 THE COURT: But the whole issue of cross-shopping 4 and when you say that most Whole Foods shoppers and most Wild 5 Oats shoppers also shop at other stores and other 6 supermarkets, is it important in trying to figure out either 7 the market, the proper product market and/or the competitive 8 impact to know what they are shopping for? 9 I mean, if somebody buys all of their organic foods 10 at Whole Foods but buys all of their non diet sodas and foie 11 gras at Safeway, does that prove anything or is it important 12 to know what they buy in the same kind of product? 13 THE WITNESS: Yes, it is. And I do explain in my 14 report. Let me, let me begin by saying I didn't make clear, 15 when Whole Foods enters the market while Wild Oats is there, 16 people have access to a, quote, PNOS. 17 They have organic produce that they claim is really 18 good and they have, you know, some organic products and that 19 other, you know, others don't have. And let's remember that 20 most of the sales of both of these companies are not organic 21 products. They're mostly natural, whatever that means. But 22 it's important to some people. 23 But, yes, their issue is are people just going to 24 Whole Foods for what Whole Foods, what they can get and they 25 can't get elsewhere, and I tried to address that extensively 25 1 in my report. The market research shows that, remember as a 2 general matter, most of the organic products generally aren't 3 purchased in PNOS, as a general matter. But that's somewhat 4 sensitive as to whether there's, whether it be PNOS around. 5 But the market research, it's really striking, the 6 market research and I cite it in my report, that sponsored by 7 the two companies, the 47 odd studies sponsored by the two 8 companies, showed that their shoppers are buying organic 9 other places, some significant percentage of them. 10 They're showing that a significant percentage of 11 Whole Foods and Wild Oats shoppers don't buy organic at all. 12 They don't care about it. So that's certainly a relevant 13 question. But, the market research data shows that's not 14 true. 15 I'm not saying it isn't true for some people. Some 16 people clearly go to Whole Foods and say I'm coming here just 17 because I want this. But the data shows that's not, Whole 18 Foods wouldn't be -- these companies wouldn't be alive if 19 they were just coming to get the exotic, relatively exotic 20 products they have. This is a problem with the FTC market 21 definition. They're supermarkets. They're one-stop 22 shopping. They have to -- to survive, they have to have a 23 substantial number of people that are buying a lot of stuff 24 there, not just -- 25 THE COURT: One-stop shopping may be a somewhat 26 1 misleading phrase because Safeway may be one-stop shopping 2 unless you really care a lot about organic foods. But there 3 are a lot of things that you can get at Safeway or Giant or 4 Costco, if you want to buy that many muffins all at once, 5 that you can't get at Whole Foods. 6 I said foie gras. I can't tell you the looks my 7 wife got at Whole Foods when she asked for foie gras. 8 But there are certain things that you can only get 9 out, and there may be certain things that you can only get at 10 Whole Foods or Wild Oats or a certain quality that you can 11 only get at Whole Foods and Wild Oats. 12 THE WITNESS: That's absolutely right. I don't 13 disagree with that. But what the market research data shows, 14 among other things, is that, remember for this critical loss 15 test, we don't need to say most of them. You just need, 16 particularly with a small snip, you don't need very many 17 sales to be lost. 18 And remember, the sales we're talking about, the 19 market research is very clear that people are coming to Whole 20 Foods, as I do, because it's across the street practically 21 and pick up stuff that, when I go to Harris Teeter, which is 22 where I go only if I want to drive because you can never get 23 into the Whole Foods parking lot, I buy a lot of the same 24 stuff. And that's what, you know, maybe not exactly, but I 25 buy breakfast cereal and other sorts of things that sometimes 27 1 I buy at Whole Foods, but I mostly buy at Harris Teeter. 2 You know, so my point is people are cross-shopping. 3 The evidence indicates that people are buying similar things, 4 not everyone. Some people are focused and some people are, 5 saying I only want natural and organic. I'm not going buy it 6 anywhere else. I'm not saying that's not true. 7 I'm saying the critical loss test says there better 8 not be very many, and the market research report, the market 9 research says there's a substantial percentage of people who 10 are cross-shopping and buying for them similar stuff, organic 11 in particular they focus at other stores. 12 MR. REILLY: Your Honor, may I follow up on this 13 point? 14 THE COURT: Yes, please. I'm done for the moment. 15 MR. REILLY: Thank you. 16 BY MR. REILLY: 17 Q Actually, why don't you turn, Dr. Scheffman, to Tab X in 18 your binder. It's probably the second -- I'm not sure which 19 binder it is, the second binder. Start with Tab X. It's the 20 Hartman study. Did you look at the Hartman study, do you 21 know, this market research study when drawing your 22 conclusions for this matter? 23 A I've looked at, I've looked at, I personally looked at, 24 you know, all of the market, if this is something that's in 25 the 47 that I've cited or that you've cited since, yeah, I've 28 1 looked at it. 2 Q Yeah, the Hartman study done for Whole Foods in the 3 ordinary course is not cited in the materials that you listed 4 on your appendix. So I was wondering if you had looked at 5 this? 6 A I believe this is one that you cite in your rebuttal 7 brief. Is that correct? 8 Q If you could turn to page. 9 A Would you please answer that? Because that will help my 10 memory. Is this a study that you cite in your rebuttal? 11 Q I believe it is? 12 A Thanks. 13 THE COURT: So, from that, you infer you may not 14 have looked at it? 15 THE WITNESS: No, I have looked at it. 16 BY MR. REILLY: 17 Q Did you look at it before you submitted your expert 18 report? 19 A No. 20 Q Why don't you turn to Page 110, please, Dr. Scheffman? 21 This pertains to cross-shopping between conventionals and 22 premium, natural and organic supermarkets? 23 A I'm sorry. I don't have the right page, I don't think. 24 THE COURT: That's not Page 110. 25 MR. REILLY: I'm sorry, P.X. 110. Excuse me, Your 29 1 Honor. 2 THE COURT: P.X. 02-072 -- 3 MR. REILLY: 02-110. 4 THE COURT: So we're now looking for that one? 5 MR. REILLY: Yes, we are. It's the Hartman group 6 report, Your Honor, at Tab X, first one, the second binder. 7 THE COURT: Yes. 8 MR. REILLY: P.X. 02-072, and I'm looking at, dash, 9 110. 10 THE COURT: I don't have any pages labeled P.X. I 11 just have pages labeled EOAT. 12 MR. REILLY: Down in the lower. It's also on your 13 screen too, Your Honor. 14 THE COURT: What page is it? 15 MR. REILLY: P.X. 02 -- 16 THE COURT: If we were just looking at page numbers 17 in the original Hartman report because all of my P.X.s are 18 now cut off. 19 MR. REILLY: Ninety-two. 20 THE COURT: The photocopy cut off some of the 21 P.X.s. Okay. So Page 92 of the original Hartman as numbered 22 by Hartman? 23 MR. REILLY: Yes. 24 BY MR. REILLY: 25 Q Do you see, Dr. Scheffman, the conclusion that this 30 1 study has made when it says, "While this same consumer shops 2 at both retailers, they tend to shop at each for different 3 things. Wild Oats for fresh and specialty items, Safeway for 4 canned and packaged goods." Did I read that correctly, Dr. 5 Scheffman? 6 MR. BRENNAN: Your Honor, I note that this page has 7 been marked confidential. So I would just ask that counsel 8 characterize it accordingly. 9 THE COURT: It may have been classified as 10 confidential but how confidential is that sentence? 11 BY MR. REILLY: 12 Q Dr. Scheffman, did you consider this marketing study 13 while coming to your opinion in this matter? 14 A I have. Since it showed up in your rebuttal brief, I 15 have reviewed it and I have two things to say. Ten-two, it 16 even says that that's what everybody does. Remember again, I 17 cite in my report and there's a number of other cites in 18 market research that were not in my report for purposes of 19 brevity, that should there actually be market research on 20 cross-shopping and show that people, that Whole Foods and one 21 of those shoppers are actually cross-shopping. The ten-two 22 is not -- then, yes, there are some people like that, okay. 23 There's absolutely people that will buy diet Coke 24 at Safeway and other sorts of things. And they will, they 25 may buy only produce, all their produce at Whole Foods. I 31 1 don't doubt for a second there are people like that. The 2 issue is what percentage are they? According to the market 3 research, the percentage of those that aren't in that 4 category are substantial, substantial relative to any measure 5 of critical loss. 6 Remember, this is really important. There are core 7 shoppers. There are people, who are the most core in some 8 sense. The most core people who say, I will only buy organic 9 and natural. That's why I go to Whole Foods or Wild Oats. 10 Absolutely there are people like that. 11 But they're not, all the market research indicates, 12 that that's not a substantial. Let me give you, we know 13 that's not true because, again, think about the entry. Whole 14 Foods comes into a market where Wild Oats was there. People 15 could have been buying all their organic and natural stuff if 16 they wanted at Wild Oats, among other places. 17 All of a sudden when Whole Foods comes in, a whole 18 bunch of people flock to Whole Foods. They get many more 19 sales than Wild Oats had to begin with. Who are they? 20 They're like me, okay? Some of them, which is, they have 21 really nice fancy stores and they have some nice things in 22 them and that's what the evidence is. 23 Q Let's talk about topics here, Dr. Scheffman, your price 24 study that was described in your report. Dr. Scheffman -- 25 THE COURT: I'm sorry, are you done with this 32 1 document? 