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Southern District Of New York Grants Preliminary Injunction, Pausing Merger Of Luxury Fashion Companies
11/05/2024On October 24, 2024, Judge Jennifer L. Rochon of the United States District Court for the Southern District of New York granted the Federal Trade Commission’s (“FTC”) motion for a preliminary injunction, thereby preliminarily enjoining the proposed merger of two luxury fashion companies (the “Defendants”).
The two companies, owners of accessible-luxury fashion brands, signed an $8.5 billion merger agreement in August 2023. After investigating the proposed transaction, the FTC sued to block the transaction in administrative court in April 2024, alleging that the transaction would substantially lessen competition in the market for accessible-luxury handbags in violation of Section 7 of the Clayton Act and constituted an unfair method of competition in violation of Section 5 of the FTC Act. Separately, the FTC moved for a preliminary injunction and temporary restraining order in August 2024 in federal district court, and the court held the hearing in September 2024. The administrative proceeding was stayed while the litigation in federal district court played out.
The FTC needed to establish a prima facie case for its motion to succeed. This included identifying the proper relevant market and showing that the effects of the merger will likely be anticompetitive. The court found that the FTC identified the proper relevant market as “accessible-luxury” handbags, which exists between the other distinct sub-markets of “mass market” and “true luxury” handbags at a price point of $100 to $1,000. While price was the primary distinguisher between different classifications of handbags, the FTC also addressed other demonstrated differences as secondary factors as well. These included what materials the products were made out of, such as leather vs. non-leather, the location of production facilities, and whether the manufacturer was vertically integrated in production of their handbags. The combination of these factors persuaded the court that these three sub-markets existed within the broader handbag market, and that Defendants were properly identified as participating in the “accessible-luxury” handbag market based on accepted industry and consumer recognition.
The court also found that the FTC successfully showed the effects of the merger were likely to be anticompetitive. The FTC’s analysis showed the combined firm would have a market share of 59% and a post-merger Herfindahl-Hirschman Index change of 1,449, both of which are “more than high enough to create a presumption—indeed, a strong presumption—of anticompetitive effects” under the 2023 Merger Guidelines. In addition to the quantitative analysis, the court also considered qualitative evidence, noting that documents from Defendants that their brands were close competitors.
Though Defendants argued barriers to entry were low, the combined firm’s brands would be kept relatively autonomous to preserve competition, and that the transaction had the procompetitive effect of revitalizing certain struggling brands, the court did not find this rebuttal persuasive. The court found that entry and expansion “will not be timely, likely and sufficient in its magnitude, character, and scope” to constrain Defendants due to supply chain, data, and marketing barriers. The court also found that testimonial evidence indicated Defendants’ various brands were less independent than portrayed, and that the revitalization of certain brands could be achieved by other non-merger methods.
The preliminary injunction of Defendants’ merger represents a win for the FTC, both immediately in the case at hand and on a larger-scale level. Judge Rochon specifically and repeatedly endorsed the new 2023 Merger Guidelines, even going so far as to dismiss Defendants’ qualms about using the new Guidelines in a lengthy footnote. Following the court’s decision, Defendants filed a joint notice to appeal the decision to the United States Court of Appeals for the Second Circuit. The FTC’s in-house adjudicatory process to decide whether the deal is permanently enjoined is scheduled to begin on December 9, 2024.
