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Handbag Merger Sewn Shut: A Review of the FTC v. Tapestry Decision

Ashley A Locke

Handbag Merger Sewn Shut: A Review of the FTC v. Tapestry Decision
Grant Faint via Getty Images

I. Key Takeaways

  • Actions speak louder than words: internal documents created in the ordinary course are more credible than self-serving witness testimony or counsel’s statements at trial
  • Experts, experts, experts: experts are more reliable when their opinions are consistent with the ordinary course documents
  • The court accepted the 2023 DOJ Merger Guidelines: for the parts relevant to this case, this Court accepted the updated 2023 Merger Guidelines

II. Background

On October 24, 2024, U.S. District Court for the Southern District of New York issued a 169-page opinion granting the FTC’s motion to preliminarily enjoin Tapestry, Inc.’s acquisition of Capri Holdings Limited. Tapestry owns brands Coach, Kate Spade, and Stuart Weitzman; Capri owns Michael Kors, Jimmy Choo, and Versace. The parties announced the $8.5 billion merger in August 2023 and the FTC sued to block the merger in April 2024. The preliminary injunction hearing spanned seven days and dozens of witnesses testified.

The opinion presents a thorough example of merger review under the DOJ and FTC’s newly updated 2023 Merger Guidelines. The court accepted the FTC’s definition of a relevant antitrust market of “accessible luxury handbags” (also referred to as “affordable luxury handbags”). The Court relied on the 2023 Merger Guidelines to test the proposed market definition, evaluate market concentration and to analyze proposed efficiencies and anticompetitive effects of the proposed transaction. Ultimately, the court granted the FTC’s request for an injunction. Approximately one month later, the parties abandoned the proposed transaction. This article reviews the decision.

III. Analytical Framework

The court reviewed the transaction under a three-part burden-shifting framework, under which first, the plaintiff bears the initial burden of showing that the merger will lead to anticompetitive effects in the relevant market. The plaintiff can, and in this case did, demonstrate “likely anticompetitive effects ‘by showing that the transaction in question will significantly increase market concentration, thereby creating a presumption that the transaction is likely to substantially lessen competition.’” Second, once plaintiff has established its prima facie case, the burden shifts to defendants to rebut the demonstrated anticompetitive effects. Defendants can meet this burden by showing the merger would create efficiencies, offering a divestiture package that could replace competition, or demonstrating that “likely and timely” competitors will enter the market. Third, if defendants successfully rebut the plaintiff’s prima facie case, “the burden of producing additional evidence of anticompetitive effects shifts to the [plaintiff], and merges with the ultimate burden of persuasion, which remains with the [plaintiff] at all times.”

In this case, the court found that the FTC “established a strong prima facie case” and that “Defendants have failed to rebut that case.” While the substantive analysis ended in the second step, the court did engage in the third burden-shifting step and considered additional evidence of anticompetitive effects. The court concluded that “even if Defendants had rebutted the FTC’s prima facie case,” the FTC “would still prevail due to the additional evidence of anticompetitive effects that it presents.”

IV. Prima Facie Case: Market Definition and Concentration

Market definition is hotly contested in most antitrust cases, and Tapestry is no exception. A properly defined market provides the geographic and product parameters in which to determine effects of a proposed transaction. The parties agreed on a geographic market of the United States, so only product market was at issue.

The FTC argued for a relevant product market of “affordable luxury handbags,” which was generally defined as handbags costing $100 to $1000. The merging parties argued this product was “completely divorced from the marketplace realities,” and contended “all handbags should be considered as part of a single, undifferentiated market.” Consistent with case law, the Tapestry court looked to both the qualitative Brown Shoe factors and quantitative econometric analysis to determine the relevant product market.

Under Brown Shoe, the court found four indicia supporting a market of accessible luxury handbags: (1) peculiar characteristics, (2) distinct prices, (3) industry recognition, and (4) sensitivity to price changes. The court relied heavily on “reams of ordinary-course documents” and rejected Defendants’ testimony as noncredible and self-serving.

