Ruling on the Tapestry, Inc. and Capri Holdings Limited Merger

The judge stopped the merger because the FTC showed it was likely to win its case against the merger. The judge decided that “accessible luxury” handbags are a real, separate market, and the merger would give the combined company too much power in that market. This would likely lead to higher prices and less choice for consumers.

Podcast Explainer

CPRI Ruling

0:00

/762.32

1×

Here's a more detailed breakdown:

• Accessible luxury is a distinct market: The judge agreed with the FTC that handbags costing between $100 and $1,000, with a focus on quality materials and craftsmanship, form a separate market.
  • Evidence came from industry reports and the merging companies’ own documents, which often use terms like “accessible luxury” or “affordable luxury”.
  • The judge was also persuaded by the FTC's expert, who showed that a hypothetical company controlling only this market could raise prices without losing too many customers to other types of handbags. This indicates the market is distinct.
• The merger would make the market much less competitive: The judge found that the combined company would control a large portion of the accessible luxury market – enough to make it very likely they could raise prices without much fear of competition.
• Arguments against the merger failed: The merging companies argued that new companies could easily enter the market or that they would keep their brands separate, preventing price increases. The judge didn’t believe these claims.
• The public would be harmed: The judge decided that the risk of higher prices and less choice for consumers outweighed any potential benefits of the merger. Plus, it would be very hard to “undo” the merger later if the FTC wins its full case.

In simple terms, the judge saw this merger as creating a handbag giant that could bully its way to higher profits, hurting consumers in the process.

The judge granted the FTC's motion for a preliminary injunction to stop the merger of Tapestry, Inc. and Capri Holdings Limited pending the completion of the FTC's in-house administrative proceeding. [1] The court outlined numerous reasons for this decision:

• The FTC demonstrated a likelihood of success in proving the merger violates Section 7 of the Clayton Act. This determination was reached after applying a burden-shifting framework to analyze the case. [2-4]
• The FTC successfully defined a relevant market. The court agreed with the FTC that "accessible luxury" handbags constitute a relevant product market distinct from mass-market and true-luxury handbags. [5-7] This determination was based on both qualitative and quantitative evidence.
• Qualitative Evidence: The court relied upon the Brown Shoe factors to reach this conclusion, including:
• Industry Recognition: Terms like "accessible luxury" are used frequently and consistently to describe this segment of handbags. [8, 9]
• Distinct Customers: The evidence showed that accessible luxury handbag consumers are distinct from those who purchase mass-market or true luxury handbags. [10]
• Distinct Prices: Accessible-luxury handbags have an entry price point of approximately $100 and rarely approach or exceed $1,000 and rely heavily on discounting, unlike the other segments. [11, 12]
• Peculiar Characteristics: The use of high-quality materials and manufacturing processes in accessible luxury handbags distinguish them from mass-market options. [13]
• Quantitative Evidence: The court accepted the FTC’s expert analysis, which showed the proposed market passes the Hypothetical Monopolist Test. [7, 14] The expert’s analysis, including a diversion analysis based on consumer surveys, demonstrated that a hypothetical monopolist could profitably raise prices for accessible-luxury handbags by at least 5% without losing significant sales to other categories. [15]
• The merger would significantly increase market concentration. The combined market share of the merging parties, and the resulting HHI (Herfindahl-Hirschman Index) numbers, were substantial enough to trigger a legal presumption that the merger would harm competition. [16] This presumption was not rebutted by Defendants.
• Defendants did not successfully rebut the FTC's prima facie case. The court rejected defense arguments regarding ease of market entry, brand autonomy within Tapestry, and procompetitive benefits of the merger. [17] The court was not persuaded that entry would be timely, likely, or sufficient to constrain Tapestry. [18] Arguments that Tapestry's structure would allow the brands to operate independently, and that the merger would revitalize Michael Kors, were similarly rejected. [19, 20]
• The FTC provided additional evidence of anticompetitive harm, specifically the loss of head-to-head competition between close competitors. [21, 22] The court noted numerous ordinary-course documents indicating that the companies view each other as significant competitors and respond to each other's pricing and marketing strategies. [23]
• The balance of the equities favored granting the injunction. While acknowledging the potential harm the injunction posed to the merging parties, the court gave greater weight to the public interest in protecting competition. [24] The court noted that the harm to competition would likely be irreparable and that the public interest in preserving competition outweighed private interests. [25-27]

The court also stated that its conclusions were preliminary and that the FTC could develop its own record in its administrative proceedings. [28] However, based on the evidence presented at this stage, the court found it necessary to grant the preliminary injunction to stop the merger. [29]