2 MR. REILLY: Yeah, but you can keep the binders. 3 I'm done with the Hartman study for now. 4 BY MR. REILLY: 5 Q This matter, Dr. Scheffman, you compared product prices, 6 at individual Whole Foods and Wild Oats stores across various 7 regions in the United States for one day; is that correct? 8 A I didn't hear the beginning. 9 Q In your price study, you compared prices at various 10 Whole Foods and Wild Oats for one day? 11 A That's correct. 12 Q June 9, 2007, correct? 13 A That's correct. 14 Q Dr. Scheffman, you have never published any work based 15 on one day of pricing data, have you? 16 A As I said in my report -- 17 THE COURT: Just answer the question. 18 THE WITNESS: I'm sorry, Your Honor. Yes, that's 19 correct. 20 BY MR. REILLY: 21 Q You testified in your deposition that your one-day 22 pricing study was comparable to a pricing study done in the 23 Staples matter; isn't that correct? 24 MR. BRENNAN: Can we have page cite? 25 MR. REILLY: I said you testified. 33 1 THE COURT: Can we have a page cite where he said 2 it? 3 MR. REILLY: Page 191, Lines 23 to 25. 4 THE WITNESS: That is as I understood but I don't 5 know that. 6 BY MR. REILLY: 7 Q In the Staples pricing study, you are aware that the 8 economist did not use one day of pricing data in the Staples 9 analysis? 10 A As I explained to you, I spend a lot of time, I was not 11 involved in Staples, but it's an important case and I read 12 the opinion. There was a lot of econometric work done by 13 both sides in Staples. The judge talked about it. 14 In my interpretation of his opinion, as far as I 15 can see it, Judge Hogan talked about the econometrics but did 16 not rely on them. What he relied on was maybe not one day of 17 data. But what he relied on clearly is the sort of evidence 18 that I'm trying to get at by looking across stores, which is 19 really the most important thing, which is, as in Staples, 20 Office Depot, do the two companies price differently when 21 they compete against one another in a significantly and 22 differently when they compete against one another, than when 23 they don't. 24 And the Judge, based on one month of data, there 25 was actually three or four months into the FTC investigation 34 1 for the two companies, found in the data Staples' prices were 2 13 percent lower than they were when Staples did not face 3 Office Depot or Office Max. He found that Office Depot's 4 prices were five percent lower when they competed with 5 Staples than when they didn't have a competitor. 6 And he also relied, as far as I could tell, he 7 relied on documents in the companies that made it clear that 8 they price exactly against each other. And they even had 9 apparently estimates in their own documents about what the 10 difference in prices were. 11 Q Dr. Scheffman, my question was, in Staples did the 12 economist use only one date of pricing data. It wasn't tell 13 me everything you know about Staples. 14 A Yeah. 15 Q Can you answer that question? In Staples, did the 16 economists use only one day of pricing data. 17 A Did the economist use it? Did the economist analyses, 18 which the judge did not rely on in his opinion, did they use 19 one day of data? No, they used a whole bunch of data. 20 Q In fact, Dr. Scheffman, you're aware that they used 20 21 months of pricing data in Staples. Are you aware of that? 22 A No, I'm aware that there was lots of data over time. 23 Q And 20 months is approximately 600 days; is that 24 correct? 25 A Mr. Reilly, the judge says very clearly that the data he 35 1 relied on was January 2006, one month of data. 2 Q Okay. 3 A Yes, there was lots of data and there was a lot of 4 econometrics done by two economists. 5 Q Let me try it one more time. I'm close. Twenty months 6 is approximately 600 days; isn't that correct, Dr. Scheffman? 7 A Six hundred seventy or whatever it is, yes. 8 Q Thank you. In the course of the Staples case, they used 9 econometric analysis to determine how pricing compared in 10 various markets, right? 11 A The economists did? 12 Q Yes. 13 A The economists did, yes. 14 Q We already know that you performed no on econometric 15 analysis to reach your conclusions in this matter, correct? 16 A A lot of economists have remarked and lawyers that, 17 after all the econometrics that were done in that case, the 18 judge decided that was not reliable. There has been a lot of 19 discussion as to why do you need an econometicians because 20 the judge didn't really place any reliance on that. 21 So I did not do any statistical analysis. I did 22 not do econometric analysis, other than in my rebuttal report 23 and since in trying to understand what Dr. Murphy had done. 24 Q You performed no econometric analysis to reach your 25 conclusion in this matter, Dr. Scheffman? 36 1 A Only for my conclusions about what Dr. Murphy had done. 2 Q Dr. Scheffman, did you ever consider doing a study that 3 compared Whole Foods, Wild Oats pricing on June 9th from 3:00 4 P.M. to closing? 5 A Almost surely the prices would be, the prices in the 6 register on a day are going to be the same for the day. 7 Q Did you consider doing a pricing study on June 9th from 8 3:00 P.M. to 6:00 P.M.? 9 A It wouldn't be any different than what I asked for, 10 which is prices that were in there on that day. 11 Q So you have no reason to think that this three-hour 12 price study would be less reliable than what you did in your 13 one-day price study; is that correct? 14 A It would be the same price. The prices in the register 15 for the day is in the register for the day. 16 Q Dr. Scheffman, your one-day price study did not account 17 for discounts offered by Whole Foods, correct? 18 A No, that's not entirely correct. 19 Q Please turn to your transcript at Page 200, Lines 2 to 20 7. I asked the question, "How did your one-day price study 21 account for discounts?" You answered, "It's the actual store 22 register data. It doesn't have, unless it was reflected in 23 the register price, it didn't account for discounts, which 24 are mostly not product specific." 25 Dr. Scheffman, did you account for discounts in 37 1 your one-day price study? 2 A In the conclusion, as I pointed you to, there are two 3 paragraphs before my price study which discuss me looking at 4 discounts. First, be clear, I don't think I was so clear 5 here. In your reply brief, you used the word certain 6 discounts. That's because most, for Whole Foods, 7 overwhelmingly that the sale is in the register price. You 8 go, if broccoli is on sale today, it's in the register. 9 That's what I found. I have two paragraphs where I 10 talk about "promotions," which are something different. And 11 I found in my discussion with Ms. Betsy -- I'm sorry, it's 12 footnoted in my report. I had discussions with her about the 13 extent to which Whole Foods has discounts that don't appear 14 in the register price. 15 If you get a circular from a supermarket that says, 16 you know, our price on a six pack of diet Coke is $1.99, that 17 price is going to be in the register unless there's a coupon 18 there. You go to the store that day and it's going to be in 19 the register. The regular discounts are in the register. 20 As I indicated in my report before, you know, the 21 two paragraphs before I go into price study, that for Whole 22 Foods my discussions with Betsy -- whose name I'm sorry I 23 can't remember right now -- indicated that Whole Foods does 24 very little of that. And that was obvious from looking at, 25 as I did extensively for other reasons too, in the Whole 38 1 Foods profit and loss statements at the store level. 2 You have promotions, which are coupons and other 3 stuff like that, are always accounted for separately. Whole 4 Foods does very little, if any, coupons or other sorts of 5 special deals. They don't. So, the answer is for Whole 6 Foods's prices, it overwhelmingly includes all discounts. 7 Q If a Whole Foods customer came in and used a coupon on a 8 specific product, your one-day price tag would not capture 9 that; is that correct? 10 A Whole Foods does very little couponing if at all. I 11 guess maybe it has done sometimes. But you can see, I talked 12 with Betsy at length, and I looked at the Whole Foods profit 13 and loss statements at the store level. And the amount spent 14 on promotions shows up in a line item. 15 Q Again, answer this question too, Dr. Scheffman. If, if 16 a Whole Foods customer came in and used a coupon for a 17 specific product, your one-day price study would not have 18 captured that; is that correct? 19 A I'm sorry, yes, that's correct. 20 Q And if a customer came in with a coupon that said get 21 ten dollars off a fifty dollar purchase, your one-day price 22 study wouldn't capture that, is that correct? 23 A That's correct. 24 Q Wild Oats, in fact, offers a number of different 25 discounts, don't they? 39 1 A They have a number of different categories of discounts. 2 Q In your rebuttal report, you state that Wild Oats has 3 offered 500 non SKU specific discounts; is that correct? 4 A No, I'm saying that they categorize them into 500 5 different things. 6 Q Do you know whether these non SKU discounts are 7 available to Wild Oats customers on June 9, 2007? 8 A No, as I said, I didn't look at that for June 9th. 9 THE COURT: I think SKU is capital S, capital K, 10 capital U? 11 BY MR. REILLY: 12 Q You didn't calculate how frequently discounts or coupons 13 are used by Whole Foods shoppers, did you? 14 A Whole Foods shoppers? 15 Q Yes, calculate. 16 A I said, I know, I know that it's minuscule from my 17 discussion with Betsy and looking at the profit and loss 18 statements at the store level. Promotions, when 19 supermarkets, in their profit and loss, regular discounts 20 appear in sales. What they call "promotions," which would be 21 coupons, appear in a different line item, and I looked at 22 that line item. 23 Q How many times precisely did Whole Foods offer a store 24 specific discount in the last month? 