A. Brown Shoe Factors

The court emphasized that “even where two products are functionally interchangeable for most (or even all) purposes,” like a reusable canvas grocery bag and a Hermes Birkin bag, “they may nonetheless be divisible into separate product markets.” The court drew a line between true luxury, affordable luxury, and mass market.

  1. Peculiar Characteristics. The court found accessible luxury handbags are generally made of genuine leather sourced from “inside and outside of Europe”, while mass market handbags are often made of polyurethane.
  2. Unique Production Facilities. The court found accessible luxury handbags are almost always manufactured by third parties in Southeast Asia, while true luxury handbags are made in Europe and “less reliant” on third party manufacturers. Customers need not be aware that products are made in different locations.
  3. Distinct Prices. The court noted that “a substantial price difference, along with other factors, can bear on the definition of product market.” The court examined both retail prices (MSRP) and the “out-the-door” prices (i.e., the average unit retail price, or the AUR) and techniques. Accessible luxury bags range from $100 to less than $1,000 and “heavily rely on discounting”; mass market handbags are typically less than $100; and true luxury handbags start at $1,000 and are discounted much less frequently.

    Defendants’ argued that because a lot of products by Coach (35%), Michael Kors (70.4%), and Kate Spade (61.9%) were sold for less than $100 in the past year, the $100-mark is erroneous. The Court rejected this argument because (a) it did not consider MSRP, and (b) Defendants’ price statistics were “deficient and ultimately misleading.” Notably, defense expert Professor Fiona Scott Morton’s analysis excluded bags sold at wholesale prices, which was a significant amount of sales (29.3% of Michael Kors’, 8.8% of Kate Spade’s, and 6.9% of Coach’s handbag revenue). As a result, the percentages of these handbags that sold for less than $100 was likely inflated because discounting is much less frequent or steeper for handbags sold at wholesale. Further, the court found Professor Scott Morton especially unreliable because her results contradicted Defendants’ internal, ordinary course documents.
  4. Industry or Public Recognition. Defendants contended the terms “accessible” or “affordable” luxury were meaningless because Defendants themselves used the term “expressive luxury” and because the general public did not use those particular terms. The court disagreed, finding Defendants and market participants used those very terms in SEC filings, earnings calls, and informal correspondence. Defendants used the term “expressive luxury” only in the months before and after announcing the merger, “only for the term to disappear from their lexicon once the FTC filed suit in April 2024.” The general public need not also use the exact term for two reasons: first, either the industry or public should understand the term (not both); and second, consumers “still may understand the concept to which the term refers”, without using it colloquially.

B. The Hypothetical Monopolist Test (“HMT”)

An HMT analysis seeks to ascertain whether a hypothetical monopolist in a defined market could raise prices by a small but significant amount and remain profitable. If the hypothetical monopolist is able to profitably increase prices in the defined market, the market is well defined. If it is not able to profitable increase prices, the market is too narrow and needs to be broadened.

Here, the FTC’s economic expert Dr. Loren K. Smith used an aggregate-diversion analysis to demonstrate that his proposed market satisfied the HMT test. In this analysis, if the actual diversion ratios of the products within the candidate relevant market exceed a defined threshold aggregate-diversion ratio, then a hypothetical monopolist will be able to profitably increase their prices a small but significant amount. That is, if more customers would switch products if the price increased than the percentage of customers needed to keep the price increase profitable, the market definition is accurate.

Dr. Smith’s calculations supported a market definition of accessible luxury handbags. He calculated the threshold diversion ratio in this case to be 17%. Second, Dr. Smith calculated the actual diversion ratios based on a customer survey of actual past purchases and corroborated by actual sales data. He found the following baseline diversion ratios: 61% from Coach to other brands, 65% from Kate Spade to other brands, and 64% from Michael Kors to others.

Because the diversion ratios (between 36% and 65%) exceed the threshold aggregate-diversion ratio (17%), “a hypothetical monopolist would find it profitable to implement an SSNIP of at least five percent.” Thus, the accessible luxury handbag market passes the HMT test.

