Featured Expert Column – Antitrust/Federal Trade Commission
Andrea Agathoklis Murino, Goodwin Proctor LLP
On December 7, 2015, the Federal Trade Commission voted 4-0 to file suit against Staples Inc.’s acquisition of Office Depot, Inc. (“OD”), finding that it would combine the number one and number two market participants and therefore lead to an anticompetitive reduction in nationwide competition in the market for consumable office supplies sold to large business customers. This vote surprised many observers as it came just two years after the FTC cleared Office Depot’s acquisition of Office Max (“OM”), which combined the then number two and number three participants.
To this observer, the decision to block was, however, not a surprise. In looking at recent FTC enforcement actions, especially the Sysco/US Foods challenge, and in closely examining the bases on which the OD/OM transaction was cleared, several key differences emerged that are almost certainly what led to such wildly divergent enforcement outcomes.
As an initial matter, it’s worth pausing to note that Staples may hold among the more notorious honors in the antitrust record books: this is actually the second time that the FTC has sought to prevent this very transaction from occurring. The first time was in the pre-Internet days of the late 1990s. At that time, Staples and Office Depot retail locations dotted cities and towns around the country and evidence indicated that the competitors tracked each other’s prices in Sunday newspaper circulars closely, regularly lowering price to try and steal business. Following a hearing before the United States District Court for the District of Columbia, the merger was enjoined. Much has changed in the consumable office-supply market and our broader economy since then, of course, but fundamentally, on both occasions, the FTC found that for a certain class of customer, Staples and Office Depot are each other’s closest competitors and a union of the two would have led to higher prices and reduced quality and innovation. As they say, the more things change…
But the truth is that in its November 2013 OD/OM closing statement, the FTC acknowledged several fundamental market changes that, in theory, could have paved the way for approval of the Staples/Office Depot deal. Among these changes, the FTC stated that:
- Retail-sales channels faced a boom of competition from online and superstore competitors and that the combination of OD/OM would not harm competition as a result;
- Large customers used various tools to ensure best pricing, including sourcing or threatening to source directly from manufacturers and other vendors;
- OD/OM documents indicated they were not each other’s closest competitors for large customers and that they rarely won or lost business to each other;
- OD/OM would continue to face “strong competition for such customers from Staples and a host of non-[office superstore] competitors, such as W.B. Mason Co., Inc.;” and
- Strong regional providers emerged and showed their ability to win national accounts.
So what’s the difference between OD/OM and Staples/Office Depot? Combining the then number two and number three players (OD + OM) was fundamentally a different antitrust analysis than combining the number one and number two players (Staples + Office Depot). The backstop that gave the FTC confidence to clear OD/OM was the presence of a larger competitive force: Staples. If it allowed Staples to purchase Office Depot, the FTC would effectively be removing that force and in the untenable position of potentially blessing a merger to monopoly. Of equal import, the Staples/OD complaint cites to the parties’ own documents showing their ferocity of competition, as well as bidding situations where the parties adjusted their price to steal business from the other. These facts do not appear to have been present in the OD/OM transaction.
More broadly, as a policy matter, the FTC scored a huge win in its 2015 challenge against the Sysco/US Foods transaction. There, the United States District Court for the District of Columbia firmly endorsed the FTC’s view that anticompetitive effects can extend to a national class of customers whose needs require what is essentially a “one stop national shop” for their sourcing needs. With the Sysco opinion as a backdrop, so long as the FTC found harm to this class of customers, it was going to be incredibly challenging to permit a transaction that would, again, be a merger to monopoly.
To be clear: this case is far from over. Staples has vowed to fight aggressively and will no doubt draw upon an arsenal of econometric data and natural experiments to demonstrate that the FTC’s closing statement in OD/OM is, in fact, the correct world view.
Get your pencils ready; much more to come.