Over the past decades, many aspects of merger law and practice have changed. New guidelines have come out—both for horizontal and vertical mergers. The availability of data has grown and economic analyses have become increasingly sophisticated. And theories of harm—as well as terminology—have evolved from a focus primarily on concentration to consideration of unilateral effects and harms to targeted customers.
But at least one thing has stayed the same: Staples has tried to acquire Office Depot. In 1996, Staples and Office Depot entered into an agreement to merge; that transaction was blocked in 1997. In 2015, they again tried to merge. Again, that transaction was blocked.
Both Staples I and Staples II attracted widespread attention. Given that the companies are public, the investor community was deeply interested in the outcome of both cases. Courtrooms were packed, and the national media followed the cases closely during and after the trial. The American Lawyer wrote a cover story about Staples I—complete with a picture of the winning team—and Law Business Research featured Staples II in a book on antitrust trials during the Obama administration.
As of the time of writing, Staples hopes that the third time is the charm. In January 2021 Staples made a $2.1 billion offer for Office Depot. Office Depot rejected the offer but suggested it might be open to some sort of venture. What will happen next is yet to be seen. But with a possible Staples/Office Depot merger back in the news, it is an opportune time to consider some key takeaways from those cases and whether 20 years showed a dramatic change in the analysis applicable to a merger of the two companies.
In Staples I, the FTC and the court focused on the combination of office superstores, a concept that was barely a decade old at the time of the merger. As the court explained, these superstores were part of “deep discount” chains selling primarily to small businesses. Staples I made no mention of contract sales to large businesses—the market that was the focus of the FTC’s challenge in Staples II. Indeed, in Staples II, it was the defendants, not the FTC, who focused on the office superstores. Their goal in bringing attention to the retail side of the business was to show the small percentage of the companies’ businesses that the FTC’s case concerned. In court, defense counsel returned repeatedly to a demonstrative of a pyramid that had a large base (consisting significantly of retail business) and a smaller tip—the 1200 or so large business customers at issue in the case.
The change in the FTC’s focus from the retail business to the contract corporate business was no surprise—the advent of Amazon and expansion of Walmart into office supplies had upended the parties’ retail businesses—providing the motive for the merger in the first place. The FTC had recognized this dramatic industry change in clearing the Office Depot/Office Max transaction in 2013. But while the FTC determined that the Office Depot/Office Max merger did not adversely affect business customers, it came to a different conclusion in the Staples II transaction. While the parties stayed the same in Staples I and Staples II, the key facts in the cases, the product and geographic markets at issue, the affected customers, and the likely entry candidates all changed.
A second change between the cases was the precise definition of what was a “consumable office supply.” In Staples I, ink and toner were included in the market. In Staples II, the FTC defined a market of consumable office supplies that did not include ink and toner. This exclusion led to some of the more entertaining moments in the cross-examination of the FTC’s expert, Carl Shapiro. The first argument the defendants made was that ink and toner were in fact consumable, e.g., used and then reordered.
Q: Well, did the FTC tell you or did you see that each and every customer and . . . competitor . . . all think ink and toner is a consumable office supply? . . .
A: In that sense of language, I’m not disputing that. You can add me to the list if you’re just describing that they’re consumed, used in the office and replenished . . . .
Q: So you agree that ink and toner is in the consumable office supply market?
A: Now, you see, the word “market” is very special to me.
The defendants also argued that the FTC (and Professor Shapiro) improperly excluded ink and toner because they had lower shares and that doing so was inconsistent with how the FTC defined the market in Staples I. In fact, the FTC excluded ink and toner in Staples II precisely because competitive conditions had changed and ink and toner faced different competitive conditions than other consumable office supplies. The court agreed that was appropriate.
However, scant precedential value can be gleaned from comparing the defined market in that case and the Plaintiffs’ alleged market in this case. The 1997 case is nearly twenty years old, and the office supply market has changed dramatically since that time. For example . . . the rise of MPS [Managed Print] services as a competitive force has occurred in the last several years.
As the Staples II court made clear, courts will clearly recognize industry changes as affecting the antitrust analysis.
Brown Shoe was decided in 1962, and addressed a vertical merger between a shoe manufacturer and a retailer of shoes. While other cases of that era have fallen out of favor (e.g., Von’s ) or engendered strong debates about their relevance (e.g., Philadelphia National Bank ), Brown Shoe continues to be the gold standard for market definition. The concepts of “reasonable interchangeability” and “cross-elasticity of demand” were hotly contested in both Staples I and Staples II; in applying those concepts the courts considered both economic and factual analysis.
In Staples I, the FTC defined a market of “the sale of consumable office supplies through office superstores.” The defendants countered that the market should include all office supplies (consumable or not and sold through office supply superstores or not), a market in which the parties had a combined share of 5.5 percent.
