Introduction
On October 24, 2024, to the surprise of many legal observers and fashion industry executives, the Federal Trade Commission (FTC) secured a preliminary injunction blocking a proposed $8.5 billion deal between Tapestry and Capri that would have created a U.S. luxury goods powerhouse. Investors exhibited shock, with Capri’s stock plunging 45 percent following the release of U.S. District Judge Jennifer Rochon’s 169-page decision.1 Judge Rochon determined that the FTC successfully defined a narrow market for “accessible luxury” handbags that is a distinct market from “mass market” and “true luxury” handbags, and that the FTC had succeeded in showing that the proposed merger would likely cause anticompetitive harm in the form of higher prices for consumers of accessible luxury handbags.
The decision dealt a major blow to Tapestry’s strategy to create a U.S. luxury behemoth, aiming to emulate the conglomerate business model of the top European luxury houses. Tapestry and Capri have filed an emergency appeal, and this must-watch antitrust battle will now move to the U.S. Court of Appeals for the Second Circuit, creating the opportunity for one of the most influential appeals courts in the country to weigh in on a high-profile merger case.
Although a Second Circuit decision on the merits would be many months away, there are several immediate takeaways from Judge Rochon’s decision:
- First, the decision reinforces the outsized role that market definition and the so-called “structural presumption” play in merger litigation, most often to the advantage of the government. Here the court accepted the FTC’s ostensibly narrow market definition and credited the FTC’s expert’s market share estimates showing a highly concentrated market, completely rejecting the defendants’ arguments and expert economic testimony.
- Second, the decision illustrates yet again the pivotal role of ordinary course documents in merger litigation. The opinion is replete with citations to the defendants’ internal documents that supported the FTC’s narrow market for accessible luxury handbags and showed the companies compared themselves to each other when conducting “Pricing Insights.” The court was scathing about the defendants’ attempts to disavow or downplay the plain words in their internal documents.
- Although the court favorably referenced the new 2023 Merger Guidelines, Judge Rochon was careful to adhere to traditional precedent. In our view, the case would have been decided the same way under the 2010 Merger Guidelines and the court’s approach is consistent with modern merger precedent.
- Despite criticism from the merging parties and industry observers that this case ignored the intense competition in all aspects of the fashion industry, the court applied well-accepted antitrust economics and merger law. The theories on which the FTC proceeded, and which the court applied, were consistent with how the agencies and courts have assessed past mergers in differentiated product markets.
- The court gave short shrift to defensive arguments about procompetitive efficiencies and that entry and repositioning would be sufficient to protect consumers from any supracompetitive price increases. This portion of the decision is perhaps the least well-reasoned and supported, and, in our view, this aspect of the decision will likely form the basis of the defendants’ arguments to overturn the decision on appeal.
FTC’s “Accessible Luxury” Handbag Market Definition Prevails
Key to the FTC’s win was establishing that the relevant market in which to assess the competitive effects of the merger was not an “all handbag” market but a market limited to “accessible luxury” handbags. The FTC successfully argued that there are three distinct handbag submarkets: 1) “mass market,” also referred to as “fast fashion” or “opening price point,” 2) “accessible luxury,” (also referred to as “affordable luxury”), and 3) “true luxury” (also referred to as “luxury,” “pure luxury,” “pinnacle luxury,” “traditional luxury,” “European luxury,” and “traditional European luxury”). The defendants had urged the court to consider a single undifferentiated market for all handbags, arguing that “accessible luxury is a generalized concept rather than a separate relevant market.” Within the accessible luxury market, the main overlap is between Tapestry’s Coach and Kate Spade handbags and Capri’s MICHAEL Michael Kors handbags. The court acknowledged that accessible luxury handbags are functionally similar to mass market and true luxury handbags yet reasoned that consumers do not find all handbags to be close substitutes. Indeed, the court emphasized that the “conclusion most consonant with the evidence is that handbag consumers do ‘purchase brands.’ To ignore the peculiar role of brands in the handbag market would be to ignore the commercial realities of the industry.” The court appeared convinced that traditional European luxury bags did not compete with accessible luxury handbags because of the massive price gap or “white space” between them, as well as the fact that accessible luxury brands relied heavily on discounting, whereas discounting was infrequent for traditional European luxury handbags.
