American consumers are at risk of being deprived of the competition for affordable handbags. Yes, you heard me right. Lina Khan, Joe Bidens FTC commissioner, who took office after saying that Federal agencies have failed to do enough proper policing filed a lawsuit this week to block the accessible luxury fashion conglomerate Tapestry from buying a UK based competitor Capri Holdings.
Look, I can tell you guys are already about to click away from the video. I am aware that my audience is 98% male. And yes, I do agree with you that all handbags are the same. But you know the way crypto bros think that all cryptocurrencies are different from each other and that they have different utility, well according to this FTC lawsuit, that is how some women feel about handbags. They don’t necessarily recognize that handbags are all exactly the same.
The FTC has been a hive of activity since Biden nominated the then 32-year-old Lina Khan to chair the Federal Agency in 2021. Khan who rose to prominence after writing a viral law article in 2017 about Amazon’s economic dominance when she worked for the think tank New America Foundation has lost two of her most significant courtroom cases so far and has attracted a blizzard of criticism for her broader agenda from both the left and the right.
This new lawsuit alleges that Tapestry’s purchase of Capri would eliminate “head-to-head” competition between the groups’ brands, like Michael Kors, Kate Spade and Coach, giving Tapestry a dominant slice of the “accessible luxury” handbag market.
The lawsuit spends a lot of time defining what accessible luxury is, saying that the term was first coined by Coach (a Tapestry brand) at the time of its IPO over twenty years ago. The suit carefully distinguishes “accessible luxury” from “mass market products” and from high end luxury. Focusing in particularly on handbags. It is worth noting that all of these brands appear to produce other products like clothing, shoes, eyeglasses, watches, perfumes and other accessories – they even make menswear (which I did look at online and they appear to mostly sell the kind of shoes worn by American politicians.)
The reason that the lawsuit is so focused on “accessible luxury handbags” which they carefully define - is that the case relies on the HHI (or Herfindahl–Hirschman index) a commonly used measure of market concentration, in order to claim that this acquisition is anticompetitive. Obviously if you widen the definition of the industry to womenswear, handbags in general, or accessible luxury goods, or even leatherwear, the acquisition does not really seem significant from a market concentration perspective.
The New York Times writes that “the lawsuit is a rare move by the agency to block a fashion deal, given that the industry does not suffer from a lack of competition”.
The lawsuit argues that the acquisition would likely lead to higher prices, decreased innovation, and reduced wages. Now, I won’t lie to you, until I read the lawsuit, I wasn’t aware that the accessible luxury handbag industry was such a hotspot of innovation.
Anyhow, why are the FTC getting involved in a deal like this? And more importantly are they just trying to block every merger? Jeffrey Sonnenfeld of the Yale School of Management wrote a piece a few months ago saying that two and a half years into Khan’s tenure, the FTC has lost every single merger challenge it has brought through litigation across both federal and administrative court without even a single win in cases as varied as Microsoft’s acquisition of Activision Blizzard, Meta’s acquisition of Within, and Illumina’s acquisition of Grail, to name just a few.
Up until recently, the consumer welfare standard has been the guiding principle for regulators and for courts.
Under that standard, regulators have generally recognized that there are usually economic benefits associated with business combinations (after all, that is why they are being done), they can lead to greater operational efficiencies within businesses. Regulators have focused mainly on preventing mergers that are anti-competitive and might harm consumers — with higher prices, reduced output or diminished quality. Under Lina Khan, the focus of the FTC has changed.
Antitrust laws are in place in almost every country to prevent certain types of business practices that are deemed anticompetitive. Courts in the US have applied these laws from 1890 through to the present day with the objective of protecting competition for the benefit of consumers, ensuring strong incentives for business efficiency, keeping prices down, keeping quality up, and fostering innovation.
People on both sides of the political divide would usually agree that vigorous competition is essential in any free-market economy.
The first US antitrust law, the Sherman Act, was passed by congress in 1890 as a "charter of economic liberty aimed at preserving free and unfettered competition". In 1914, Congress passed two additional antitrust laws: the Federal Trade Commission Act, which created the FTC, and the Clayton Act. With some revisions, these are the three main federal antitrust laws still in effect today.
