ALEJANDRO OTERO—As the hip crowd gathered around the runway in Chelsea for New York Fashion Week, the case for the future of the fashion industry began in Lower Manhattan. On September 9, 2024, the United States District Court for the Southern District of New York began hearing arguments in the FTC’s case against the merger of Tapestry, Inc. (the fashion house responsible for brands such as Coach, Kate Spade, and Stuart Weitzman) and Capri Holdings Limited (responsible for Michael Kors, Jimmy Choo, and Versace). The FTC seeks to block the 8.5-billion-dollar deal as an unfair method of competition under Section 5 of the FTC Act and as an illegal merger under Section 7 of the Clayton Act.
The Tapestry-Capri merger constitutes a horizontal merger of competitors, an area in which antitrust enforcers have typically exercised a lot of authority. In its complaint, the FTC defines the relevant market as the U.S. market for “accessible luxury” handbags, which are “crafted predominantly in Asia from high-quality materials with fine craftsmanship at affordable prices” and distinguishable from “mass-market” items on the low end and “true luxury” goods on the high end. While the FTC’s findings on each company’s market share are not publicly available, the FTC alleges that the post-acquisition market share would be “considerably more than 30 percent,” an important threshold for antitrust analysis.
The case will likely turn on whether the Court accepts the FTC’s narrow definition of the relevant market. While it is certainly rare for antitrust enforcers to propose that the relevant market should be confined to a segment of the industry based on a price range, it is not unprecedented. In United States v. Gillette Co., the Department of Justice sought to block an acquisition that threatened competition in the “premium fountain pens” market with prices ranging from $50 to $400.
The court in Gillette held that a sub-market with a defined price range “may be segregated out of the larger . . . market for Clayton Act purposes” on the theory that the relevant market “must be limited to recognize only those products which in fact do compete with the products of the merging companies.” For the Court to rule similarly here, the FTC will have to establish that “accessible luxury” handbags do not stand in competition with either mass-market items or true luxury goods.
In their response, the defendants assert that the market cannot be so easily stratified, arguing that the relevant market should include handbags at all price points. They claim that the FTC’s proposed market “is based on an unrealistic view of the marketplace as consisting only of vulnerable, choice-constrained consumers that care deeply about fashion, but are unwilling to pay for it, and who are highly sensitive to price, but refuse to consider hundreds of bags available at every price point in competition with [the merging brands].”
The defendants also argue that the Michael Kors brand is in decline, and Tapestry’s plan to revitalize it will increase competition in the market. This kind of argument, known as an efficiency defense, is fraught with challenges for the asserting party. For example, the efficiency defense requires that the efficiency gain be “merger-specific.” In other words, the defendants must show that the boost to Michael Kors’ competitiveness would be “unlikely to be accomplished in the absence of . . . the proposed merger.” It may be difficult to show that the brand could not be improved through adopting a more competitive business model or management structure as opposed to merging with another major fashion house.
Additionally, an unfavorable ruling for the defendants would likely kill the merger. In other cases, courts have found ways to salvage the underlying deal through tailored measures designed to lessen the anticompetitive effects of the merger, often achieved through the forced sale of overlapping assets in a process known as divestiture. In this case however, such curative measures are likely unappealing to the merging parties due to the nature of both the market and the merger.
Regardless of the ultimate outcome of this case, the FTC’s decision to pursue it provides an important insight about its shifting theory of authority. Under the Biden Administration and the direction of FTC Chair Lina Khan, the FTC has played a more active role in pursuing antitrust litigation than it has in the past 40 years. This case adds an interesting dimension to the developing story.
Critics of Khan’s FTC have argued that the commission has abandoned its traditional responsibilities in favor of pursuing more conduct-based claims and vertical mergers. However, this challenge to a horizontal merger shows the FTC’s commitment to its historic antitrust mandate, suggesting that the commission seeks to broaden its enforcement activities rather than change them. Still, the FTC’s “narrow band” theory of the relevant market in this case is certainly a risk and may have been on the fringes of what previous administrations would have been willing to challenge. The Tapestry-Capri merger case unfolds against the backdrop of this potential sea change in antitrust enforcement. With other high-profile antitrust cases currently in progress, this case provides helpful context for understanding the current enforcement regime.