25 A I don't have the last month. 40 1 Q How many times did Whole Foods offer store specific 2 discounts in the last year? 3 A Well, I know from the profit and loss, I guess we're not 4 talking past one another, I can tell the magnitude in terms 5 of redemptions, how much Whole Foods gave in a discount in 6 total each quarter for each store and it's very, very tiny. 7 Q How many store specific discounts did Whole Foods offer 8 on June 9, 2007? 9 A I don't have the P&L for that quarter, I don't think. 10 Q You don't know whether rebates, discounts or use of 11 coupons varies across Whole Foods stores, do you? 12 A I know that all of the stores, it's really, really 13 small, the amount -- remember, it's not -- I think it's 14 Dr. Murphy. I think he talked about this. It's not how 15 many. That's certainly not, it's of interest. How much did 16 it add up in discounts to consumers? 17 Okay, that would show up in the profit and loss, 18 like if they spent, you know, if in their profit and loss it 19 showed they spent $500,000, that they would count as a "below 20 the line" reduction in revenue, you know, discounts not off 21 the register, you know, that you would notice that. It's 22 very, very small, less than, if I remember right, it's on 23 average like, you know, .03 percent of sales or something. 24 It's tiny. They don't do it. I'm not saying they've never 25 done it. 41 1 I would say also that, what I was surprised at in 2 the record, and I searched and I looked at your exhibits to 3 your briefs, how very, very few for both companies of these 4 things show up. I'm not saying they don't happen. They 5 don't happen hardly ever for Whole Foods but, yes, I have 6 seen ten dollars off on a fifty dollar purchase. But there 7 are so very, very few. 8 Q You have not conducted an empirical analysis to 9 determine whether Whole Foods offers more discounts or 10 coupons when facing PNOS competition, have you? 11 A Do you want to refer me to my deposition? 12 Q No. I want to know have you done an empirical analysis 13 that studies whether Whole Foods offers more coupons or 14 discounts when faced with PNOS competition? Have you done an 15 empirical study is the question, Dr. Scheffman? 16 A I have looked at the P&Ls, and the amounts across all of 17 the stores is extremely tiny. They don't do this in the, the 18 only sense it's important for antitrust or anything, which is 19 did it add up to any significant discount for consumers. 20 Q Have you conducted an empirical analysis to determine 21 whether Wild Oats offers more discounts and coupons when 22 facing PNOS competition? 23 A I did not do that analysis. I said I did have, I 24 cited -- I talked about the paragraph where I cited Betsy 25 about Whole Foods. I have the second paragraph, the 42 1 paragraph after that. I have a similar paragraph about Wild 2 Oats, where Mr. Smith, whose name I can remember I guess, 3 indicated that most Wild Oats promotions, coupons, et cetera, 4 are done nationally or regionally. He stated in his 5 deposition under oath that they don't do much of it locally. 6 And that's all I did. I did not, at the time of my 7 reports, investigate that any further. 8 Q You did not do an empirical study to investigate whether 9 discounts varied across stores based on PNOS competition, did 10 you? 11 A For Wild Oats? 12 Q For Wild Oats. 13 A That's correct. 14 Q In your one-day price study, you picked a day after the 15 announcement of this acquisition, didn't you? Yes or no 16 question, Dr. Scheffman. 17 A Yes. 18 Q How many days of the 600th day pricing study done in 19 the Staples case took place after the acquisition was 20 announced? 21 A I believe many, because I think they use data, we know 22 that Judge Hogan used January 2006 data, which is three 23 months into the investigation. 24 THE COURT: I don't think you mean 2006. 25 THE WITNESS: I think 1996, I believe. 43 1 I mean, I think I do have to, because you're not 2 asking me to clarify. I said in my deposition that I did use 3 June 9th. It's the only, I could only get register prices 4 for both companies, for some time in the future after I asked 5 for it because, like most companies, Whole Foods doesn't keep 6 those data. It takes up, it's enormous data, you don't need 7 the register prices for accounting or any other reasons. 8 Whole Foods didn't keep historical register prices. 9 So, otherwise, I would have asked for more days 10 certainly. So I asked the companies, I asked the companies 11 to please give me register prices for a Saturday, some for 12 Saturday because it was a major shopping day. And you did 13 ask me, you know, that was after, you know, you investigated 14 and then I think maybe had, you know, brought suit. I 15 understand that. 16 And I talked to you in my deposition about why I 17 used that data. But I could only get one day. If I was 18 going to get two for both companies, I could only get -- I 19 could get every day after I asked for it. I could say give 20 it to me every day. They would still be spinning the 21 computers, but I could only get a day. I couldn't get a past 22 day. 23 BY MR. REILLY: 24 Q You asked for more days but couldn't get it; is that 25 correct? 44 1 A If we had historical register prices for both companies, 2 I would have gotten it. 3 Q You asked for more days of pricing data, didn't you, Dr. 4 Scheffman? 5 A I did. 6 Q Thank you. Dr. Scheffman, isn't it possible that two 7 companies could compete less vigorously after they have 8 decided to become one company? Isn't that possible? 9 A It is possible. I said in my deposition I did not tell 10 anyone what I was going to use the data for, the lawyers or 11 anyone. No one knew what I was going to do until I produced 12 my draft. The lawyers didn't even know what I was going to 13 do with it. So no one knew what I was going to do with it. 14 I did, as I indicated in my deposition, my 15 understanding of the companies is that they hadn't changed 16 their pricing, basic pricing approach. But I agree that that 17 is a potential criticism of the study, that it was done in 18 June 9th. 19 Q Dr. Scheffman, let's look at some documents that relate 20 to pricing and premium and natural and organic store 21 competition. These can be found in Tab C and Tab D of your 22 binder. 23 Let me ask you a general question, first, Dr. 24 Scheffman, while you're looking for those documents. You do 25 not believe that in any geographic area, prices are lower 45 1 because of PNOS competition, do you? 2 MR. BRENNAN: I missed the tab cite. 3 MR. REILLY: Tab C and D. 4 THE COURT: But this question is a more general 5 question. 6 MR. REILLY: It's more -- yeah. 7 BY MR. REILLY: 8 Q Do you want me to repeat the question? 9 A Yes. 10 Q Do you not believe that, in any geographic area, prices 11 are lower because of PNOS competition. Do you? 12 A What I did in my report, if you remember -- 13 MR. REILLY: Your Honor, can I restate that 14 question? 15 THE COURT: I don't -- why don't you answer the 16 question? 17 THE WITNESS: No, that's not true. 18 MR. REILLY: It's a yes or no. You do believe? 19 THE COURT: He said no, it's not true. 20 BY MR. REILLY: 21 Q So no, you do not believe that the prices are lower in 22 any area because of the PNOS competition? Let me ask it this 23 way. 24 THE COURT: Do you believe? 25 46 1 BY MR. REILLY: 2 Q Do you believe that in any geographic area prices are 3 lower because of PNOS competition? 4 A I would have to explain why I did a little bit. 5 THE COURT: Can you answer the question yes or no 6 or sometimes or maybe and then explain? 7 THE WITNESS: For PNOS competition, specifically, 8 in any significant magnitude, what I find is, for reasons 9 I'll explain, no. 10 BY MR. REILLY: 11 Q Let's look at Tab C. Tab C is P.X. 00234-001. 12 Do you have that document? 13 A Yes. I'm familiar with this document. 14 Q You are? 15 A Yes. 16 Q The document pertains to Whole Foods and Wild Oats 17 competition in Boulder, Colorado; is that correct? 18 A Yes. 19 Q "Need your help as we approach the opening of the new 20 Wild Oats Flagship in Boulder in March. We are going to be 21 running a 90-day strategy against Oats. That includes 22 different aspects but value is a key component." 23 Do you agree that this document describes local 24 price competition between Whole Foods and Wild Oats in fairly 25 vivid terms? 47 1 A Yes, there are a number of documents that serve like 2 this and I reviewed them. I have opinions about them. 3 Q At least in this instance, you would agree that 4 customers benefitted from this price competition between 5 Whole Foods and Wild Oats, wouldn't you? 6 A If this was the only reason why something was happening, 7 to whatever extent it happened, yes. 8 Q Could you turn to Tab D please, P.X. 00187-001? 9 A Yes. 10 Q I'm reading one quote that will be blown up here soon. 11 "I have asked the store, the Boulder store, since 12 these deals are only in the four store in the Boulder area, 13 to match these deals but not to advertise them. And those 14 deals are B.O.G.O. sales." What does B.O.G.O. stand for, Dr. 15 Scheffman? 16 A Buy one get one free. 17 Q Buy one get one free being offered by Whole Foods in 18 this matter? 19 A Yes. 20 Q Buy one get one free offers would not have been captured 21 in your one-day price tag; is that correct? 22 A I think that's correct. 23 Q At least in this instance, where Whole Foods is matching 24 buy one get one free, Dr. Scheffman, you would agree that 25 customers benefitted from this price competition between Wild 48 1 Oats and Whole Foods? 2 A For whatever that particular product was. 3 Q Products or product, you say product? 4 A Product, whatever. I mean, I would like to, I did deal 5 with this and I'd like to explain how I dealt with it. 6 Q You can explain that on redirect. I would like you to 7 just answer the questions I'm asking. 