What a Difference 16 Years Can Make: FTC Approves Merger Between Office Superstore Giants Office Depot and OfficeMax

by Mintz Levin
Contact

In 1997, most people thought of Amazon.com as mainly an online bookseller, you couldn't buy groceries at Wal-Mart or Target, and if you wanted floppy disks, VHS tapes, or a fax machine, you drove to your local Staples, OfficeMax, or Office Depot.

In light of developments in the office supply market in the last 16 years, the Federal Trade Commission (“FTC”), in a complete about-face from its successful 1997 challenge of the proposed merger of office supply superstores Staples, Inc. (“Staples”) and Office Depot, Inc. (“Office Depot”),1 recently unanimously voted to close its seven-month investigation into the proposed $1.2 billion merger of Office Depot, Inc. and OfficeMax, Inc. (“OfficeMax”).

FTC v. Staples

In its Statement closing the investigation into the proposed merger of Office Depot and OfficeMax, the Commission found that the competitive dynamics were very different than in the 16-year-old Staples case. In 1997, the FTC successfully obtained a preliminary injunction blocking the proposed merger of Staples and Office Depot (at the time two of the three largest office supply superstores), arguing that the deal would lead to competitive harm in the relevant product market — the “sale of consumable office supplies through office supply superstores.”2 The Staples case was a notable victory for the FTC. In the two decades prior to Staples, the Antitrust Division of the Department of Justice and the FTC had brought few cases, instead choosing to negotiate consent settlements.3 Moreover, the antitrust agencies’ win-loss records at the time could be described as mediocre, at best.4 When the Staples case went to court, stock market speculators and the national press were overwhelmingly of the position that the superstores would prevail and the government would lose its first big merger case of the 1990s.5

In Staples, the FTC used strategic plans and pricing information to show a distinct market for the sale of consumable office supplies through office supply superstores. By establishing that these superstores were a market unto themselves, the FTC was able to reduce the number of players from two to one in 15 cities and from three to two in 27 more cities.6 The FTC then presented pricing evidence, including internal Staples documents and Office Depot documents illustrating price comparisons, and showing that in geographic areas where three office supply superstores competed, prices were at their lowest; when two were present prices increased; and prices were at their highest when there was only one.7 Although the FTC did not provide the court with evidence regarding the amount of non-superstore competition (that is, mass merchandisers such as Wal-Mart, Kmart, Target, or wholesale clubs such as BJ’s and the then-PriceCostco, among others) in each of Staples’ and Office Depot’s markets, the Court nonetheless concluded that the evidence showed that prices were affected primarily by other office superstores, and not by the presence of non-superstore or mail-order competitors.8

The Staples case also demonstrated the important impact that econometric analysis could have in merger enforcement. In addition to documentary evidence, the FTC estimated the effect of having an Office Depot located in a metropolitan area on Staples’ prices in that area while controlling for cost differences and the presence of other competitors. The analysis concluded that Office Depot was a significant constraint on pricing by Staples, even after taking into account the presence of other types of retailers.9 The court found that the merger would have likely led to price increases in the areas where the two companies were competing.10

Over the past 15 years, the antitrust agencies have used Staples as an important precedent in seeking narrower product market definitions. For example, in 2011, citing Staples, the government in United States v. H&R Block successfully argued, based upon company documents, for a narrow product market of tax preparation software, excluding other tax preparation approaches from the market.11 In enjoining the proposed acquisition by H&R Block (which markets the tax-preparation software “H&R Block at Home”) of 2SS Holdings, Inc. (which markets the tax-preparation software “TaxACT”). The court agreed the acquisition would reduce competition in the market for “digital do-it-yourself tax preparation products” (“DDIY” products). The court found that while defendants’ internal documents did discuss the broader tax preparation industry, including assisted and manual tax preparation, the “documents make clear that TaxACT’s own view — and that conveyed by its investment bankers to potential buyers — is that the company primarily competes in a DDIY market against Intuit and H&R Block and that it develops its pricing and business strategy with that market and those competitors in mind.”12

FTC’s Enforcement Decision Regarding OfficeMax and Office Depot

Office Depot and OfficeMax, respectively the country’s current second and third largest chains of office supply superstores, announced the merger earlier in 2013, with the expectation to create a combined company with sales of $17 billion, putting it in a stronger position to navigate the changing tide in the market for consumable office supplies.

