The Federal Trade Commission’s effort to block the merger between two fashion groups lacks teeth, according to a new filing in the closely-watched case. In an opposition brief, Tapestry, Inc. and Capri Holdings urge a New York federal court to shoot down the FTC’s bid for a preliminary injunction, arguing that the regulator has “built [its] case on theories and models that are completely divorced from the marketplace realities,” and that the case is “devoid of any focus on what matters most in an antitrust case: the options available to the consumer.” That is a problem, according to Tapestry and Capri, as “merger analysis is supposed to examine how a proposed transaction will change consumer choice and whether it will leave consumers without reasonable alternatives, forcing them to pay higher prices.”
Setting the stage in the brief that they lodged with the U.S. District Court for the Southern District of New York on August 20, Tapestry and Capri (collectively, the “defendants”) maintain that while the FTC argues that Tapestry’s proposed acquisition of Capri – and its brands, Michael Kors, Versace, and Jimmy Choo – will lessen competition in the “accessible luxury” market, that is not true. In fact, the two groups contend that “consumers face handbag choices everywhere they turn, and they have hundreds of choices in a highly competitive marketplace.”
The evidence in the case at hand “will show that there is no handbag at any price remotely relevant to this case where consumers do not have dozens and dozens – if not hundreds – of substitutes available to them,” the defendants argue. In addition to calling foul on the FTC’s claim that Tapestry will raise prices following the closing of the deal to the detriment of consumers and competition, Tapestry and Capri assert in their filing that the FTC falls short in making its case in a number of ways …
> The Relevant Market: Primarily, Tapestry and Capri argue that the FTC “cannot meet its prima facie burden to establish that the merger is likely to result in substantial harm to competition in a relevant antitrust market and that the merger will result in ‘undue concentration’ in a properly defined market.” The FTC regulator fails at the first prong, according to the defendants, as it cannot show that it is likely to succeed in establishing a relevant market.
The FTC’s “relevant market” argument comes up short, per Tapestry and Capri, as it does not – and cannot – show that the “accessible luxury handbags” market has customers that are distinct from “mass market” and “luxury” customers, for example, or that “accessible luxury” handbags have distinct prices warranting a separate market between lower and higher-end products.
As for the FTC’s claim that the merger will cause “undue concentration” in the market, which it says is an independent basis to block the transaction, Tapestry and Capri push back here, as well. The law requires that a plaintiff must establish a relevant market before the court can analyze anticompetitive effects, they argue. The FTC has not defined a relevant market, and it “cites no case to support the proposition that it can evade market definition and obtain a preliminary injunction without proving a relevant market.”
> Effects on Competition: Even if the FTC can establish its prima facie case, Tapestry and Capri claim that they can still rebut it by demonstrating that the FTC “inaccurately predict[s] the merger’s probable effects on competition.’” Specifically, they put forth three key arguments on this front …
(1) The FTC overstates the transaction’s likely competitive effects because entry, expansion and repositioning are likely – The FTC’s statistics about the market share of Tapestry and Capri “overstate the transaction’s potential competitive effects because competitors can (and already do) quickly enter, expand, and reposition,” thereby, making it so that the groups “probably cannot maintain supracompetitive pricing for any length of time.” (Pricing is relevant here, as the FTC argues that one critical effect of the merger will be price increases for brands under the Tapestry/Capri umbrella.)
(2) Tapestry’s emphasis on brand autonomy will ensure competition among Coach, Kate Spade, and Michael Kors continues – The market shares cited by the FTC “are not indicative of an antitrust issue,” according to Tapestry and Capri, because the FTC’s “entire theory in challenging this transaction rests on a fallacy that, after the merger, Tapestry intends to eliminate competition among Coach, Kate Spade, and Michael Kors, including [by] setting prices, discounting, product development, and wholesaler negotiations.” That is “not true,” the groups argue, as “Tapestry has no incentive or plans to merge the brands, share pricing information between the brands, or to otherwise limit innovation.”
(3) The transaction rationale is procompetitive: Tapestry intends to improve demand for Michael Kors handbags and drive increased sales – Tapestry and Capri argue that despite the FTC’s claims to the contrary, the merger will actually spur competition in the market since Tapestry aims to “enhance the Michael Kors’ brand’s value and provide consumers with a procompetitive benefit” given that the brand has “lost its luster” in recent years. More broadly, the two groups argue that FTC’s market concentration statistics “fail to accurately portray the merging company’s weak competitive stature given the merged entity’s declining competitive significance.”
> Substantial Anticompetitive Effects: Tapestry and Capri contend that the FTC needs to prove that it is likely to prevail on the merits of its claim that the transaction will “have substantial anticompetitive effects in a relevant market.” The problem here, they argue, is that the FTC’s pre-trial brief “says nothing on this issue.” Instead, the regulator appears to rely exclusively on its expert’s projection that the merger will result in “as much as a 30% price increase on Michael Kors handbags.”
In addition to other issues with that projection (which the defendants deny), Tapestry and Capri state that “it is factually implausible to suggest that Tapestry could acquire Michael Kors … impose as much as a 30% mark-up, and consumers would accept that increase” in light of the fact that “consumers have hundreds of choices they can turn to if they do not want to pay the price that the defendants or any brand offers.”
> Balance of Equities: Finally, Tapestry and Capri argue that the equities favor denying injunctive relief here. The FTC “has had a year to develop its case, but has remained blind to the evidence,” opting to base its lawsuit on “cherry-picked document excerpts” instead of “deposing a single customer or competitor” or conducting “a proper consumer survey.”
“Tapestry’s acquisition will benefit Capri’s customers and especially the current and future consumers of Michael Kors brands,” the two companies contend, further stating that “because of the lengthy time required to go through the administrative litigation process, granting an injunction will necessarily kill the deal, robbing consumers of the procompetitive advantages resulting from this merger.”
With this in mind, the parties ask the court to deny the FTC’s request for a preliminary injunction and allow their deal to move ahead.
A Bit of Background: The FTC is looking to block the proposed $8.5 billion merger between Coach-owner Tapestry Inc. and Versace and Michael Kors’ parent company Capri Holdings. The consumer protection regulator filed suit against Tapestry and Capri this spring, roughly eight months after the two U.S. fashion groups announced that they had reached a deal to merge their respective holdings and create what has been likened to the American equivalent of European luxury goods groups like LVMH, Kering, and Richemont.
In the somewhat heavily-redacted complaint that it filed on April 23, the FTC argues that the Tapestry, Capri deal, if permitted, “would eliminate fierce head-to-head competition on many important attributes including price, discounting, and design,” resulting in “tens of millions of Americans that purchase Coach, Kade Spade, and Michael Kors products fac[ing] higher prices.” In other words, if Tapestry – which owns Coach, Kate Spade, and Stuart Weitzman – acquires Capri, whose brands include Versace, Jimmy Choo, and Michael Kors, “Tapestry would gain a dominant market share in the ‘accessible luxury’ handbag market, dwarfing every other competitor” to the detriment of American shoppers.
The case is Federal Trade Commission v. Tapestry, Inc., 1:24-cv-03109 (SDNY).
Share