8 Would you please turn to Tab E now, P.X. 00469-009? 9 A Yes. 10 Q This is a Whole Foods competitive marketing plan 11 prepared by Wild Oats. I would like you to turn to P.X. 12 00469-009. 13 MR. ARONSON: Excuse me, Your Honor, this is a 14 confidential document, so I'd just alert counsel to be very 15 careful how the questions are asked, how the questions are 16 answered. 17 MR. REILLY: Sure. Yeah, Page 8 of the exhibit, 18 Page 9, 009. You are on the right page, Dr. Scheffman. 19 I'm going to the third bullet. 20 THE COURT: Do we know what store this is talking 21 about? Somewhere in the document does it identify or you 22 don't have to say it by name if it's confidential. Just let 23 me know what it's talking about. He's talking about a 24 competitive marketing plan but does it tell us somewhere in 25 the document whether it is about a particular store or 49 1 stores. 2 MR. ARONSON: Your Honor, it would be confidential, 3 the name. 4 THE COURT: I understand that. I just want to get 5 the witness to focus and to know what he's talking about in 6 answering the question. You don't have to say the name out 7 loud. 8 MR. REILLY: It is our understanding that it was a 9 general document put together by Wild Oats that talked about 10 Whole Foods competitive marketing plan. They do list on one 11 page some of the openings of Whole Foods. I think Page 5. 12 THE COURT: The only reason I raise it is because, 13 before you ask him the question, the paragraph you're 14 focusing on, uses the word store singular. I want to be sure 15 that, when he answers the question, even if he answers it 16 generically, not discussing competitive information, that he 17 knows what he's talking about or knows what you're trying to 18 get him to focus on or what this document focuses on. 19 BY MR. REILLY: 20 Q Going back to Page 8. 21 A Yes. 22 Q It talks about Wild Oats needs to counter this tactic by 23 creating a separate price zone for the store, so the pricing 24 strategy can be executed and the Whole Foods in turn can be 25 neutralized? 50 1 MR. ARONSON: Excuse me, Your Honor, I think that 2 reading this document is inappropriate. Wild Oats strategy 3 is how to deal with competition. Whether it's to create a 4 zone or do something else is confidential and proprietary and 5 should not be discussed in open courtroom. 6 MR. REILLY: That's fine. 7 BY MR. REILLY: 8 Q I guess my question would be, does this document, 9 generally speaking, Dr. Scheffman, talk about Wild Oats 10 competitive response by Whole Foods entering into an area? 11 A No. 12 Q It does not? 13 A Well, I teach marketing. This is a marketing plan. The 14 issue is what did they actually do? That would be, that 15 would be relevant to this. And what was the effect on 16 consumers? How much did it lower average transaction prices? 17 Remember, there are lots of documents like this for 18 both companies that are not looking at each other. They're 19 looking at Trader Joes and King Supers and Safeway 20 lifestyles, et cetera. They do, they compete, absolutely. 21 Wild Oats bickered when Whole Foods enters. They compete 22 with Whole Foods as do the other supermarkets. 23 Q I want to switch topics to repositioning now, Dr. 24 Scheffman. Conventional supermarkets try repositioning by 25 offering more organic and natural products for a while now, 51 1 haven't they? 2 A I missed the end of the question. 3 Q You mentioned store had been repositioning by offering 4 more organic and natural products for a while, haven't they? 5 A Yes, I cite an extensive amount of evidence about that 6 in my reports. 7 Q You believe that this repositioning is being done to 8 compete more effectively against the PNOS? 9 A Yes. In the sense that, as we see in the data, when 10 Whole Foods enters an area, even if Wild Oats is there, and 11 certainly in New York City or D.C. where there are not other 12 PNOS, they pick up most all their sales from the non PNOS 13 supermarkets. 14 Q Have you seen any evidence that repositioning by the 15 conventionals has resulted in significantly lower pricing by 16 Whole Foods on a sustained basis? 17 A Thank you for asking that. What we see, my report never 18 says that the prices are the same in all the stores. They're 19 not. I point out that they're not the same. They're mostly 20 the same. 21 THE COURT: In all the Whole Foods stores? 22 THE WITNESS: All the Whole Foods stores. I don't 23 find that their, I find that the percentage of products that 24 aren't the same is small. But I also calculate what 25 difference it makes to the average transaction. My 52 1 conclusion is probably not clear from that long chart with 2 the colored rows, is that it's very clear that by Whole Foods 3 there is some amount of local pricing, to local conditions. 4 And it's not different for whether Wild Oats is there or not. 5 We see the same thing in the markets in which there is no 6 Wild Oats. 7 BY MR. REILLY: 8 Q Have you seen any evidence that Whole Foods has lowered 9 its prices because of this repositioning on a sustained 10 basis? 11 A Well, I don't know about repositioning. We know that 12 Whole Foods did this in a substantial way with respect to 13 Trader Joes. We know that Whole Foods, in its K.V.I. 14 program, which did price checking for lots of stores, wanted 15 to make sure that its prices were competitive with the many 16 stores they price check, which were mostly not Wild Oats. 17 Q Dr. Scheffman, you've reviewed ordinary course documents 18 that, by Whole Foods that state repositioning by 19 conventionals has never hurt Whole Foods, haven't you? 20 A I believe that Mr. Mackey said something like that. And 21 I have another, whatever it's worth, there is another 22 document which is in a blog, which is actually an internal 23 memo by Mr. Mackey that says the opposite. 24 Q You are aware that Whole Foods executives have stated 25 that repositioning by conventional supermarkets has helped 53 1 Whole Foods? 2 A There is a document, one or more document says, well 3 this makes people more interested in organic and we can 4 benefit from that, yes. 5 Q Would you please turn to Tab L in your binder, P.X. 6 00532-001? 7 A Yes. 8 Q Do you see the title of this document saying script for 9 conference call? Do you see that? 10 A Yes. 11 Q Do you know if that means investor call script? 12 A It's a script for a conference call, typical, public 13 company having a first quarter '03 press release. 14 Q So, this would be a conference call with investors; is 15 that correct? 16 A That anyone could dial into it. The analyst certainly 17 and other interested people, employees. 18 Q I'm looking at the highlighted first sentence. "We 19 believe that the fact that our comparable store sales have 20 been running above our historical average over the same 21 timeframe that conventional supermarkets have stepped up 22 their offerings of natural and organic products is evidence 23 that, rather than hurting us, they are in fact helping us." 24 Do you see that, Dr. Scheffman? 25 A Yes. 54 1 Q Dr. Scheffman, you are aware that there are strict FTC 2 regulations regarding making false statements during investor 3 calls, aren't you? 4 A Yes. 5 Q And you don't believe that any Whole Foods executive 6 made false statements in saying that repositioning by 7 conventionals is helping rather than hurting Whole Foods, do 8 you? 9 A Yes, but this is a, a first quarter 2003. Mr. Reilly, 10 you asked me a question in my deposition about what has 11 happened to Whole Foods much more recently like 2006, 2007. 12 Where the story has changed. 13 Q Fair enough. Let's look at Tab L of your document 14 binder, Dr. Scheffman? 15 A Isn't that what I'm looking at now? 16 Q Tab L, yeah. I'm sorry, Tab M. My apologies. 17 This is another investor call script for second 18 quarter 2006, Dr. Scheffman; is that correct? 19 A Yes. 20 Q This is a little bit more recent than the 2003 investor 21 call script; is that correct? 22 A That's correct. 23 Q In this investor call script, the Whole Foods executive 24 says, "To understand why that has not hurt us, but has 25 instead created a gateway experience," once again, talking 55 1 about repositioning; is that correct, Dr. Scheffman? 2 A I'm sorry, what page are we on? 3 THE COURT: You didn't direct him. 4 MR. REILLY: I'm sorry, Page 5. It's on the 5 screen. That's why I jumped ahead. 6 BY MR. REILLY: 7 Q Do you understand why that has not hurt us but has 8 instead created a gateway experience as evidenced in part by 9 accelerating comps over the last five years? You have to 10 understand that the Whole Foods market is much more involved 11 than just selling commodity natural and organic products. 12 So my question, Dr. Scheffman, is in this investor 13 call for second quarter 2006, hasn't the Whole Foods 14 expressed a very similar point of view about repositioning 15 that it has not hurt them; is that correct? 16 A No. I know data about this so, as an economist. I can 17 say something about the document because I know the data. By 18 2006 -- 19 Q Are you asking me a question? 20 A By 2006, if we look at what they're talking about, Whole 21 Foods comps, the growth of same store sales declined from 22 2004 onward, declined. And the last guidance in late 2006 or 23 early this year, as I referred to in the deposition, said 24 their same store sales growth rate was going to fall 25 substantially, probably be substantially lower than what it 56 1 had been before. We talked about this at length in my 2 deposition. 3 So it's not, he's talking about over the last five 4 years, yes. If you look at what their comps had happened, if 5 you take five years ago versus 2006, if you look at the trend 6 in 2006 and later, their comps are going down. It's in the 7 guidance that I referred to. It's in the Mackey internal 8 memo to the people at Whole Foods saying this is, this 9 matters. 10 Q When this Whole Foods executive stated that 11 repositioning has not hurt us on an investor call, do you 12 believe that executive was making false statements? 