In direct contrast to both the Staples and H&R Block cases, the FTC decided last week that the current office supply market in the retail sector as occupied by OfficeMax and Office Depot is broader than that articulated in Staples. The FTC based its changed position on significant developments in market dynamics in the past 16 years. These changes consist primarily of: (1) brick-and-mortar companies such as Wal-Mart, Target, Costco, and Sam’s Club that have expanded their offerings and sales of office supplies to compete with traditional office supply superstores. These stores have won over consumers by offering the option to purchase office supplies at locations that also offer other products that those consumers purchase; (2) the “explosive growth of online commerce,” most notably Amazon.com, which has had a major impact on the office supply market by offering convenience and often lower prices.

The FTC also concluded that the merger was unlikely to substantially lessen competition in the market for the sale of office supplies sold to businesses and other large customers on a contract basis, a market not addressed in the Staples case.

Conclusion

Given the background of the hard-won Staples case and agency use of that case as an important precedent to advocate for narrower product markets, last week’s decision to clear OfficeMax and Office Depot may have been unexpected. As it is a decision not to proceed, it is not precedential in litigation. However, as the Commission’s unanimous decision noted, “yesterday’s market dynamics may be very different from the market dynamics of today,” demonstrating that each transaction requires a hard look at the specific facts at issue, and in the tug of war between antitrust enforcers and merging parties over market definition, an important milestone has occurred.

Endnotes

1 FTC v. Staples, Inc., 970 F.Supp. 1066 (D.D.C. 1997).

2 Defined as pencils, pens, Post-it notes, paper, even staples — the sort of products that people return again and again to purchase at Staples. Id. at 1075.

3 Robert Pitofsky, Proposals for Revised United States Merger Enforcement in a Global Economy, 81 GEO. L.J. 195, 196 (1992) (“By the 1980s, the United States maintained an extremely lenient merger policy, regularly allowing billion dollar mergers to go through without government challenge, even when they involved direct competitors.”).

4 David Scheffman, Malcolm Coate, and Louis Silvia, 20 Years of Merger Guidelines Enforcement at the FTC: An Economic Perspective, available at http://www.justice.gov/atr/hmerger/12881.htm (In the 1980s and 90s, “the major FTC monopolization cases were lost or abandoned. None of the many industry investigations led to significant cases that were won.”); William E. Kovacic, The Modern Evolution of U.S. Competition Policy Enforcement Norms, 71 ANTITRUST L.J. 2 (2003) (“the establishment of sensible merger policy does not take place until the 1990s, when the federal agencies began challenging substantial mergers and prevailed more often in court.).

5 Jonathan Baker and Robert Pitofsky, A Turning Point in Merger Enforcement: Federal Trade Commission v. Staples, in Crane and Fox (ed.), Antitrust Stories, New York: Foundation Press (2009).

6 970 F.Supp. at 1081.

7 Id. at 1075-1078.

8 Id. at 1077 (The Court came to this conclusion by relying on the testimony of executives of non-superstore competitors, such as the Wal-Mart executive who testified that “where both Staples and Wal-Mart exist [price-checking] showed that, on average, Staples’ prices were higher where there was a Staples and a Wal-Mart but no other superstore than where there was a Staples, a Wal-Mart and another superstore.”).

9 Id. at 1081 (The FTC relied heavily on economic analysis to show high concentration in post-merger market shares).

10 Id. at 1082-1083.

11 United States v. H&R Block, 833 F.Supp. 2d 36 (D.D.C. 2011)

12 Id. at 53.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Mintz Levin | Attorney Advertising

Written by:

Mintz Levin
Contact
more
less

Mintz Levin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.