On May 17, 2016, Judge Emmet G. Sullivan (D.D.C.) issued a memorandum opinion explaining his decision to enjoin the Office Depot/Staples merger under Section 13(b) of the FTC Act. The court conducted a two-week trial in which the FTC called ten witnesses and 4000 exhibits were admitted into evidence, after which defendants opted to rest. The court found that the FTC “established their prima facie case by demonstrating that Defendants’ proposed merger is likely to reduce competition in the Business to Business (“B-to-B”) contract space for office supplies.” Defendants largely relied on Amazon’s development of on-line B-to-B services to replace or restore any reduction in competition resulting from the merger, but the court found that argument unpersuasive and enjoined the merger.

While much is being written, and will be written, about the court’s decision, we believe there are several important takeaways for companies contemplating mergers:

  1. Markets are not one size fits all—business transactions for goods can be argued to exist in a market that is different from the consumer market for the same goods.

The court viewed the relevant market as the B-to-B market, and more specifically focused on “large B-to-B customers,” which the FTC defined as those that spend $500,000 or more per year on office supplies. It found that approximately 1200 U.S. corporations are included in this market. This is an important consideration for companies contemplating mergers—evaluating market shares and potential anticompetitive effects based on downstream sales not only to consumers, but also to different slices of their B-to-B transactions.

  1. Brick and mortar companies seeking to merge cannot assume that nascent on-line competition will serve as a meaningful counterweight to their increased market share.

Although e-commerce continues to grow and develop new models and mechanisms for retail sales to consumers and in the B-to-B space, e-commerce is not a panacea to alleviate agency concerns regarding a merger’s anticompetitive effects. Here, defendants relied heavily on Amazon’s effort to compete in the office supply industry through Amazon Business. The court said that despite having significant strengths, Amazon Business has less experience in the industry and faces challenges that caused the court to believe that it will not “be in a position to compete in the B-to-B space on par with the proposed merged entity within three years.” This serves as a reminder that merging companies that plan to rely on on-line competitors as ensuring competition should conduct a thorough analysis of their prospects and their ability to act as a competitive restraint.

  1. Experts are critical in defining the market and explaining why the merger’s procompetitive effects outweigh any anticompetitive effects.

The court relied extensively on the FTC’s expert, Carl Shapiro, one of the architects of unilateral effects analysis and one of the drafters of the 2010 Horizontal Merger Guidelines while at the DOJ. He submitted expert reports and testified at trial, and the court relied time and again on his analyses of market definition, market share, and competitive effects such as win-loss data and bid data. As noted above, defendants opted to rest at the conclusion of the FTC’s case; accordingly, although their expert, Jonathan Orszag, submitted expert reports he was not called to testify, which the court noted. Without debating the merits of specific analyses the court relied upon, the court’s decision highlights the need for experts to provide understandable analyses the court finds persuasive, and demonstrates the risk of not providing the court with an opportunity to hear trial testimony from an expert.

  1. The FTC, like the DOJ, continues to focus on negative documents to construct a narrative that the merger will harm competition.

The court focused on company documents that suggested a lessening of competition as a result of the merger. Some documents showed that defendants view themselves as the most viable office supply vendors for large businesses in the United States: “There are only two choices for them. Us or Them.” Other documents sent to customers advised them that post-merger they would lose negotiating leverage: “[The merger] will remove your ability to evaluate your program with two competitors. There will be only one.” In short, just as in the DOJ’s challenges to mergers in Bazaarvoice and H&R Block, here documents enabled the FTC to paint a picture of self-recognition that already-limited competition would be lessened if the merger were to proceed. This hardly needs repeating, but agencies are unlikely to ignore company documents suggesting a significant reduction in competition as a result of the merger.

Companies contemplating mergers would be prudent to keep the above considerations in mind in case the merger is challenged.