13 A I'm only pointing out he says accelerating comps. So 14 I'm sure they had lawyers all over this, accelerating comps 15 over the last five years. He doesn't point out what happened 16 between 2005 and 2006, where if I recall right, the comps 17 fell already. And then, and then, the most recent 18 pronouncement to the market, which is a very serious problem 19 for them in the stock prices, that the comps, they were 20 projecting were going to fall substantially. 21 THE COURT: What are comps? 22 THE WITNESS: That's same store, same store sales. 23 When you're a retailer, if you can build more stores, your 24 sales go up. But the market says, well, that's interesting 25 but what's happening to the stores that you already have. 57 1 What Whole Foods had been, why it was such a hot stock, in a 2 way, was because, when they'd come into a market, whether 3 Wild Oats was there or not, they would get a lot of sales. 4 Then the sales would keep growing significantly. 5 So, they were the same stores. So this thing is 6 really working well because at the store level, if you look 7 at the comp sales, keep the stores constant, what's happening 8 to the sales in the store level. That's what the analysts 9 looked at because that tells you are you topped out now and 10 the only way you can grow is to build more stores or you 11 still have growth. 12 The big problem, as we all know, there was a big, 13 you know, a significant fall in the Whole Foods stock price. 14 And people began to realize that the same store sales growth 15 was slowing down. 16 Q Actually, my next stop -- 17 MR. BRENNAN: I'm sorry to interrupt. The witness 18 has been on the stand for about an hour and a half. I was 19 wondering if it would be convenient for the Court and counsel 20 to take a short break. 21 THE COURT: Mr. Reilly, what's your prognosis? 22 MR. REILLY: I don't mind taking a short break now, 23 Your Honor. My guess is I'll go right up to the time I've 24 allocated, whatever time is left. 25 THE COURT: Why don't we take about a 15-minute 58 1 break if that is all right with everybody. 2 MR. REILLY: Thank you, Your Honor. 3 (A brief recess was taken.) 4 THE COURT: There are 40 minutes left according to 5 my calculation. The last time I used a chest clock was a 6 eight or nine week patent trial. One side invoked 60 hours, 7 and one side used something like 59 hours and 50 minutes. If 8 they could be that close after eight or nine weeks, you can 9 surely do well in one day. 10 MR. REILLY: I'm trying to use about 30 seconds at 11 the end, Your Honor. 12 THE COURT: I figured that's what you were aiming 13 for. 14 MR. REILLY: If you get up and leave I'll know to 15 stop talking. 16 BY MR. REILLY: 17 Q Dr. Scheffman, I would like to talk now about efficiency 18 work that you did in this matter. You did not do a merger 19 guidelines analysis relating to efficiencies, did you? 20 A That's correct. 21 Q Not only didn't you do a merger guidelines analysis, you 22 didn't obtain the data and information necessary to do a 23 merger guidelines efficiencies review; is that correct? 24 A That's correct. 25 Q Rather than doing a guidelines efficiencies analysis -- 59 1 A I did use data to look at financial data for Whole Foods 2 and Wild Oats to compare their relative costs and made some 3 conclusions based on that. 4 Q Rather than doing a guidelines efficiencies analysis, 5 you tried to point out some positive aspects of this proposed 6 merger; isn't that true? 7 A That's true. 8 Q Project Gold Mine, Dr. Scheffman, is a pro forma 9 analysis done by Whole Foods business people in connection 10 with the proposed acquisition; is that correct? 11 A Project Gold Mine had Whole Foods people involved and it 12 also had the investment banking firm R.B.C. involved. 13 Project Gold Mine, I think, was their name and was usual when 14 investment banks give. 15 Q These Gold Mine documents were not created for this 16 litigation, right? 17 A Yes. 18 Q They were created in the ordinary course of business, 19 correct? 20 A That's my understanding. 21 MR. REILLY: And I think the efficiency number is 22 confidential; is that correct? 23 MR. BRENNAN: That's correct. 24 MR. REILLY: So, if you can turn to -- just so the 25 Judge can know the number that I'm referring to, Page 225 of 60 1 your transcript at Line 11 to 17. 2 THE COURT: That's 225? 3 MR. REILLY: 225, yes, Your Honor. It would be the 4 numbers in both the question in Line 7 and 8 and Line 11 to 5 12. That's the number we'll be referring to but I won't say 6 it. 7 BY MR. REILLY: 8 Q The only efficiency quantified is this number from a 9 wholesaling contract that Whole Foods has, correct? 10 A That I referred to? 11 Q Yes. 12 A Yes. 13 Q You took this number from the Project Gold Mine 14 documents, didn't you? 15 A As I explained in my deposition, I cited Project Gold 16 Mine document in my report. And I explained in my deposition 17 that I talked to Betsy Foster about those analyses. 18 Q Page 165 of your transcript, Lines 1 through 4, I asked 19 you the question, "Just focusing on your use of Project Gold 20 Mine, the blank million savings in the wholesaling contract 21 comes from Project Gold Mine documents?" Your answer was 22 yes. Did I read that correctly, Dr. Scheffman? 23 THE COURT: Page 165. 24 MR. REILLY: 165, Lines 1 through 4, Your Honor. 25 THE WITNESS: I said something further as you know 61 1 but I'll say yes, that's what I said there. 2 BY MR. REILLY: 3 Q And this potential savings of this number is a 4 cumulative total over ten years; is that correct? 5 A Yes. 6 Q So, ten years from now, the potential savings from this 7 contract may equal that number in total according to this 8 estimate; is that correct? 9 A For this particular line item, yes. 10 Q And this is the only line item you quantify in your 11 entire efficiencies analysis; is that correct? 12 A That's correct. 13 Q Even though it would take ten years potentially to get 14 all of these savings, you didn't use a discount rate for 15 these future potential savings, did you? 16 A No, I didn't. 17 Q You didn't independently verify that this potential 18 estimate of savings from this contract, did you? 19 A No, I didn't. 20 Q In fact, you quoted this potential savings number 21 without having reviewed the contract, this wholesaling 22 contract that the number is derived from. Isn't that 23 correct? 24 A That's correct. 25 Q In fact, you didn't even check to see if this contract 62 1 extended into ten years; is that right? 2 A I did have, as I pointed out, I did have a significant 3 interview with Ms. Foster about this. 4 Q Ms. Foster? 5 A Uh-huh. 6 Q Did you rely on this interview, Dr. Scheffman? 7 A As I indicated in my report, in my deposition, yes. 8 Q Because if you could turn to Page 15 in your transcript. 9 MR. REILLY: Page 15, Your Honor, of the Dr. 10 Scheffman transcript, yes. 11 BY MR. REILLY: 12 Q And I asked you who you interviewed in this matter, and 13 you named two names, Mr. Lamacchia and Chad Smith. 14 Then I asked you, starting on Line 19, "Besides the 15 two interviews that you just described, did you rely on any 16 other interviews of Whole Foods or Wild Oats business people 17 to reach your conclusions?" Dr. Scheffman, you answered no. 18 Did I read that correctly? 19 MR. BRENNAN: Your Honor, I object to the question. 20 I think the context is missing here in terms when he asked 21 these questions in the deposition. This has nothing to do 22 with the topic we're arguing now. 23 MR. REILLY: Your Honor, this is, first of all, 24 impeachment. Second of all, we talked a long time in his 25 deposition about efficiencies. He said he relied on two 63 1 interviews. That's all I'm doing is reading that. 2 THE COURT: The question that you asked him was who 3 did you interview to reach your conclusions in this matter. 4 I guess, unless there's something on those pages that limits 5 the word conclusions, I guess it's talking about all the 6 conclusions in this whole case or in his entire report. But 7 we'll leave it for redirect. 8 MR. REILLY: Thank you, Your Honor. 9 BY MR. REILLY: 10 Q Dr. Scheffman, you didn't determine whether the 11 efficiencies in this merger are merger specific; is that 12 correct? 13 A I pointed out that, if there were reductions in purchase 14 costs, those would be merger specific. 15 Q But you can't tell me specifically how these potential 16 efficiencies compare with Wild Oats being purchased by 17 Safeway, for example? 18 A We talk about the deposition, I didn't do an analysis of 19 that. 20 Q Do you know whether the potential cost savings that are 21 described in the Gold Mine documents were used in Whole 22 Foods' evaluation of this deal? 23 THE COURT: Say that again. 24 MR. REILLY: Does he know whether the efficiencies 25 estimates were used by Whole Foods in the evaluation of the 64 1 deal? 2 THE COURT: In other words, what's called the Gold 3 Mine -- 4 MR. REILLY: Project Gold Mine documents, yes. 5 THE COURT: From some time ago, whether that 6 document was used by Whole Foods and Wild Oats in their own 7 evaluation of the merger? As opposed to being used by either 8 Dr. Scheffman or Dr. Murphy. 9 MR. REILLY: Actually, I would like to clean up the 10 record. 11 BY MR. REILLY: 12 Q When were the Project Gold Mine documents created, Dr. 13 Scheffman? 14 A I believe, well, there were a whole series of Project 15 Gold Mine documents. There are at least two Gold Mine, the 16 investment banker does an analysis and puts forward the ward 17 for fairness opinion and various other things. There are at 18 least two actual slide show presentations or slide shows, 19 hard copies, by -- remember Project Gold Mine on the 20 documents and with the board, have R.B.C. on them, Real Bank 21 of Canada. They're their presentation to the board. 22 Q And my question was, Dr. Scheffman, when were these Gold 23 Mine documents created? 24 A Which Gold Mine documents? 25 Q The latest version or any version you know of, Dr. 65 1 Scheffman? 