Notably, the court swiftly disposed of Defendants’ “additional market-definition arguments.” Defendants argued (1) that the market definition “does not accord with the commercial realities of handbag competition” (i.e., because Defendants potentially compete with every brand that sells handbags in the country, the market should include all handbags); and (2) because customers cross-shop (i.e., own luxury and accessible luxury and mass market bags) the market definition was inaccurate. The court rejected both arguments. As to the “commercial realities” argument, the court relied on documents over “platitudes” of trial testimony, and emphasized that competitors viewed for business strategy “does not necessarily require that it be included in the relevant product market for antitrust purposes.” The court also explained that cross-shopping “does not necessarily mean that consumers treat these goods as reasonably interchangeable.”

C. Market Concentration

Next, the court turned to determine whether this transaction would unduly concentrate the now properly defined market. There are two ways to measure market concentration: ascertaining market shares as set forth in United States v. Philadelphia National Bank or calculating the Herfindahl-Hirshman Index (“HHI”) under the 2023 Merger Guidelines. Plaintiffs can use either—or both, as the FTC did here—to argue that the merger was presumptively anticompetitive.

First, the Supreme Court has held that a post-merger entity with 30% of the market would “[present] that threat” of undue concentration. Relying on Defendants and third parties’ sales data, Dr. Smith calculated that post-merger Defendants would hold approximately 59% of the accessible luxury handbag market, far surpassing this 30%.

Second, HHI calculations indicated the merger would be presumptively anticompetitive. The HHI measures market concentration pre-and post-proposed transaction, accounting for the size of a company relative to its industry and is “calculated by summing the squares of each market participant’s share of the relevant market.”

Per the 2023 Merger Guidelines, which the Tapestry court applied, HHIs over 1,000 means the market is “concentrated” and over 1,800 a market is considered “highly concentrated.” A change of more than 100 points pre- to post-merger is considered a “significant increase” in concentration. If the proposed transaction is in a highly concentrated market and would result in market changes of 100 HHI points or more, the transaction is presumed to lessen competition or tend to create a monopoly.

Dr. Smith’s uncontested calculations revealed a post-merger HHI of 3,646— a change of 1,449 points. The court found the “HHI levels are more than high enough to create a presumption—indeed, a strong presumption—of anticompetitive effects.”

Defendants argued the market was too narrowly defined and Dr. Smith should have included preowned bags, “designer,” “moderate,” and “better” bags, and others. The Court disagreed, finding Dr. Smith’s HMT candidate market “an appropriate market to evaluate the anticompetitive effects” and concentration levels in the market. The court emphasized that Dr. Smith’s calculations “may not be perfect. But they need not be.” The court explained that market definition is not a precise science, but at a certain point, a margin of error becomes irrelevant. That is, high concentration levels can be apparent even without ascertaining the defendants’ “exact share” of a market.

Overall, the court found that the FTC met its prima facie burden. “Because the FTC has shown both a sufficiently (and significantly) high post-merger market share (59 percent) and a sufficiently (and significant) large post-merger HHI of 3,646 with a merger-induced change in HHI of 1,449, the Court finds that the FTC has established a strong prima facie case under Section 7.”

VI. Defendants’ Rebuttal of the Ftc’s Prima Facie Case

Under the burden-shifting framework, defendants have the opportunity to rebut the prima facie case. Here, Defendants attempted to discredit the evidence and show that anticompetitive effects are unlikely to occur. Defendants argued that the merger should be permitted because (1) the industry has low barriers to entry and expansion; (2) Tapestry will maintain brand autonomy to preserve continued competition post-merger; and (3) the merger will have a procompetitive effect of revitalizing the Michael Kors brand. The Court rejected these arguments, by referring to the objective, economic incentives, ordinary course documents, and FTC’s expert Dr. Smith over Defendants’ promises, and ultimately determined that Defendants were not able to rebut the FTC’s prima facie case.