The court agreed that the products sold by superstores and other retailers were the same; it acknowledged the difficulty in overcoming the “initial gut reaction” to the FTC’s market definition. The court went methodically through the Brown Shoe factors. Noting that functional interchangeability did not end the analysis, the court turned to “the practical indicia” and asked whether a submarket existed. First, the court focused on a variety of economic analyses. These showed lower prices based on the number of office superstores in a market and that defendants changed their prices when faced with entry of another superstore. In marching through the Brown Shoe factors, the court also considered the “uniqueness” of office superstores, in part based on the judge’s own visit to numerous retailers selling office supplies, noting that “[y]ou certainly know an office superstore when you see one.”
Brown Shoe equally drove the analysis of the market definition in Staples II. The court focused on three indicia. First, the court noted that vendors recognize large B2B customers as separate, with Staples and Office Depot each maintaining categories of customers depending on the amount of their purchases. Second, the court focused on the fact that large B2B customers obtain distinct prices (e.g., through multi-year contracts). Finally, the court spent significant time showing that the needs of large B2B customers were distinct from those of other customers. The court recognized that “the rationale” for market definition is different than it was at the time of Brown Shoe. Nevertheless, the Staples II court explained that it found “the Brown Shoe factors a useful analytical tool and, as Judge Amit P. Mehta recognized in Sysco, “‘Brown Shoe remains the law, and this court cannot ignore its dictates.’”
Despite sophisticated economic analyses playing key roles in both cases, documents had their day in court as well. Although neither case offered a “hot document” setting forth the parties’ intent to raise prices, both had documents that helped bolster the government’s product market definition. In Staples I, the court noted Staples’ documents referring to the “office superstore industry” and the “Big Three.” Both parties’ long-range plans focused on the plans of other superstores. And the documents bolstered the economic evidence, showing different price zones and price comparisons depending on which office superstores were also in the market.
In Staples II, the court focused on ordinary course documents with language such as, “[T]here are only two real choices for [large business customers]. Us or Them[,]” and that Staples is Office Depot’s “[t]oughest and most aggressively priced national competitor.” The court also pointed to documents showing that Staples used the merger to lock in prices with customers by suggesting that prices could increase after closing. One document told customers: “[t] his offer is time sensitive. If and when the purchase of Office Depot is approved, Staples will have no reason to make this offer.”
Interestingly, the defendants never put on a defense in Staples II, choosing to rest after the FTC’s case. Some suggested it was fear of subjecting the executives to cross-examination —and perhaps the parade of documents that the FTC would have placed in front of them. Defendants may have rested because they did not believe the FTC had met its burden. But in any event, the documents were part of the record and influenced the court’s decision.
Both cases cited the Horizontal Merger Guidelines and in almost equal numbers—12 times in Staples I and 13 times in Staples II. Yet in Staples I, case law, more than the Guidelines, underpinned the framework of analysis. In Staples I, the court acknowledged that office supplies could be obtained through numerous stores, but determined there was an appropriate “submarket” of office superstores, following the Brown Shoe approach to defining submarkets. Indeed, the term submarket, which does not appear in the 1992 Guidelines, appears more than 20 times in the 1997 Staples I decision. The term “hypothetical monopolist” appears only once—in a footnote to explain the court’s use of 5 percent as a figure in comparing the price difference between markets in which there are different numbers of office superstores.
In Staples II, there were far more references to the 2010 Horizontal Merger Guidelines terminology. The term “submarket” appeared only twice, both in an initial paragraph discussing Brown Shoe. In contrast, an entire section of the decision described Professor Shapiro’s analysis of the hypothetical monopolist test, including a detailed discussion of the SSNIP test. Staples II also followed the Guidelines in defining B2B customers as targeted customers.
While both cases used a market definition of consumable office supplies, only Staples II explained the concept of a cluster market, i.e., a market that combines different products that have similar market conditions. Interestingly, the Merger Guidelines make no mention of cluster markets so Staples II drew upon Grinnell for the notion that it is appropriate to combine different products or services “where that combination reflects commercial realities.”
Finally, both cases make clear that the burden of proving efficiencies is on the defendants—and it is a high burden. In Staples I, efficiencies played a significant role at trial. The defendants presented a detailed “Efficiencies Analysis,” calling both a fact and expert witness on the subject. The court went through a detailed discussion of the specific efficiencies, considering them both unreliable and unverifiable. The court also determined that the pass-through rate—the extent to which cost savings would benefit consumers—was unrealistic.
The defendants in Staples II had argued at opening that efficiencies from the deal were necessary to keep them afloat, using an image of penguins on a melting iceberg to make their point. Given that opening—and the repeated focus on the small amount of the business at issue in the FTC’s merger challenge—a robust efficiencies defense was expected. Because the defendants put on no defense, efficiencies were relegated to a mere footnote in the Staples II opinion, with the court noting only that defendants had not met their burden.
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The decisions in Staples I and Staples II show that the basics of antitrust analysis have not changed over the decades. Facts may change and terminology may change, but the basics of determining whether customers are likely to be injured by a merger still rely on the same questions set forth in the Brown Shoe analysis 60 years ago. The two decisions also show that courts readily examine the detailed industry facts and whether they have changed.
We have yet to see what will come of the current Staples/Office Depot transaction—but we can expect that more will be written about the antitrust aspects of any combination of those companies.