2 A The latest version I know of Project Gold Mine is the 3 one, the slide show that went to the board. 4 Q Project Gold Mine documents were created specifically 5 for this deal. Isn't that true, Dr. Scheffman? 6 A They were part of the input into the determination by 7 Whole Foods' people and R.B.S. 8 Q For this deal? 9 A Yes. 10 Q Dr. Scheffman, also included in the Project Gold Mine 11 documents were estimates of the Wild Oats sales that would be 12 captured by the local Whole Foods if a specific Wild Oats 13 store was closed; is that correct? 14 A Yes. 15 Q These diversion estimates were done as part of Project 16 Gold Mine analysis, correct? 17 MR. BRENNAN: Objection, Your Honor. There is no 18 foundation for that question. 19 MR. REILLY: Which one, the one he answered yes to 20 or my most recent one? 21 THE COURT: Your most recent question was what? 22 MR. REILLY: Were these diversion estimates done as 23 part of the Project Gold Mine analysis? 24 MR. BRENNAN: The prior question he answered did 25 not provide a foundation for that question. 66 1 MR. REILLY: The diversion estimates referred to, 2 were estimates, that the Wild Oats sales that would be 3 captured by the local Whole Foods if a specific Wild Oats 4 store was closed, and he answered yes. And I referred to 5 that in my next question as diversion estimate as in my 6 deposition as well. 7 THE COURT: I don't know. The foundation doesn't 8 have to be in the immediately preceding question. I mean is 9 there some factual basis for this question? 10 MR. REILLY: Yes, if the Project Gold Mine 11 documents had diversion estimates in them. He talked about 12 it in one of his depositions. I can show you his deposition. 13 THE COURT: The question is whether he knows what 14 you're talking about. 15 MR. REILLY: Were these diversion estimates done as 16 part of the Project Gold Mine analysis? 17 THE COURT: Why can't he answer that if he knows 18 the answer? 19 MR. BRENNAN: Your Honor, he can answer the 20 question. All I'm saying is there was no foundation for the 21 question that Mr. Reilly asked. I'll withdraw the objection. 22 THE COURT: If you know the answer to the question, 23 you can answer it, you can explain it if you need to explain 24 it. 25 THE WITNESS: Those estimates were done at some 67 1 point during the process of Project Gold Mine. I could 2 explain for the record what was done and when. Yes, they 3 were done by a Whole Foods person at some point well prior 4 to, as far as I can tell, the final valuation. 5 BY MR. REILLY: 6 Q The Project Gold Mine work was done by a serious person 7 in Whole Foods; is that correct? 8 THE COURT: By what? 9 MR. REILLY: A serious person in Whole Foods. 10 THE COURT: How would he know how serious the 11 person was? 12 MR. REILLY: He used that description in his 13 deposition, Your Honor. 14 THE COURT: A person of substance is that what you 15 mean? 16 THE WITNESS: These were done, my understanding 17 from the record, these were done by Mr. Katish. There was 18 extensive testimony in his deposition about, whether he is a 19 serious person. I don't doubt. 20 THE COURT: He's not a frivolous person. 21 THE WITNESS: Yeah. But there is, in his 22 deposition, he explains the nature of what he did and how 23 seriously he took it. 24 BY MR. REILLY: 25 Q You reviewed the Project Gold Mine maps that were 68 1 included in Dr. Murphy's expert report, correct? 2 A Yes. 3 Q You discussed some of these specific Project Gold Mine 4 methods in your deposition, is that right? 5 A Yes. 6 MR. REILLY: Would you put up Tab T as in Thomas? 7 THE WITNESS: Is this in the notebook? 8 MR. REILLY: Tab T, yes. 9 BY MR. REILLY: 10 Q Dr. Scheffman, do you recognize this Project Gold Mine 11 diversion map that is on your screen or in Tab T of your 12 binder? 13 A Was this the one we discussed in my deposition or a 14 different one? 15 Q It is one of the ones we discussed. 16 A Okay. It's not, I don't remember discussing this one. 17 I may be mistaken. 18 Q Here, under the Project Gold Mine analysis, they predict 19 that if they close a Wild Oats store in the middle of this 20 map, the Whole Foods store three and a half miles away will 21 capture most of those store sales; is that right? 22 A That's what -- first of all, this map, this map was, if 23 I recall right, this map was created by the FTC, not by Whole 24 Foods. It wasn't part of Gold Mine. 25 Q The actual number, transfer of revenue to Whole Foods 69 1 from closing Wild Oats was created by the Project Gold Mine 2 analysis, wasn't that, Dr. Scheffman? 3 A The title of this document, whatever it is, is 4 consistent I believe. We could check. I assume it is what, 5 there are statements like this in Gold Mine. There aren't 6 maps like this in Gold Mine. 7 Q Just so it's clear, the number that is stated, the 8 transfer of revenues, that large number, that percent, is 9 what Whole Foods estimated would be transferred to the Whole 10 Foods store three and a half miles away if the Wild Oats in 11 the middle of that map closed; is that correct? 12 MR. BRENNAN: Your Honor, I object to this line of 13 questioning. The exhibit that's on the screen was prepared 14 by the FTC or its expert. And the numbers in it are 15 purportedly to come from a place -- the numbers purportedly 16 to come from a place, and I'm not in a position to dispute 17 whether they do or whether they don't, but I think to ask 18 this witness whether a number put into a, a demonstrative put 19 together by the FTC is the number that comes from a different 20 Whole Foods document is not a fair question. 21 MR. REILLY: Your Honor, we turned these maps over 22 as part of Dr. Murphy's expert report. More importantly, we 23 went over several of these maps at Dr. Scheffman's deposition 24 and actually asked what he thought of the numbers and the 25 diversion estimate, put these maps in front of him. He was 70 1 able to answer question after question about them. 2 THE COURT: Well, Dr. Scheffman just said he wasn't 3 sure that this was the one that was shown to him at the 4 deposition. And without describing a number or the location, 5 I think it should be fairly easy to refresh his recollection 6 or to show him whether this is something that he did discuss 7 at his deposition. 8 You can either go to the underlying documents, 9 which purports to be the project, a portion of the Project 10 Gold Mine documents. Or you can go to the deposition pages. 11 Once he's comfortable that this is something he has already 12 thought about, studied and acknowledged, then I expect that 13 the objection can be withdrawn. 14 MR. BRENNAN: Thank you, Your Honor. If Mr. Reilly 15 points to the pages in the deposition where the map on the 16 screen was discussed in the deposition, I would certainly 17 withdraw my objection. 18 MR. REILLY: Fair enough, on Page 168 of his 19 transcript. 20 THE COURT: The map that's now up on the screen is 21 a different map than the one you were just asking about? 22 MR. REILLY: Yeah. Yes, we just found the city 23 that we did refer to in the deposition transcript. I'm not 24 sure if the other one was. We can look for it while I'm 25 doing these questions. But this was referred to in the 71 1 middle of Page 168 in Dr. Scheffman's deposition transcript. 2 MR. BRENNAN: Thank you. 3 THE WITNESS: Which map? 4 THE COURT: So at this point, at this point, he 5 doesn't want you to look at Tab A. It's the first page of 6 Tab T. 7 MR. REILLY: That's in Tab T, just not the first 8 page. 9 THE COURT: Not the first page, it's the third 10 page. 11 THE WITNESS: Yes. 12 BY MR. REILLY: 13 Q Dr. Scheffman, this refers to another city where there 14 is a Wild Oats right in the middle of the map, and I showed 15 this to you during your deposition; is that correct? 16 A Yeah, this is actually the only map we discussed in my 17 deposition as far as I know. 18 Q I guess I'll only be talking to you about this one today 19 then. 20 And the Whole Foods is located more than six miles 21 away from the Wild Oats store; is that correct? 22 A That's correct. 23 Q So the Project Gold Mine analyst estimate that if the 24 Wild Oats in the middle of this map closes, the Whole Foods 25 store over six miles away will capture that number on the top 72 1 of the map; is that correct? 2 A Let me say that this, the only thing that came from Gold 3 Mine, and I assume, my answers at deposition, I assumed that 4 you were accurately representing what Project Gold Mine 5 estimated for this situation. I assumed that. 6 Q So the Whole Foods six miles away would capture that 7 percent of Wild Oats' revenues while all the other stores on 8 this map combined would capture the remaining revenue; is 9 that correct? 10 A According not to this map. But if Project Gold Mine, if 11 we're talking about a spread sheet because it was the 12 document where this came from, if for this store, said for 13 that store, if it's closed, how much would be estimated to be 14 transferred, yes, that's what the document, I should have 15 asked to see the document, but I assume you're representing 16 it accurately. 17 Q So the amount that all those other stores, actually 18 18 in number if you count them up, will capture in total, from 19 the Wild Oats closure is significantly less than what the 20 Whole Foods alone captures; is that correct? According to 21 Project Gold Mine estimates. 22 A According to this estimate. 23 Q To the Project Gold Mine estimates? 24 A According to a document that was used in the analysis of 25 Project Gold Mine, but not clear how it was used in the 73 1 actual valuation and fairness opinion, there was an internal 2 analysis that, if you're representing me correctly, I sure 3 you are, that yes, that's what it did. 4 Q Project Gold Mine had many of these diversion estimates 5 in there, didn't it, not just for one or two cities? It had 6 several cities? 