Tapestry/Capri Handbag Merger Temporarily Halted by S.D.N.Y.

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On October 24, 2024, Judge Rochon of the U.S. District Court for the Southern District of New York granted the Federal Trade Commission’s (FTC) motion for a preliminary injunction to prevent Tapestry, Inc. (“Tapestry”) from acquiring Capri Holdings Limited (“Capri”) (collectively, “Defendants”). The 169-page opinion continues the trend of lowering the bar for FTC merger challenges.[1] Tapestry and Capri have already announced their intention to appeal.

The deal would combine Tapestry’s Coach and Kate Spade brands and Capri’s Michael Kors brand, which, according to the FTC, are three close competitors in the “accessible luxury” handbag market.[2] FTC also alleged that Tapestry was engaged in pattern of serial acquisitions, and that the acquisition of Capri would further entrench Tapestry’s stronghold, making it harder for new brands to enter the market and meaningfully compete and giving Tapestry additional leverage to continue this pattern.[3]

While interesting for many reasons, including that challenges to fashion mergers are rare, the opinion, if upheld, will make it easier for the FTC to win preliminary injunctions while administrative proceedings go forward, a juncture that often determines the fate of the deal. Our key takeaways are discussed below.

Diminishing Standard for Preliminary Injunctions Under the FTC Act

As in many other recent cases, the FTC and Defendants disagreed on the burden FTC must meet when seeking a preliminary injunction pursuant to its authority under Section 13(b) of the FTC Act. Defendants assert that FTC must make a clear showing of a likelihood of success on the merits on appeal, a standard commensurate with that imposed in most cases.[4] FTC argued that a lower burden should apply, one that only requires it to show that it has raised serious questions about the antitrust merits that warrant thorough investigation in the first instance by the FTC.[5] Judge Rochon avoided the question, deciding that the FTC would meet its burden either way, but included dicta that effectively embraced the “serious questions” standard advanced by the FTC.[6] Similarly, Judge Rochon avoided deciding whether the relevant “likelihood of success” is success in the FTC administrative process, as opposed to success in front of an independent federal judiciary, finding that the court has no reason to assume at the outset that an FTC determination would be reversed on appeal.[7]

Along with other recent cases like the FTC’s recent challenge to the merger of IQVIA and DeepIntent, the opinion creates further divergence between DOJ and FTC merger challenges, leaving merging parties before the FTC potentially materially worse off as compared to those before DOJ.

Court Endorses Brown Shoe Factors and Finds Very Narrow Relevant Market

Market definition was the central issue in the case; Defendants claimed that Coach, Kate Spade, and Michael Kors competed with all handbag brands in a highly fragmented and competitive market, while FTC claimed they competed in a narrow subset of “accessible luxury” handbags, a submarket including other brands like Rebecca Minkoff, Marc Jacobs, and Tory Burch.[8]

Ultimately, the court accepted FTC’s market definition, heavily relying on the Brown Shoe factors, which include industry or public recognition of the submarket as separate, as well as the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.[9] Judge Rochon assessed each while continually emphasizing that all factors need not be met, and that exceptions to the boundaries of the market are permissible.

The court found that “accessible luxury” handbags are (1) priced between $100 and $1,000; (2) heavily reliant on discount and other promotions to sell; (3) made primarily in Southeast Asia by third parties; (4) made of “genuine materials” like leather; and (5) recognized as a separate category of handbags by the industry. In accepting these “unique” characteristics and finding a narrow submarket, the court often wrote off evidence suggesting much murkier market boundaries. For instance, the court largely dismissed evidence of heavy discounting by the parties, which often took the prices that customers actually paid below $100.[10] The court also found that most accessible luxury handbags were made in Southeast Asia by third parties while acknowledging that some “true luxury” handbags like Alexander Wang, Prada, and Burberry are made there too, and that the parties make some of their bags in Italy, where most “true luxury” bags are made.[11] Similarly, the court acknowledged that not all “accessible luxury” handbags are made of genuine materials like leather, and that “mass market” handbags can be made of leather, and that other “true luxury” handbags can made of synthetic materials like nylon and canvas.[12] Last, while numerous party witnesses denied recognition of an “accessible luxury” market, the court found the testimony to be unreliable given their demeanor and many ordinary course documents suggesting the opposite.[13]

Ultimately, the opinion encourages the FTC to cherry pick firms, identify common brand or product characteristics, and exclude other firms’ brands and products outside the alleged market that have those same characteristics when convenient.

