On Monday, the Federal Trade Commission (FTC) moved to block the $8.5 billion purchase of Capri Holdings, the parent company of brands like Michael Kors and Versace, by Tapestry Inc., the parent company of Coach and Kate Spade. The FTC claims that the deal would eliminate head-to-head competition between Capri’s Coach and Kate Spade and Tapestry’s Michael Kors, giving Tapestry a dominant position in the “accessible luxury” handbag market, “significantly increas[ing] concentration and result[ing] in a highly concentrated market[.]”
“Accessible Luxury”: Tailoring the Relevant Product Market
The FTC argues that the deal results in concentration specifically in the “accessible luxury” handbag market, as distinguished from “true luxury” or “high-end luxury” like Chanel and Louis Vuitton that tend to attract “affluent, high-wealth consumers—in contrast to the millions of working- and middle-class clientele who comprise a large part of the customer base for Coach, Kate Spade, and Michael Kors.”
The Merger Guidelines released in December 2023 express support for construing product markets narrowly, even if doing so leaves “significant substitutes” outside the market definition, marking a substantive change from the previous 2010 Horizontal Merger Guidelines. The 2023 Guidelines explain that “[t]here may be effective competition among a narrow group of products, and the loss of that competition may be harmful, making the narrow group a relevant market, even if competitive constraints from significant substitutes are outside the group.” (emphasis added) and further outline definition methods including those around “targeted customers.”
Accessorizing the Complaint: Ancillary Theories of Harm
In addition to the horizontal overlap between Tapestry and Capri, the FTC alleges other theories of harm advanced by the 2023 Guidelines:
- Labor Market Harms: The FTC alleges that the transaction would not only lead to a reduction of competition between the parties for sales of handbags, but also in the purchase of labor. The Guidelines specifically acknowledge that when a merger combines competing buyers of labor, it can result in a lessening of competition that may slow wage growth and worsen conditions for workers. This is particularly the case in labor markets that are highly specialized and have high switching costs.
The FTC has similarly brought labor market harms as an additional theory of harm in prior merger challenges—for example, in Kroger / Albertsons, the FTC alleged potential harm to a subset of employees, particularly by weakening union leverage. However, in its challenge to Tapestry/Capri, the FTC does not focus on any particular category of labor (e.g., sales) or highly specialized labor. Instead, the complaint alleges that the combination of the parties could harm competition in light of their combined “more than 33,000 employees worldwide . . . in a variety of locations and functions.”
- Serial Acquisitions: The FTC harkens to another part of the Merger Guidelines scrutinizing serial acquisitions, arguing that the deal “builds on a deliberative, decade-long M&A strategy by Tapestry. . .to achieve its goal to become the major American fashion conglomerate” through successive acquisitions of fashion brands. Citing to its documents, the FTC noted that it has no plans to slow its acquisition strategy.
Key Items to Carry with You
Anticipate novel theories of harm: This complaint is the latest in a string of lawsuits in which the FTC has demonstrated its willingness to allege novel theories of harm advanced by the Merger Guidelines. It is not clear whether the FTC would have been willing to bring forth the labor or serial acquisitions theory of harm on a standalone basis to block the suit – Commissioner Holyoak voted in favor of the suit specifically based on head-to-head competition between the parties. Nonetheless, the harms alleged signal that parties should be prepared to address the FTC’s continued interest in a wide range of theories of harm, particularly if there is substantial head-to-head competition between the parties.
Market definition is key: As noted, the FTC has in recent years alleged narrow product markets to support findings of anticompetitive harm. Market definition is typically outcome determinative. Here, whether the FTC can substantiate its market definition will affect the level of concentration considered by the court, and ultimately the parties’ prospects for closing the transaction.
Documentary evidence can be crucial: The FTC relied heavily on internal documents throughout its complaint to support its market definition, labor market harms, and Tapestry’s alleged serial acquisition strategy. The documentary evidence is redacted in the complaint, but surely will be critical if the challenge ultimately proceeds to trial.
