On November 10, 2011, Judge Beryl Howell, of the United States District Court for the District of Columbia, released her 86-page opinion enjoining H&R Block (HRB) from acquiring TaxAct. (United States of America v. H&R Block, Inc., Civ. No. 11-00948.) The opinion has generated substantial discussion and disagreement regarding whether it portends the outcome of the Department of Justice (DoJ) suit to stop AT&T from acquiring T-Mobile. AT&T has stated that the H&R Block case is of little consequence because it involves different markets and different facts. This is certainly true. Nevertheless, we believe it is useful to review the analytical approach taken in the H&R Block case for possible clues as to how Judge Huvelle will review the AT&T transaction.
Although the analytical approach adopted by Judge Howell is not binding on Judge Huvelle’s review of the Department of Justice’s complaint to enjoin AT&T’s proposed acquisition of T-Mobile, as an opinion from a judge in the same court, the opinion is likely to be persuasive. Moreover, both the H&R Block and the AT&T cases involve horizontal mergers, which tend to be subject to closer scrutiny than the vertical mergers.
We believe that based on the allegations in the DoJ complaint, there are sufficiently similar market characteristics between the H&R Block case and AT&T’s proposed acquisition of T-Mobile, that the application of Judge Howell’s analysis could be problematic for AT&T.
Some initial facts. H&R Block and TaxAct both provide digital do-it-yourself (“DDIY”) tax preparation products. The court agreed with DoJ that DDIY products were the relevant market. This is a three firm market, with Intuit, maker of TurboTax, the leading firm with 62.2% of the market, HRB 15.6% and TaxAct with 12.8%. These three firms thus account for 90% of the market. The next largest firms hold 3.2% and 2.7% market share, with the remainder spread among a number of even smaller firms. HRB and TaxAct compete head-to-head. Judge Howell found that the merger of HRB and TaxAct would create a duopoly in the relevant market, the merged HRB/TaxAct and Intuit.
By way of comparison to AT&T/T-Mobile, DoJ claims that the relevant market, nationwide mobile wireless tele-communications services, is a four firm market with the top four firms providing more than 90% of service connections. No other firm exceeds a 3% share on a nationwide basis. Verizon is currently the largest provider. According to Sprint’s antitrust complaint, AT&T holds a 32% share (based on revenues), Sprint has 15% and T-Mobile has 12%. Sprint and others have alleged that the AT&T merger would effectively result in a duopoly between AT&T and Verizon.
HIGH MARKET SHARES AS MEASURED BY DOJ’S MERGER GUIDELINES CREATES A PRESUMPTION OF HARM
In her review, Judge Howell strongly embraced the Department of Justice’s Horizontal Merger Guidelines in applying the general legal standards for assessing a Clayton Act Section 7 violation. Under these standards, the DoJ can establish a presumption that the merger will substantially lessen competition by showing that the merger would produce “a firm controlling an undue percentage of the relevant market” and would result “in a significant increase in concentration of firms in that market.” Judge Howell used the DoJ’s Horizontal Merger Guidelines’ measurement of market concentration, the Herfindalh-Hirschmann Index (“HHI”) and the Merger Guidelines’ presumption that HHI levels in excess of 2500 points are considered “highly concentrated” and that HHI increases above 200 points “will be presumed likely to enhance market power.”
HRB’s acquisition of TaxAct would increase the HHI in the relevant market by approximately 400 points, resulting in a post-acquisition HHI of 4,691. Judge Howell found that “[t]hese HHI levels are high enough to create a presumption of anticompetitive effects” and that the DoJ had made prima facie case -- an initial showing -- that the merger would violate the antitrust laws. The concentration levels alleged in DoJ’s complaint against AT&T are, at least for some geographic markets, on par with those that Judge Howell found sufficient to create a presumption of anticompetitive effects. Of the 100 largest local wireless markets identified in the DoJ complaint, 12 have post-merger HHIs in excess of 4,000. The vast majority have post-merger HHIs in excess of 4,000. The vast majority have post-merger HHIs between 3000-4000 and a number have changes in the HHI of 1000 or more. Based solely on HHI comparisons, Judge Howell’s analysis might suggest that the DoJ could make a showing of concentration sufficient to trigger the presumption of anticompetitive effects.
H&R BLOCK’S INABILITY TO REBUT THE PRESUMPTION
Once the presumption is met, the burden shifts to the defendants to show that the HHI market concentration numbers are “not an accurate indicator of the merger’s probable effect on competition” or that merger benefits outweigh harms. The Court rejected each of HBR’s rebuttal arguments. HBR argued that new entry was likely, that coordinated or unilateral effects were unlikely, and that merger efficiencies where substantial.