The first really big antitrust case came in 1911 (twenty-one years after the passing of the Sherman Act) against John D. Rockefellers Standard Oil company which at the time controlled almost all oil production, processing, marketing, and transportation in the United States. The Courts ordered the company to be broken up by divesting itself of its major holdings—33 companies in all. Chevron, Exxon Mobil, BP and Marathon oil can all be traced back to Rockefellers Standard Oil.
Anticompetition law has always been both broad and vague, thus, how and if anti-trust laws are enforced has varied significantly over time, and enforcement depends heavily on political will. Enforcement fell significantly during both world wars, as government needed to rely on big business during that time for war production.
The 1974 breakup of AT&T marked the end of the really aggressive anti-trust enforcement era. Since the Regan presidency there has been a move to only bring anti-trust cases if it can be demonstrated that consumers are being harmed by a large business (this is the consumer welfare standard).
Before Lina Khan the most recent big anti-trust case was the United States vs. Microsoft. The issue central to that case was whether Microsoft was allowed to bundle its web browser software with the Windows operating system. The court ordered a breakup of Microsoft in June 2000. But then in 2001, the Department of Justice reached an agreement with Microsoft to settle the case. The settlement required Microsoft to share its API with third-party companies and appoint a panel of three people who would have full access to Microsoft's systems, records, and source code for five years in order to ensure compliance.
From the 1990s to the 2010s, the average number of mergers investigated by the Department of Justice fell from 180 per year to 70 per year.
Corporate concentration has risen across the decades in both America and Europe as anti-trust enforcement declined. But according to the Economist “this expansion appears to have been caused mainly by growing economies of scale from technology, not market power.
The big ideas behind the decades-long retreat from antitrust enforcement in the United States are that three firms are usually enough to keep any market competitive, monopolies are often only temporary, and mergers often create efficiencies that are reliably passed on to consumers in the form of lower prices.
In deciding whether to block a merger or outlaw business practices, judges in recent years have mostly relied on an economic analysis of how much prices would likely go up or down if the deal gets done.
In December 2023 the FTC and the Antitrust Division of the Department of Justice released new Merger Guidelines which describe how the agencies review proposed mergers and acquisitions under federal antitrust laws. These “merger guidelines” have existed in varying forms for more than 50 years.
The new guidelines were described by Ankush Khardori, an attorney and former federal prosecutor as a bid to will into existence an expansive and enforcement-friendly legal framework that modern courts have not endorsed either in the particulars or in broad strokes, and whose wisdom as a matter of domestic economic policy is open to serious question.
The Merger Guidelines lay out “frameworks” that the agencies then use to assess whether a merger violates the antitrust laws. These new frameworks differ from the past 40 years of antitrust enforcement in two key manners.
Firstly, the new guidelines substantially lower the threshold at which a merger is considered anticompetitive, meaning that more mergers can be challenged or scrutinized than in the past. Most notably, they lower the Herfindahl-Hirschman Index and market share thresholds that the agencies use to assess whether a merger of competitors is considered to be anticompetitive.
Secondly, a number of the guidelines are based on novel or less proven legal theories, including:
Prohibiting transactions that enable a firm “dominant” in one market from extending its position into other markets, even if one of the merging firms has no presence in the other market.
Finding that a firm may violate the law by engaging in an “anticompetitive pattern” of multiple small acquisitions, (this is something Tapestry is accused of in this case) even if no individual acquisition would violate the antitrust laws. Relevant evidence for an “anticompetitive pattern” can include failed deals that did not close and future potential acquisition strategies by the acquiring firm or others in the industry.
Additionally, the guidelines allow for blocking a merger that is not necessarily anticompetitive but might result in lower wages, slower wage growth or other degradations of workplace quality in the industry.