7 A There are spread sheets, but Project Gold Mine is not a 8 spread sheet, which is what you're now focusing. Project 9 Gold Mine was R.B.C.'s, Whole Foods and R.B.C.'s estimates 10 evaluation. That went to the board. There was discussion of 11 the board. The spread sheet that we're not looking at was, 12 according to the depositions, an input into what followed. 13 Q You considered these diversion projections when doing 14 your competitive analysis, correct? 15 A No, I didn't discuss them in either report. 16 Q Did you consider them while reaching your opinion in 17 this matter, Dr. Scheffman? 18 A I didn't. It wasn't in my reports. 19 Q Is the fact that closing Wild Oats store would result in 20 a very large percent of sales going to Whole Foods of any 21 relevance to the competitive analysis? 22 A This is a projection. You didn't ask me what I thought 23 about the projection. I teach M.B.A.s how to do such things. 24 You didn't ask me my opinion about what I thought of this 25 analysis as a Professor that teaches people how to do this 74 1 sort of thing. 2 But it is, it is, it was done in the ordinary 3 course of business. Somewhat, Ms. Katish, as I understand 4 from the record, did these projections. 5 Q He is a serious man? 6 A Yes. 7 Q Project Gold Mine diversions of any relevance to how 8 close a competitor Wild Oats is to Whole Foods? 9 A We did discuss about that. The issue is close. What do 10 you mean by close? 11 Q The way the guidelines use close. 12 A Let me discuss briefly what the guidelines mean by 13 close. What Dr. Murphy used this for is to, and it's in his 14 rebuttal report if I recall, he said, look at this. I'm 15 sorry. I don't want to characterize. Said Whole Foods is 16 projecting in the Gold Mine documents that it's going to, 17 when it closes a store, it's going to get a lot of sales. 18 I infer from that, that Whole Foods and Wild Oats 19 are, that in some sense close, and then the important thing 20 about close is that, therefore, when Whole Foods gets all 21 these more sales, they're going to raise the price. That's 22 what it used it for. That's the disconnect. 23 You have store closures in all supermarket mergers. 24 You hope to have, the reason why you close is you hope to 25 pick up some significant amount of sales from the store you 75 1 close if you have a store in the same area. The issue this 2 is used for, in terms of close, is, if this happened, would 3 that mean that Whole Foods would raise the price? That is 4 what it uses it for. 5 I point out in my deposition, and it was important 6 to me, as it always is, there was no assumption in any of the 7 Gold Mine documents that Whole Foods was going to change any 8 prices as a result of the transaction. 9 Q But if I asked you, looking at this map on the screen, 10 if Wild Oats increased prices at a Wild Oats store by one to 11 two percent, what precise percent of sales would that Whole 12 Foods store capture? And you couldn't give me an answer, 13 could you, a precise estimate? 14 A This is economist talking to a lawyer, but it's really 15 important. This is a transfer that, in no way, assumes 16 anything about price. You can't make an inference about 17 price even if you accepted this. 18 Q Can you answer my question sitting here today? 19 A Not based on this, it has nothing do with price. 20 Q So the fact that Whole Foods expects that these very 21 high percentages of the Wild Oats business will bypass all 22 those conventional stores, the Trader Joe stores, and go to 23 Whole Foods isn't relevant at all to your competitive 24 analysis, Dr. Scheffman? Is that your testimony? 25 A I'm saying these are estimates. We have estimates in 76 1 the record about what happens if a Wild Oats store closes. 2 We have estimates of that in which I provided among others, 3 and I'm sure Dr. Murphy did. And the issue is, until we 4 know, you know, order of magnitude what that is, in actual 5 store closures or we can figure out what the maximum could 6 be. 7 But the issue here is, Dr. Murphy is asserting, 8 based on economic theory, not any facts in the record, that 9 if this happened, as a matter of economic theory, Whole Foods 10 would raise its price. 11 THE COURT: Let me ask you this question. Assuming 12 that your characterization of Dr. Murphy's testimony or 13 expert report is accurate, that he's got an assumption built 14 in from this, and you don't accept that assumption 15 necessarily? 16 THE WITNESS: That's correct. 17 THE COURT: Is there anything in either what you 18 have said or what Dr. Murphy has said that would answer this 19 question? In this particular locale, suggests that if Wild 20 Oats closes, X percent of the revenues of the closed Wild 21 Oats would go to Whole Foods. 22 Supposing that, after X percent went to Whole 23 Foods, Whole Foods raises its price one percent across the 24 board. Then three months later, raises its price another one 25 percent. Then three months later, raises its price another 77 1 one percent. Is there anything to suggest either that this 2 same percentage of transfer of revenues would stay steady or 3 that it would decrease and people would then choose one of 4 these other 18 stores in the five- or six-mile radius? Do we 5 know anything about that? 6 THE WITNESS: Well, yes, we do. This is really the 7 central to this case. It's a decision about what the 8 relevant market is. If the relevant market is not PNOS, this 9 transfer is of no consequence because there are so many 10 competitors. These two, it's really important. Market 11 definition is important in this case because, in the FTC's 12 alleged market, it's a merger monopoly. My conclusion is 13 that it's not right, that they're clearly competing with 14 Trader Joes and the other conventionals. 15 So, the issue is the transfer doesn't mean the 16 price change. Think about it. My sales go up a lot. I'm 17 trying to build my sales. Am I going to want to raise the 18 rice? Well, maybe, not clear. It could be. But the issue 19 is what is the constraint? My conclusion is, although Whole 20 Foods and Wild Oats compete with one another, really the 21 primary constraint are the other competitors. I don't want 22 to waste more time, but that's what -- 23 THE COURT: Maybe this is, maybe again, I'm mixing 24 apples and oranges but, in terms of your critical loss 25 analysis, or maybe not even those terms, maybe it's in some 78 1 other analysis, doesn't there come a point where some of the 2 revenues that have been transferred to Whole Foods don't stay 3 with Whole Foods, even after the closure of Wild Oats because 4 some of the Whole Foods customers will say, I used to pay 5 fifty-cents for this kind of apple at Whole Foods and 6 53-cents at Wild Oats. Now they're asking me to pay 62-cents 7 at Whole Foods because they've raised their prices after Wild 8 Oats went out of business. And I'm not going to do it. 9 Where is the nearest Safeway or where is the 10 nearest Acme or where is the nearest WalMart. And do they 11 have any product that's comparable at a lesser price? 12 THE WITNESS: Yes, Your Honor. Again, I've said a 13 lot of things that are important. What we know from the 14 market research is those customers at that Wild Oats store, 15 not all of them, but a substantial percentage were virtually 16 all of them were shopping a lot at other, at all those other 17 stores, not Whole Foods. And they were buying comparable 18 products, not all of them, but a substantial percentage of 19 them. 20 So, I'm saying something different, which is a lot 21 of these folks at Wild Oats are already shopping at Super 22 Target, and other. And I don't want to disclose more, but 23 these retailers in this area already, they were spending 24 their money there. They were in some significant amount they 25 were buying comparable, just as you said, the apple at 79 1 Safeway looks good. And it's a better deal than Wild Oats, 2 and I'm going to buy it there. That's happened before the 3 merger. That's why my fundamental conclusion is that's 4 really what the constraint is here and why the PNOS market is 5 not sustainable. 6 THE COURT: I don't want to ask any more questions 7 because I think Mr. Reilly probably has about ten minutes. 8 MR. REILLY: I appreciate that, Your Honor. Feel 9 free to ask any questions when Mr. Brennan is up there, 10 actually. 11 THE COURT: I'll save my questions. 12 MR. REILLY: I have a list for you if you want. 13 THE COURT: Give me the last three pages of your 14 outline. 15 MR. REILLY: He's probably going to object so. 16 I have all the pressure for a good finale, Your 17 Honor. I don't know what to do. 18 BY MR. REILLY: 19 Q Can you turn to Tab Y please? Tab Y, as in yo-yo. When 20 analyzing product market for this case, you knew that 21 Mr. Mackey told the board of directors that this acquisition 22 would avoid nasty price wars in a lot of cities, several 23 cities -- I'm not sure if I can name them -- that would harm 24 our gross margins and profitability. Were you aware of that? 25 A Yes. 80 1 Q Were you also aware that Mr. Mackey, the C.E.O. of Whole 2 Foods, told his board that this acquisition, we eliminate 3 forever the possibility of Kroger, Super Value or Safeway 4 using their brand equity to launch a competing national 5 natural/organic food chain to rival us? You read that and 6 you knew that he had said that; is that correct? 7 A This is not confidential? 8 Q Did you know that he made those statements? 9 A I'm aware of this and from publicly available 10 information that he made such comments. 11 Q You also note that Mr. Mackey told the board that these 12 two reasons alone make the deal worth doing? 13 A Yes, I'm well aware of that. 14 Q Dr. Scheffman, if your view of product market is 15 correct, that Whole Foods would be unable to exercise market 16 power because of Safeway, Target, Krogers, Alberson's, maybe 17 farmers markets, WalMarts, club stores, et cetera, the 18 elimination of any one competitor should be insignificant; is 19 that right? 20 A Should be? 21 Q Insignificant. 