The court weighed several qualitative factors—known as the Brown Shoe factors after a famous U.S. Supreme Court merger case from 1962—including unique production facilities, peculiar characteristics, distinct prices, industry recognition, and price sensitivity.2
In addition to these qualitative factors, the court also undertook a detailed examination of the quantitative evidence and expert economic testimony. The court heavily favored the FTC’s economic expert testimony on market definition based on the well-established hypothetical-monopolist test, which the expert supported with analysis based on one of the company’s consumer survey data. Although the court recognized that there were limitations in the quantitative analysis, the court nevertheless credited the economic analysis as additional evidence in support of the FTC’s market definition. The FTC’s expert calculated very high diversion ratios between accessible luxury handbags and the merging parties’ overlapping brands in particular. The reliability of this calculation was vigorously disputed by the Defendants who claimed that it dramatically overestimated actual diversions. The court was unpersuaded. Adopting the analysis of the FTC’s expert, the court calculated that the combination of the merging parties would account for 59 percent of the accessible luxury market. By contrast, the court largely rejected the analysis and methodology of defendants’ testifying economic expert.
Having succeeded in demonstrating a relevant market with high concentration, the court found that the FTC had established a prima facie case of anticompetitive harm. The court found this prima facie case was also bolstered by additional evidence of unilateral effects. Because the court found that the merging parties were unable to rebut the FTC’s prima facie case of anticompetitive harm, the FTC prevailed.
The FTC’s Expert and Ordinary Course Documents Prevail over Defense Witnesses
As noted, the decision is peppered with quotations from the defendants’ own documents. Although the defendants’ executives tried to distance themselves from their documents in testimony, the court was unconvinced, labeling defense witnesses’ attempts to assert a broader market definition as “convenient litigation assertions.” The court emphasized that the ordinary course documents were “more compelling evidence of commercial realities than the platitudes offered by Defendants’ executives and experts.” This stands in contrast to other recent merger cases in which the court has credited testimony from the merging parties’ key executives.3 In our view, the court’s extensive citations to the factual record and witness credibility determinations will create some difficulties for the merging parties on appeal.
2023 Merger Guidelines Make a Small Splash
All eyes were on this case as it was one of the first to be decided since the new 2023 Merger Guidelines were released by the FTC and the U.S. Department of Justice. The court cited the 2023 Merger Guidelines favorably yet sidestepped one of the most controversial aspects of the 2023 Merger Guidelines, namely whether elimination of substantial competition between two firms in itself is a sufficient to prohibit a merger. In a footnote, the court declined to decide whether the FTC could have won the case with this evidence alone; instead relying on accepted precedent regarding market definition and unilateral effects analysis. Ultimately, we think the case would have been decided the same way under the 2010 Merger Guidelines and their forebears.
Industry Buzz About Competitive Fashion Industry Does Not Undermine Established Antitrust Analysis
The decision received widespread attention and sparked much criticism within the fashion industry. The merging parties and some industry observers commented that this case ignored the fashion industry’s intensely competitive nature.4 In addition, Neil Saunders, a retail analyst and managing director at the consultancy GlobalData, claimed that the ruling was unwarranted because “the blocking of the merger has been made on grounds that do not reflect the realities of the market.”5 The merging parties suggested that the FTC’s narrow focus on pricing of handbags was misguided because consumers would simply choose not to purchase handbags if the price became too high—they could buy another “accessible luxury” good or experience instead. Despite these criticisms, the court’s unilateral effects analysis is well within the mainstream of antitrust economics and merger law. The court explicitly rejected broader views of competition by reasoning that “handbags are important to many women” and “Plaintiffs often prevail in … cases involving consumer goods that are arguably less essential.”
Merging Parties’ Procompetitive Arguments Rejected Wholesale
In an attempt to rebut the FTC’s prima facie case of anticompetitive harm from the merger, the merging parties argued that the deal would revitalize Michael Kors, improving demand and driving increased sales, thus benefiting consumers. In contrast with other merger cases that have assessed procompetitive benefits as part of a “totality of the circumstances approach” which weighs potential procompetitive benefits and anticompetitive effects,6 the decision applies a narrow standard for assessing the defendants’ efficiencies arguments, requiring the merging parties to prove that the claimed efficiencies were both merger-specific and sufficient to offset any anticompetitive harm.
