By Jeffrey May, J.D.
The federal district court in Washington, D.C. has released a redacted version of its opinion, blocking Staples, Inc.’s proposed $6.3 billion acquisition of Office Depot, Inc. On May 10, the court issued an order, granting the FTC’s motion for a preliminary injunction pending the completion of the agency’s administrative challenge to the proposed transaction. The defendants have since dropped the deal. The court’s opinion explains how the FTC, along with the State of Pennsylvania and the District of Columbia, established their prima facie case demonstrating that the proposed merger was likely to reduce competition in the business-to-business (B-to-B) contract space for office supplies (FTC v. Staples, Inc., May 10, 2016, released May 17, 2016, Sullivan, E.).
At the outset, the court laid out the standard of review and the government’s burden. The standard for preliminary injunctive relief under Sec. 13(b) of the FTC Act required a showing: (1) that there was a likelihood of success on the merits; and (2) that the equities tipped in favor of injunctive relief. The court noted that this standard contrasted with the typical preliminary injunction standard, which required a plaintiff to show: (1) irreparable harm; (2) probability of success on the merits; and (3) a balance of equities favoring the plaintiff.
The government had the initial burden of showing that the merger would result in “undue concentration” in the relevant market, allowing a single entity to control a sufficiently large percentage of the relevant market so that concentration was increased and competition was lessened. Then, the burden shifted to the defendants to rebut the presumption that the merger would substantially lessen competition. If the defendants were to successfully rebut the presumption, then the burden of producing additional evidence of anticompetitive effects shifted back to the government. The equities also had to be weighed.
Because the FTC met its burden, and the defendants did not adequately rebut the presumption, the motion for preliminary injunction was granted. At the conclusion of the plaintiffs’ case-in-chief, the defendants did not present any facts or witnesses to support arguments that proposed remedies would negate any anticompetitive effects of the merger or that there were merger-specific efficiencies resulting from the transaction.
Relevant market. The court accepted the plaintiffs’ relevant market, defined as a cluster market of “consumable office supplies”— including pens, paper clips, notepads, and copy paper—replenished frequently and sold to B-to-B customers who spend more than $500,000 annually on these items. According to the court, the “practical indicia,” identified in the U.S. Supreme Court's 1962 decision in Brown Shoe Co. v. U.S., supported viewing large B-to-B customers as a target market. The indicia included: (1) recognition of the market as a separate economic entity; (2) B-to-B customer demand for distinct prices demonstrating a high sensitivity to price changes; and (3) B-to-B customer requirements that vendors provide value-added services, such as customer support and expedited delivery. Expert testimony, as well as testimony of customers, also supported the market definition, the court noted.
The defendants unsuccessfully argued that the market was “gerrymandered and artificially narrow.” They contended that the market also should have included ink and toner, as well as so-called “beyond office supplies” or “BOSS” products. Simply because customers had the option of purchasing these items through their primary vendors did not mean that those goods were subject to the same competitive conditions and should be included in the market, the court reasoned.
Competitive effects based on market share calculations. The plaintiffs established their prima facie case based on the increase in market concentration. The combined firm would have a market share of roughly 79 percent. Using the Herfindahl–Hirschman Index (HHI), a commonly accepted measure of market concentration, the plaintiffs’ expert concluded that the transaction was presumptively illegal based on the increase in market share in an already highly-concentrated market.
“The relevant HHI would increase nearly 3,000 points, from 3,270 to 6,265,” it was noted. “These HHI numbers far exceed the 200 point increase and post-merger concentration level of 2,500 necessary to entitle Plaintiffs to a presumption that the merger is illegal.”
Moreover, the plaintiffs offered the defendants' bid data and business documents to support their contention that the defendants competed head-to-head for large B-to-B customers.
The court concluded that the defendants’ sole argument in response to the plaintiffs' prima facie case—that Amazon Business as well as local and regional office supply companies will expand and provide B-to-B customers with competitive alternative to the merged entity—was inadequate as a matter of law. Several significant institutional and structural challenges faced Amazon Business, and it was unlikely that online marketplace for business would be in a position to restore competition lost by the merger within three years, according to the court.
Moreover, WB Mason, the third largest office supply company in the United States, was not a competitive threat. It retained less than one percent market share in the relevant market and had only nine customers in the Fortune 100. There was a question of whether WB Mason had the desire or ability to compete with the merged entity nationally. In addition, there was no evidence that a collection of regional or local office supply companies would meet the needs of large B-to-B customers.
Public interest standard. Lastly, under Sec. 13(b)'s public interest standard, the court weighed the public and private equities of enjoining the merger. The two public interest factors to be considered weighed in favor of the injunction: (1) the public interest in effectively enforcing antitrust laws; and (2) the public interest in ensuring the FTC has the ability to order effective relief if it succeeds at the merits trial. It was clear that the merger would likely lessen competition in the relevant market. The defendants did not make a showing that the equities favored allowing the merger to proceed immediately, since they rested at the close of the plaintiffs’ case-in-chief, the court noted.
Extraordinary effort. The court also noted the “extraordinary amount of work” that went into the case and commended the lawyers and paralegals involved in the matter. Over seven weeks of discovery, 15 million pages of documents were produced, more than 70 depositions were taken, and five expert reports were completed, the court explained. In addition, the court heard from 10 witnesses at the evidentiary hearing, and there were nearly 4,000 exhibits introduced into evidence, it was noted.
This is Case No. 1:15-cv-02115-EGS.
Attorneys: Tara L. Reinhart for FTC. Bennett C. Rushkoff, Office of the Attorney General, for District of Columbia. Norman Wesley Marden, Commonwealth of Pennsylvania Office of Attorney, for Commonwealth of Pennsylvania. Andrew L. Goldman (Goldman Ismail Tomaselli Brennan & Baum LLP), Diane P. Sullivan (Weil, Gotshal & Manges LLP) and Ronald F. Wick (Cozen O'Connor P.C.) for Staples, Inc. Andrea B. Levine (Simpson, Thacher & Bartlett LLP) and Carrie Mahan (Weil, Gotshal & Manges LLP) for Office Depot, Inc.
Companies: Staples, Inc.; Office Depot, Inc.
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