Federal Trade Commission v. Staples, Inc.
1997 U.S. Dist. LEXIS 9322, 970 F. Supp. 1066 (1997)
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Rule of Law:
A relevant product submarket can be established for antitrust purposes by demonstrating, through direct evidence like pricing data, that competition from sellers outside the proposed submarket does not significantly constrain the pricing of sellers within it. A merger that leads to high concentration within such a valid submarket is presumptively unlawful.
Facts:
- Staples, Inc. and Office Depot, Inc. were the two largest office supply superstore chains in the United States, with OfficeMax, Inc. being the only other national competitor in this retail category.
- Both companies sell a wide range of office products, including consumable supplies like paper, pens, and toner cartridges, primarily to small businesses and home-office consumers.
- On September 4, 1996, Staples and Office Depot entered into an agreement to merge, whereby Office Depot would become a wholly-owned subsidiary of Staples.
- The merger would reduce the number of office superstore competitors from three to two in many metropolitan areas, and from two to one in fifteen areas.
- While other retailers like mass merchandisers (Wal-Mart), warehouse clubs (Sam's Club), and mail-order firms sell consumable office supplies, the superstores offer a much larger variety and depth of inventory, averaging over 5,000 SKUs.
- Internal documents from both Staples and Office Depot primarily identified other office superstores as their key competitors and made pricing and strategic decisions based on superstore competition.
Procedural Posture:
- Staples and Office Depot filed a Premerger Notification and Report Form with the Federal Trade Commission (FTC) on October 2, 1996.
- The FTC conducted a seven-month investigation into the proposed merger.
- On March 10, 1997, the FTC voted 4-1 to challenge the merger.
- The FTC rejected a proposed consent decree that would have required the defendants to sell 63 stores to OfficeMax.
- The FTC filed a lawsuit against Staples and Office Depot in the U.S. District Court for the District of Columbia on April 9, 1997.
- The FTC sought a preliminary injunction to prevent the consummation of the merger pending a full administrative hearing on its legality.
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Issue:
Does the Federal Trade Commission demonstrate a likelihood of ultimate success on its claim that the proposed merger of Staples and Office Depot may substantially lessen competition in the market for consumable office supplies sold through office superstores, justifying a preliminary injunction?
Opinions:
Majority - Hogan, District Judge
Yes, the FTC demonstrates a likelihood of success on the merits, justifying a preliminary injunction. The court found that the relevant product market is the sale of consumable office supplies through office supply superstores, and within this market, the merger would create a high concentration that is likely to substantially lessen competition. The court rejected the defendants' broader market definition (all sellers of office products) because compelling pricing evidence showed a low cross-elasticity of demand between superstores and other sellers. Specifically, data demonstrated that Staples and Office Depot priced their products significantly higher—often over 5%—in markets where they faced no superstore competition, even when other types of retailers were present. This indicates that other retailers do not provide a sufficient competitive constraint on superstore pricing. The court applied the 'practical indicia' from Brown Shoe Co. v. United States to validate the existence of this superstore submarket, noting differences in customer base, product selection, and industry recognition. Given the high post-merger market concentration (Herfindahl-Hirschman Index) in this well-defined market, the merger is presumptively anti-competitive. The defendants failed to rebut this presumption with credible evidence of easy market entry or merger-specific efficiencies.
Analysis:
This case is a landmark in modern merger analysis for its acceptance of a narrow product market defined by a specific retail format—the 'category killer' superstore. It established that direct empirical evidence of pricing effects can be more persuasive than traditional arguments about functional interchangeability of products. The court's reliance on data showing how prices vary with the number of direct superstore competitors validated the use of sophisticated economic evidence in antitrust litigation. This decision emboldened enforcers to challenge mergers in other retail sectors by defining markets based on store format and competitive realities rather than just the products sold, significantly influencing how 'relevant market' is defined in the retail industry.
