Is antitrust back in fashion? Implications of the FTC‘s win in the Tapestry/Capri merger

Background

In August 2023, Tapestry and Capri entered into a merger agreement under which Tapestry proposed to acquire Capri for $8.5 billion.  On April 23, 2024, the FTC filed a complaint1 to preliminarily enjoin the proposed merger.  At issue in the FTC’s case was the potential combination of “accessible luxury” brands Michael Kors, Coach, and Kate Spade, which the agency alleged would not only eliminate head-to-head competition, but also would significantly increase concentration in the ‘accessible luxury’ handbag market.

The FTC alleged in its complaint that the reduced competition would affect not only consumers, but also employees, because “competition for labor has resulted in higher wages, better benefits, and improved working conditions.”2 The FTC’s complaint also cited to the provision in the 2023 Merger Guidelines stating that a “firm that engages in an anticompetitive pattern or strategy of multiple acquisitions in the same or related business lines may violate Section 7 [of the Clayton Act],”3 and alleged that the proposed acquisition “builds on a deliberate, decade-long M&A strategy by Tapestry” and is part of the company’s “pattern and strategy of serial acquisitions.”4

In defense of the transaction, the Parties asserted that the proposed acquisition “will realize significant cost synergies,” and result in “more than $200 million in operational cost savings and supply chain efficiencies within three fiscal years.”5 However, the Parties also contended that they were not asking the Court to “clear the transaction on the basis of an efficiencies defense,” and therefore their argument that the transaction rationale was procompetitive should not have to meet the formal elements of that defense.6 Defendant’s primary arguments were related to the FTC’s market definition.

Key points from the court’s decision

Market definition

This case turned on market definition.  The FTC argued that there are three distinct submarkets for handbags: “mass market,” “accessible luxury,” and “true luxury,” with “accessible luxury” handbags being the market at issue in this case.  In its complaint, the FTC alleged that "accessible luxury” was a term coined by Coach (owned by Tapestry) 20 years ago to “fill[] the void between ‘mass-market’ items on the one hand and ‘true luxury’ products on the other.”7 The Parties disagreed with the FTC’s understanding of the “accessible luxury” classification, arguing that “accessible luxury is a generalized concept rather than a separate relevant market,”8 and that all handbags fall into a single, undifferentiated market.9

Ultimately, the Court agreed with the FTC’s market definition, reasoning that “accessible luxury” handbags are differentiated from “true luxury” and “mass-market” counterparts due to the Brown Shoe factors: unique production facilities, distinct prices, industry recognition, and sensitivity to price changes.  The Court also agreed with the FTC that quantitative analysis supported an “accessible luxury” market.

Market share and concentration

The Court cited to the lower Herfindahl-Hirschman Index (“HHI”)10 thresholds in the 2023 Merger Guidelines used to establish whether a market is “highly concentrated.”  Importantly, however, the HHI resulting from the Tapestry/Capri transaction would have also exceeded the higher structural presumptions in the 2010 Guidelines.  As such, the Tapestry Court did not have to rely on the lower thresholds under the 2023 Merger Guidelines.  The FTC argued that, post-merger, the combined firm would have a 59% share of the accessible luxury handbag market, well over the 30% threshold in the 2023 Guidelines and creating a presumption for anticompetitive effects.

Defenses

The Parties attempted to prove that the FTC’s prima facie case was an inaccurate prediction of the transaction’s probable effect on future competition on the basis that: (1) the barriers to entry and expansion are low, (2) Tapestry’s emphasis on brand autonomy would ensure continued competition between Coach, Kate Spade, and Michael Kors, and (3) the merger had a procompetitive rationale: to revitalize Michael Kors.  The Court rejected these arguments.

The Court also took issue with the Parties’ claim that they were not articulating an efficiencies defense when they argued, among other things, that the merger would “realize significant cost synergies” such as “operational cost savings and supply chain efficiencies.”  Finding that the Parties had in fact sought to argue an efficiencies defense, the Court concluded that “Defendants cannot reap the benefits of an efficiencies defense while evading its requirements.”11 The Court proceeded to analyze the Parties’ arguments accordingly, ultimately finding that the Parties failed to satisfy the necessary elements of an efficiencies defense.12

Takeaways

Continuing the uptick in agency enforcement in recent years, the FTC’s Tapestry/Capri merger challenge demonstrates the agency’s willingness to target transactions even if they involve niche markets or “discretionary” products such as handbags.  We can expect that the agencies will continue to investigate and potentially challenge transactions in markets that have historically not been a major focus of the Government.

The decision in this case also highlights:

• The importance of the Parties’ ordinary course documents. The judge gave “no credence” to the Parties’ testimony that it found to be “contradicted by record evidence” presented in Court.13

• The need to vet industry experts thoroughly for relevant experience.  The Court discounted the testimony of industry experts on market entry on the basis that, while they may have had experience working with third-party manufacturers, they lacked experience making decisions for third-party manufacturers.

• Claimed efficiencies must be merger-specific and verifiable.  Merging parties should expect that their pro-competitive arguments regarding synergies will be analyzed by the Court pursuant to the standards of an efficiencies defense, regardless of whether or not the parties have denied raising an efficiencies defense.

Stay tuned for further news about the Parties’ decision to appeal.  Should they choose to stay the course, the Second Circuit’s decision will be one to watch.

Authored by Claude Szyfer, Ilana Kattan, Meschelle Noble, and Jill Ottenberg.