22 A Well, my conclusion is that Whole Foods is competing 23 with lots of competitors, which is what their actions 24 indicate. And that Wild Oats is just one of them where they 25 compete with one another. 81 1 Q You don't think the elimination of Wild Oats would have 2 a negative impact on competition at all; is that correct? 3 A I conclude, based on the evidence, that OATS is a 4 competitor as are the, quote, non PNOS retailers in the area. 5 And there's a number in each of the local areas I analyzed. 6 There's a number of competitors. This is just one of the 7 numbers. 8 Q Dr. Scheffman, you do not believe that the elimination 9 of Wild Oats as an independent competitor will have a 10 negative impact on competition, do you? 11 A Not in an antitrust sense. 12 Q That's what I was asking about. Yet the C.E.O. is 13 saying that the elimination of Wild Oats and blocking entry 14 is worth hundreds of millions of dollars; isn't that correct? 15 MR. BRENNAN: Objection. Mr. Reilly is 16 characterizing the document. 17 MR. REILLY: It makes this deal worth doing? 18 THE COURT: Slow down. 19 I'm going to sustain that objection. Start over. 20 MR. REILLY: Sure. Thank you, Your Honor. 21 BY MR. REILLY: 22 Q That the C.E.O. is saying that the elimination of Wild 23 Oats and blocking entry makes this deal worth doing; is that 24 correct? 25 A That's the question now? 82 1 Q Yes. 2 A Well, that's what the document says. 3 Q If you assume that Mr. Mackey is right, the C.E.O. of 4 Whole Foods, doesn't your conclusion in this case have to be 5 wrong? 6 A Mr. Reilly, I seriously considered this. I knew this 7 stuff from the beginning. 8 Q So I'm so obvious in my questions is that what you're 9 telling me, Dr. Scheffman? 10 A And I treated it seriously. But I, as an economist and 11 a business school professor, looked at the evidence. I took 12 this quite seriously. I looked at the evidence. And what 13 does the evidence indicate? 14 I came to a conclusion for the reasons I explained 15 in my two reports that I do not agree that, from an antitrust 16 perspective, that the acquisition will materially change 17 competition in any relevant market. 18 Q I have one more final question. I'm out of time, Dr. 19 Scheffman. If this acquisition does allow Whole Foods to 20 avoid nasty price wars, your conclusions about this 21 acquisition are wrong, aren't they, Dr. Scheffman? 22 A No, because the issue is what quantitatively, what is a 23 nasty price war? There is certainly competitive interaction. 24 The issue is how much did it add up to be, for how long, and 25 what factors were involved, if there were, beyond Whole Foods 83 1 and Wild Oats? 2 MR. REILLY: Thank you for your time and patience, 3 Dr. Scheffman. 4 I have nothing further, Your Honor. 5 THE COURT: Thank you very much, Mr. Reilly. 6 MR. REILLY: Feel free to ask whatever questions 7 you want, Your Honor. 8 THE COURT: Again, you want to give me your last 9 three pages of your outline? 10 MR. BRENNAN: Can I look at them first? 11 Your Honor, could we just have a few minutes to 12 consult with co-counsel. I think it would help expedite it. 13 THE COURT: Sure. Now, when you say a few minutes, 14 five minutes or less? 15 MR. BRENNAN: Five. 16 THE COURT: I don't know whether, it's going to be 17 disruptive if people start to go -- 18 MR. BRENNAN: I would suggest not clearing the 19 courtroom. 20 THE COURT: I would rather not clear the courtroom. 21 But we're going to take five minutes. I am going to stand up 22 and stretch because I need to do that any way and anybody 23 else can. 24 MR. BRENNAN: Thank you, Your Honor. 25 (A brief recess was taken.) 84 1 MR. BRENNAN: Your Honor, we have no redirect. I 2 did want to make one point for the record. 3 In the binders that we were given this afternoon 4 that Mr. Reilly's, some of the contents in his cross 5 examination, including the infamous map with the circles that 6 we had the little discussion about, behind it are the 7 colorful stuff. 8 I believe those are demonstratives and they were 9 not shared last night, as opposed to ordinary course 10 documents or part of any expert report. They weren't used. 11 But I did want to state on the record that we were supposed 12 to exchange demonstratives last night. With that -- 13 MR. REILLY: The demonstratives for closing are not 14 due yet. So if you want to use them for that, I sure we can 15 hand them over in a timely manner. 16 MR. BRENNAN: With that, Your Honor, we have no 17 redirect. 18 THE COURT: Okay. You can't have any recross if he 19 has no redirect. 20 MR. BRENNAN: That was part of the thinking. 21 THE COURT: You can step down now, Dr. Scheffman. 22 THE WITNESS: Thank you, Your Honor. 23 THE COURT: Thank you. 24 (Witness excused.) 25 THE COURT: With respect to exhibits, I guess a lot 85 1 of the stuff -- I assume everything that has been handed to 2 me, except the things that we've been talking about as 3 demonstratives, are also contained in the dozens of binders I 4 have in my chambers. I mean, they're just other copies of 5 the same things that are already there. 6 We still have this question at some point as to 7 whether or not everything in all of those binders is in 8 evidence or is going to be in evidence, because what's going 9 to happen, I guess, when you all file your proposed findings 10 of fact and conclusions of law, you're going to be citing 11 lots of stuff. 12 You're going to be citing deposition excerpts. I 13 supposed there are no objections to deposition excerpts 14 because people were under oath. They testified. They said 15 what they said. It's all about how much weight each side 16 gives it and how much you think I should give it. 17 With respect to particular documents, we've never 18 really gone through the exercise, I certainly don't want to, 19 of the standard evidentiary objections. What I said in the 20 case management order, after some discussion with all of you, 21 is that, because there is no jury here, that I wasn't going 22 to exclude even hearsay but consider it for what it's worth. 23 But I guess at some point, if there are documents 24 or exhibits that -- the demonstrative ones I can look at if I 25 find them helpful but not actually rely on unless somebody 86 1 believes they inaccurately present data. Then it would be 2 helpful to me. If I'm going to look at this colorful thing, 3 for example, that's not really in evidence because it's more 4 fun to look at that than the other one, as long as there is 5 nothing inaccurate in there and it accurately reflects things 6 that are in evidence, neither side should care. 7 But with respect to the things that are or may be 8 in evidence, have we reached or are we going to reach an 9 agreement that everything is in evidence that I have in the 10 binders in my chambers unless somebody files a piece of paper 11 saying I object to these particular exhibits because they're 12 quadruple hearsay, rather than single hearsay, or because 13 they, they're not accurate or because whatever lack of 14 foundation, lack of authenticity. 15 Mr. Denis, what's your understanding? 16 MR. DENIS: Your Honor, we're prepared to just move 17 into evidence all that you have and you will give them the 18 weight you deem appropriate. I'm sure. 19 Michael, if you have a different view. 20 MR. BLOOM: Your Honor, I think actually that's the 21 resolution we reached in the last conference call with 22 Ms. Plat. We're perfectly a happy to have everything moved 23 into evidence. 24 THE COURT: To the extent you think it's not worth 25 the paper it's written on, you will say so in your briefs? 87 1 MR. BLOOM: Yes, Your Honor. 2 THE COURT: Sounds like a good plan. 3 Okay. So, we had agreed that we would start 4 tomorrow at 9:30 and that each side would have two and three 5 quarters hours. Is that essentially what we've agreed to? 6 Now, how do you see it in terms of, it's the 7 plaintiff's motion? So, presumably they'll start and then 8 the defendants. Then are we going to have -- the plaintiff's 9 will have some rebuttal. 10 Are the defendants going to have some limited 11 surrebuttal? Have we discussed that? 12 MR. BLOOM: Your Honor, as I understood our 13 agreement to be, the sequence was going through the 14 plaintiff's rebuttal and that was going to be close of the 15 matter. 16 THE COURT: Mr. Denis, is that the way we left it? 17 MR. DENIS: That is the way we discussed it, Your 18 Honor. At this point, not having heard what they have to 19 say, we just have no request for surrebuttal. 20 THE COURT: I think we'll leave it that way unless 21 there's something that you think is just so beyond the pail 22 that you feel the need to, then you'll make your proffer to 23 me as to why you need to say something. 24 MR. DENIS: Yes, Your Honor. 25 THE COURT: Then the rest we'll deal with later in 88 1 the week. So I'm going to have something from the defendants 2 on this unsealing? 3 MR. DENIS: Yes, Your Honor, that brief is being 4 worked on right now. You'll have it late this afternoon so 5 you can rule this afternoon. 6 THE COURT: You both look for what I say on ECF so 7 if it presents the way you present your argument tomorrow. I 8 think we did well this afternoon with a couple of little 9 mistakes here and there of avoiding confidential stuff. And 10 hopefully we can do it again tomorrow. 11 Okay. We'll open the courtroom at 9:15 and we'll 12 start at 9:30. 13 Okay. All right. Thank you very much. 14 (Whereupon, the Court adjourned at 4:33 p.m.) 15 16 17 18 19 20 21 22 23 24 25 89 1 C O N T E N T S 2 WITNESS DIRECT CROSS REDIRECT RECROSS 3 (Defendants) 4 David Scheffman 5 By Mr. Brennan 5 6 By Mr. Reilly 8 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 90 1 CERTIFICATE OF REPORTER 2 I, Lisa Walker Griffith, certify that the 3 foregoing is a correct transcript from the record of 4 proceedings in the above-entitled matter. 5 6 7 8 9 10 ______________________________________ __________________ Lisa Walker Griffith, RPR 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25