Economic Rigor or Outdated Surveys and Incomplete Data?

The court did not rely on the Brown Shoe factors alone, but quickly credited the FTC’s expert economists’ diversion analysis, hypothetical monopolist test (HMT), and market share calculations. While all of the aforementioned analyses are common to Section 7 merger challenges, the court wrote off Defendants’ arguments about their serious deficiencies as applied in this case. For instance, Defendants retorted that the FTC’s diversion analysis relied on less than a thousand observations in four old surveys from 2021–2022, but the court found that “[d]espite some limitations with the data, . . . [FTC]’s approach is at least highly indicative of diversion, which is sufficient.”[14]

Similarly, when assessing FTC’s market share calculations which included a narrow subset of brands tracked in an industry data source, NPD, the court discredited its incompleteness as the parties had at times purchased or relied on NPD’s data to assess their position in the market.[15]

The court also embraced the return of Philadelphia National Bank’s presumption from 1963 that mergers resulting in a market share over 30% are anticompetitive, building on the S.D.N.Y.’s recent embrace of the same in the IQVIA case.[16]

Barriers to Entry – or to Becoming an Equally Sized Competitor?

Defendants raised numerous rebuttals, including that barriers to entry and expansion are low, as many third-party manufacturers have excess capacity and new brands continue to emerge. FTC retorted that huge marketing budgets, access to voluminous data, and establishing reliable supply chains make it difficult to have the entry and expansion necessary to restrain the parties’ prices. Remarkably, FTC argued that entry of a single new Michael Kors-sized brand would need to be able to easily enter to counteract the merger’s anticompetitive effects, but the court stated that the main question was whether “existing and potential handbag companies have the collective ability to constrain the post-merger Tapestry.”[17] The court’s discussion of barriers to entry was inconsistent with a large body of economic literature.

For instance, the court credited supply chain barriers while Tapestry and Capri use non-exclusive agreements with contract manufacturers in Asia. The parties presented evidence that excess capacity could be tapped by existing competitors to expand, as well as by new entrants, but the court was not convinced it would be “easy” to do, discounting contrary testimony from Tapestry’s chief supply-chain officer because he had not worked for upstart brands.[18] The court’s discussion of the capital required for effective marketing was surprising as well;[19] simply needing to spend money on marketing and for access to readily available third-party data to conduct such marketing is not typically a barrier to entry. Instead, the court’s discussion assumes inefficient capital markets.

Hot Documents Prevail

As cited throughout the Opinion, documents discussing head-to-head competition between the parties captured the court’s attention and ultimately persuaded it to side with the FTC. While reliance on such ordinary course evidence is not new, in today’s world, parties tend to produce millions of documents to the agencies and a very small portion of those become the centerpiece of the FTC’s case.

Key Takeaways

While pending appeal, the court’s decision granting the FTC’s motion for a preliminary injunction is yet another win for FTC in S.D.N.Y., making it an attractive venue for future merger challenges. The decision builds on the trend of: (1) lowering FTC’s burden of proof when seeking a preliminary injunction pursuant to its authority under Section 13(b) of the FTC; (2) applying the Brown Shoe factors to find narrow relevant product submarkets; (3) reducing the economic rigor once required in merger challenges; and (4) heavily relying on a small subset of “hot” documents to dismiss alternative evidence. While the upcoming election could change the agency’s approach to cases, for now, companies should expect to see these trends continue, emboldening the FTC to take more merger challenges through litigation.

[1] Opinion and Order, FTC v. Tapestry Inc. et al., No. 1:24-cv-03109 (Oct. 24, 2024, S.D.N.Y.).

[2] Complaint, FTC v. Tapestry Inc. et al., No. 1:24-cv-03109 (Apr. 23, 2024, S.D.N.Y.).

[3] Id.

[4] Op. at 10.

[5] Id.

[6] Id. at 11.

[7] Id. at 10–11.

[8] Id. at 20–21.

[9] Id. at 19.

[10] Id. at 39–43.

[11] Id. at 33.

[12] Id. at 28.