While the new guidelines are likely to result in increased agency scrutiny of proposed deals, it is important to note that they are just guidelines, and they don’t have the force of law. The agencies still need to convince federal courts to apply these guidelines, and so far, that is not going too well. Under the Biden administration, the agencies have suffered a number of high-profile losses in federal court, suggesting that courts are reluctant to go along with the novel or less-tested theories of harm reflected in the new Guidelines.
Since Lina Khan has headed up the FTC, she has lost a number of high-profile cases, and some argue that she is taking these cases more to send a message to big business than to necessarily win the cases.
In an interview with CNN, Khan said she was “quite happy” with her progress at the FTC citing feedback she’s received from business leaders about the agency’s “deterrent effect.”
She went on to say, “We’ve heard that executives are taking much more seriously the potential antitrust risks of deals on the front-end,” adding that “deals are not being pursued because they’re recognized on the front end as being legally suspect.”
Although the overall number of M&A deals has only fallen slightly since Khan has led the FTC, the average deal size has fallen by about 40%, suggesting that larger deals are being deterred. Since Joe Biden took office in 2020, the share of deals involving the largest tech giants has been cut in half.
It is not just pro-business conservatives who are concerned with the new direction of the FTC either. The Chamber of Progress, a Democratic-founded “center-left tech policy industry coalition,” has warned that the Khan FTC’s defeats made the FTC less credible saying “All these court losses are making their threats look more like a paper tiger.”
Khan has had some successes at the FTC. In 2022 a federal judge blocked a bid by the publisher Penguin Random House, to buy one of its main rivals, Simon & Schuster.
The assistant attorney general on that case argued that “The proposed merger would have reduced competition, decreased author compensation, diminished the breadth, depth, and diversity of our stories and ideas, and ultimately impoverished our democracy,”
That case focused on author earnings, rather than harm to consumers, which was a significant shift in how antitrust law is applied. Antitrust policy has mostly been guided by an effort to prevent large corporations from imposing higher costs on consumers, rather than focusing on the impact on workers, suppliers or competitors.
The accessible luxury handbag lawsuit seems rather questionable in terms of its claim that it would reduce competition in the apparel industry, which is highly fragmented and competitive, but it is a test of the new guidelines in that one of its key arguments is that the merger would directly affect hourly workers who may lose out on higher wages due to reduced competition for employees.
The complaint does however highlight that accessible luxury handbags are typically manufactured in Asia and so it would seem that the hourly workers the FTC is discussing are people who work in retail stores selling the handbags.
The complaint also highlights that a wide variety of retail outlets sell these bags, from company operated stores to big chains like TJ Maxx and Macys to online sellers, so it is not clear to me which workers’ wages specifically they expect to fall if this merger were to go ahead.
It is possibly worth questioning if this lawsuit is a case of regulatory overreach, and if the FTC have narrowly defined a category of handbags such that Coach and Michael Kors seem to be more dominant in this carefully selected category than they actually are in the real world of women’s fashion. It could be argued that if the prices of these brands were to go up, another brand would quickly take their place on the shelves of TJ Maxx and Macys. It strikes me as unlikely that an entire price category of handbags would disappear from store shelves.
Lina Khans argument that launching a series of lawsuits that fail in the courts but have a deterrent effect on businesses is reasonable, doesn’t strike me as being appropriate government action. If Federal agencies are to launch nuisance lawsuits to deter business combinations that are legal, but distasteful to the head of the FTC, it is imposing unreasonable legal costs on businesses for no good reason. It could even be argued that imposing these costs on businesses affects consumers as the businesses would have to raise prices to remain profitable.
A lot of the evidence cited in the lawsuit (much of which is redacted in the public document) is commentary from the management of Tapestry and the investment bankers who are pitching the deal to investors stating that the merged entity will be more profitable than it was before due to synergies between the two firms. Every deal that gets done (or is even pitched) is (of course) done in the expectation of profits.
If the FTC is only willing to allow mergers that can be demonstrated to be bad for the businesses in question this might set a difficult standard to meet. It is not obvious that under the new merger guidelines that two children’s lemonade stands could be merged without attracting an FTC lawsuit.
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