New Entry or Expansion Unlikely
To rebut the presumption, HRB first argued that the smaller tax preparation software competitors could expand sufficiently to offset the likely effects shown by market concentration. The court again looked to the merger guidelines, noting that HRB must show that new entry or expansion by existing smaller entities must be timely (e.g., usually a two-year time frame) and sufficient in magnitude “to fill the competitive void that will result if [defendants are] permitted to purchase” their target. The court concluded that the smaller providers in the market were not likely to deter anticompetitive effects in light of alleged barriers to entry and market characteristics. Among the court’s key findings were that one of the smaller provider’s market share had not expanded despite marketing efforts, that the market was maturing to the point that new, first time customers were dwindling, and the tax preparation products had features that made switching from one provider to another unattractive.
The “Presumption of Collusion”
The HBR court also found that, “[s]ince the government has established its prima facie case, the burden is on the defendants to produce evidence of ‘structural market barriers to collusion’ specific to this industry that would defeat the ‘ordinary presumption of collusion’ that attaches to a merger in a highly concentrated market.”
The court concluded that HBR did not meet this burden. Although the court’s finding of likely collusion rested in part on evidence very specific to that case, including some evidence of prior collusion, the HBR court also pointed to certain indicia of coordination that arguably are shared in the wireless market. The court noted that “[t]ransactions in the market are small, numerous, and spread among a mass of individual consumers, each of whom has low bargaining power; prices can be changed easily [and are reasonably transparent]; and there are barriers to switching due to the ‘stickiness’ of the DDIY products.”
These same indicia arguably exist in the mass market for mobile wireless services. DoJ’s complaint against AT&T alleges that its merger with T-Mobile will lead to “enhanced risk of anticompetitive coordination” citing certain market characteristics similar to those identified by Judge Howell. These include “transparent pricing, little buyer-side market power, and high barriers to entry and expansion.” If Judge Howell’s analysis applies, AT&T may bear the burden of overcoming a “presumption of collusion” if the Judge concludes that the market is sufficiently concentrated, based on the HHI numbers.
The Acquired Company is a Maverick
Finally, the HBR court noted that the merger would “result in the elimination of a particularly aggressive competitor in a highly concentrated market, a factor which is certainly an important consideration when analyzing possible anti-competitive effects.” Judge Howell cited TaxAct’s “impressive history of innovation and competition in the DDIY market.” As is likely in the AT&T case, the DoJ and HBR “spilled considerable” ink debating whether TaxAct was a maverick, which overall Judge Howell found unhelpful. The crucial question for Judge Howell was whether TaxAct had “consistently play[ed] a role within the competitive structure of this market that constrains prices.” She concluded that TaxAct had in fact played such a role.
This same question may be framed the same way for T-Mobile by Judge Huvelle. DoJ’s complaint certainly alleges that T-Mobile was an aggressive price cutter, an important innovator, and a key competitor for AT&T, in some instances citing AT&T internal documents to support this allegation. T-Mobile’s status as a maverick is likely to be a key issue in the trial.
Efficiencies Are Not Verifiable or Merger Specific
Substantial post-merger efficiencies may rebut a government’s showing of likely competitive harm. Markets with high concentration levels, however, require “proof of extraordinary efficiencies,” which courts have generally found inadequate, according to Judge Howell. She once again closely followed the Merger Guidelines in requiring that claimed efficiencies must be objectively verifiable and cannot be achieved without the merger. This is a relatively high bar. The court rejected estimates of efficiencies based on “the estimation and judgment of experienced executives about costs” and appeared to require predicted cost savings to be based “on an analysis of facts that could be verified by a third party.” The court also noted HBR’s history of past acquisitions and whether efficiency claims had in fact been met.
AT&T claims substantial benefits from its acquisition of T-Mobile, predicated primarily on the ability to quickly expand capacity by acquiring T-Mobile facilities and spectrum. In light of the alleged levels of market concentration, application of Judge Howell’s analysis will require AT&T to meet a rigorous analytical framework for demonstrating claimed efficiencies and benefits.
Judge Howell’s opinion in the H&R Block case appears problematic for AT&T. The judge strongly embraced the DoJ’s Horizontal Merger Guidelines that emphasize the importance of market concentration, which creates presumptions of anticompetitive effects that are difficult to rebut. In light of the high levels of concentration in at least some markets resulting from AT&T’s proposed acquisition of T-Mobile, it is likely that similar presumptions will apply, shifting the burden to AT&T to substantiate the existence of price-constraining competitive alternatives or substantial, verifiable merger-specific benefits.