  1. Low Barriers to Entry and Expansion. Low barriers can qualify a market concentration calculation when “timely, likely, and sufficient in its magnitude, character, and scope” to offset anticompetitive effects. The court “[was] not persuaded” that such barriers would constrain a Tapestry/Capri “powerhouse,” finding high supply chain and data/marketing barriers.
  2. Brand Autonomy. Tapestry argued that because the brands would maintain their own “identities and structures,” there would still be competition in the market. The court disagreed for two reasons. First, ordinary course documents and reliable testimony were contrary, showing “Tapestry brands are not as separate as Defendants suggest.” Second, per Bertelsmann, Defendants’ assurances regarding brand autonomy post-merger are “unenforceable” and ignore that it would be “economically irrational” for them “to not cooperate in negotiations.”
  3. Procompetitive Effect of Revitalizing Michael Kors Brand. The court rejected Defendants’ argument that the merger would increase competition by revitalizing a flailing brand, finding that Defendants failed to meet the elements required for an efficiencies defense. The asserted efficiencies ($200M in savings over three fiscal years) would not offset the projected harm to consumers ($365M annually), and could be achieved by ways other than the merging (Michael Kors was already experiencing “a brand transformation” unrelated to the merger). Further, the court pointed out that when Defendants contended the Michael Kors brand would be “revitalized,” they actually meant higher prices and less discounting—neither of which are good for consumers.
  4. “Discretionary” Products Are Price-Capped by Nature. The court disposed of Defendants’ assertions that they could not raise prices because consumers would not purchase handbags if prices were too high, as handbags are “discretionary” items. The Court did not credit Defendants “self-interested statements” and further found that handbags may not actually be “discretionary.” Moreover, the FTC’s expert accounted for such diversion and sensitivities.

VII. Additional Evidence of Anticompetitive Effects

Despite finding that the FTC met its prima facie case and that Defendants did not successfully rebut it, the Tapestry court entertained the last burden shifting possibility, wherein the plaintiff could still prevail (had Defendants successfully rebutted) by showing additional anticompetitive effects. For this analysis courts can examine the projected unilateral and coordinated effects of the merger. Coordinated effects were not at issue in Tapestry, so the court focused on unilateral anticompetitive effects, which arise when a post-transaction entity can raise prices due to the proposed merger lessening competition in a market.

The court found both qualitative and quantitative evidence of unilateral effects. For qualitative evidence, the court found that Defendants are close competitors, “evidencing the significant competition between them that would be lost due to the merger.” Internal documents demonstrated that Tapestry and Capri compared and responded to prices and marketing by the other—and not many other entities. Defendants’ attempts to explain such documents away were “conclusory and self-interested testimony.”

The court also found quantitative evidence of unilateral effects, via Dr. Smith’s Upward Pricing Pressure (“UPP”) analysis. Among other things, the UPP model predicts how a merged entity will price products, by quantifying the incentives for post-merger price increases. Notably, the merged entity is able to “‘[recapture]’ what would have been lost sales absent the merger,” putting upward pressure on prices. Dr. Smith also performed a merger simulation, which assumes retailers price items to maximize profits. The results indicated an average price increase of 17% in a post-merger world, leading to consumer harm of $365 million annually.

Here, Dr. Smith calculated that a post-merger Tapestry would be able to raise prices across all brands by 18%. Ultimately, the court found that “Dr. Smith’s UPP analysis and merger simulation are persuasive additional evidence that the merger will cause consumer harm of approximately $365 million per year.”

D. Balance of Equities

While the court found the FTC was likely to succeed on the merits, it was required to (and did) engaged in a balancing equities analysis. While there is no set of equities, generally the public’s interest in a competitive marketplace is the heart of any merger analysis.

The court took issue with Defendants’ minimization of handbags as a product, wherein they claimed that as “nonessential discretionary items that consumers can simply choose not to buy,” the market is inherently capped at a reasonable price. The court was clear that there is “no hierarchy of products” under the Sherman Act, and the perceived level of essentialness is irrelevant: “Plaintiffs often prevail in Section 7 cases involving consumer goods that are arguably less essential.” The court moreover found “handbags are important to many women, not only to express themselves through fashion but to aid in their daily lives” and as such, the Sherman Act still applies.

Ultimately, the court found that denying injunctive relief pending the administrative proceedings would result in irreparable harm (i.e., increase in prices and an inability to reverse merged assets), and enjoined the merger.

Ashley Locke is an Assistant Attorney General at the Washington State Attorney General, Antitrust Division. She expresses her personal views in this article and not the views of the Washington State Attorney General or the Attorney General’s Office.

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