In this instance, not only did the court find these standards could not be met, but the court also found the purported procompetitive benefits were more suggestive of anticompetitive effects, reasoning that the Tapestry’s revitalization plans revealed their desire to decrease Michael Kors’s reliance on discounting—an anticompetitive harm because less discounting would mean higher prices. In reaching this conclusion, the court relied on Tapestry’s internal presentation to its CEO about the strategic benefits of acquiring Michael Kors that the merger “suggest[s] room to increase MK AUR (Average Unit Retail)” and “opportunity to reduce MK discounting.” The court construed this presentation as evidence that Tapestry perceived the acquisition to be an opportunity to decrease Michael Kors’s reliance on discounting and increase prices. Referencing executive testimonies, the court expressed concerns that “Tapestry may also further reduce discounting by Coach and Kate Spade, [which] has been Tapestry’s goal in recent years” and rejected the defendants’ procompetitive argument.
Given the contrast between Judge Rochon’s restrictive approach to efficiencies in this case compared with fellow Southern District of New York Judge Victor Marrero’s approach to efficiencies in the 2020 T-Mobile/Sprint case, it will be interesting to see how the Second Circuit decides what role procompetitive efficiencies should play in merger analysis.
Ease of Entry and Repositioning Likely to Become Central Issues on Appeal
In attempting to rebut the FTC’s prima facie case, the merging parties focused on the ability of competitors to quickly enter, expand, and reposition to defeat any attempt by the merged firm to raise handbag prices. The court was unpersuaded that other existing and potential handbag companies would have the collective ability to constrain the merged firm from raising prices.
The court found that establishing and maintaining effective supply chain constraints was a significant barrier to entry and expansion. The court reasoned that new entrants would need to meet minimum order requirements from third-party manufacturing facilities that would prove difficult for smaller companies. Additionally, the court found that new entrants lacked the long-lasting strategic relationships with producers in Asia that Tapestry and Capri maintained and that it would be difficult for new brands to replicate. Similarly, with respect to data and marketing, the court found that new entrants and smaller brands lacked the years of consumer data necessary for effective marketing, essentially finding data to be a significant barrier to competitive entry and expansion.
In our view, the court’s findings on the supposed difficulty of accessing third-party manufacturing and distribution and on data are not as well-supported as other aspects of the decision, despite the court’s attempts to ground her decision in credibility determinations about the defendants’ supply-chain witnesses. Although the court was at pains to say that the defendants did not need to prove that a new Michael Kors-size brand would emerge to restore competition, the decision leaves the distinct impression that the court overlooked whether repositioning by existing smaller brands would collectively be a sufficient competitive constraint in such a dynamic and fast-changing industry as fashion. Indeed, the defendants pointed toward evidence that manufacturing facilities often have large amounts of capacity and third-party logistics companies can assist smaller companies in bringing products to market.
Given the questions that may be raised about the ability of other brands to reposition and expand, the Second Circuit could very well find its way to the opposite conclusion on the defendants’ entry defenses, despite the decision being grounded in credibility determinations not susceptible to appeal. The potential for new market entrants and the role of efficiencies will likely be some of the main issues to watch on appeal.
For further information on the blocked merger, please contact Beau Buffier, Taylor Owings, Brendan Coffman, Michelle Yost Hale, Jamillia Ferris, or another member of the antitrust and competition practice at Wilson Sonsini Goodrich & Rosati.
[1] Bob Van Voris, “Capri Sinks After FTC Wins Halt to $8.5 Billion Tapestry Tie-Up,” Bloomberg Law (Oct. 25, 2024), https://finance.yahoo.com/news/tapestry-8-5-billion-capri-202318423.html.
[2]Brown Shoe Co. v. United States, 370 U.S. 294 (1962).
[3] See e.g., New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179, 224 (S.D.N.Y. 2020).
[4] Anne D’innocenzio, “Tapestry, Capri File Notice to Appeal Court Decision Blocking Their $8.5 Billion Merger,” ABC News (Oct. 28, 2024), https://abcnews.go.com/Business/wireStory/tapestry-capri-file-notice-appeal-court-decision-blocking-115235375.
[5] Lauren Hirsch, “Judge Blocks Luxury Fashion Deal, Citing Risk of Higher Handbag Prices,” The New York Times (Oct. 24, 2024), https://www.nytimes.com/2024/10/24/business/tapestry-capri-merger-coach-versace.html.
[6] See e.g., New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179, 206 (S.D.N.Y. 2020); FTC v. H. J. Heinz Co., 116 F. Supp. 2d 190, 200 (D.D.C. 2000); United States v. Anthem, Inc., 236 F. Supp. 3d 171, 215 (D.D.C. 2017), aff’d, 855 F.3d 345, 364 (D.C. Cir. 2017).
