Foodmaker To Pay $1.45 Million To Settle Federal Charges over Chi-Chi's Acquisition of Consul

Under an agreement the Federal Trade Commission has negotiated with Foodmaker, Inc., the San Diego-based restaurant chain owner will pay a $1.45 million civil penalty to settle charges that one of its subsidiaries knowingly failed to notify the nation’s two antitrust enforcement agencies before the subsidiary acquired its largest franchisee.

According to the government complaint filed in court, Chi-Chi’s, Inc. was a wholly-owned subsidiary of Foodmaker in October 1992 when it acquired Consul, Inc., operator of 26 Chi-Chi’s franchises in the United States and Canada, without making a required premerger filing under the Hart-Scott-Rodino Act (HSR Act) to give the government its opportunity to review the transaction under the antitrust laws. This is the fourth time in 1996 that the FTC has obtained substantial civil penalties in cases involving this type of federal law violation.

Foodmaker owns, operates and franchises the Jack In The Box fast-food restaurant chain. Chi-Chi’s, a chain of full-service Mexican restaurants, now is a wholly-owned subsidiary of Family Restaurants, Inc., and is based in Louisville, Kentucky. At the time of the acquisition at issue in this case, Consul was based in Bloomington, Minnesota, and had initiated bankruptcy proceedings, submitting a reorganization plan to the court. Chi-Chi’s had submitted an alternative plan under which it proposed to acquire 100 percent of Consul’s voting securities. The bankruptcy court approved the alternative plan in October 1992. Chi-Chi’s completed the acquisition, worth $12.7 million, on Oct. 23, 1992.

Under the HSR Act, companies contemplating mergers or acquisitions that meet certain size thresholds must first notify the government and then wait a specified period before going ahead with the deal. During that waiting period, one of the two federal antitrust agencies (the FTC or the Department of Justice) will analyze whether it believes the transaction might violate federal antitrust laws. The filing requirement provides an early warning system, allowing the government to challenge a transaction that it believes would raise prices or reduce quality or selection for consumers before the deal goes through and causes such injury.

According to the government complaint detailing the charges in this case, Chi-Chi’s knew that an HSR filing was required before it could acquire Consul’s voting securities, yet it determined to go ahead with the deal without making the filing. Foodmaker, as parent company of Chi-Chi’s, was responsible for the HSR filing. Moreover, the complaint alleges, Foodmaker approved the acquisition and authorized the expenditure. The complaint charges that it was not until Jan. 26, 1994, upon notification by the FTC’s premerger notification office, however, that Foodmaker filed the required HSR documents.

The 10-day waiting period to which this particular deal was subject expired on Feb. 5, 1994, so Foodmaker was in continuous violation of the HSR Act from Oct. 23, 1992 until Feb. 5, 1994, the government charged. The maximum civil penalty for an HSR Act violation is $10,000 per day. The $1.45 million Foodmaker has agreed to pay to settle the charges in this case represents virtually the maximum amount the company can pay without violating outstanding loan commitments, which could put the company into default. Foodmaker would be required to pay the civil penalty amount within 30 days after the federal district court approves the settlement.

The complaint and proposed consent judgment were filed by FTC attorneys, acting as Special Attorneys to the U.S. Attorney General, this morning in U.S. District Court for the District of Columbia. The FTC vote to authorize filing was 5-0.

NOTE: This consent judgment is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.

Copies of the complaint and proposed consent judgment are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov

(FTC File No. 941 0056)

(Civil Action No. 1:96CV01879, Oberdorfer)