United States v. H & R Block, Inc.
833 F. Supp. 2d 36 (2011)
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Rule of Law:
A merger between the second and third largest firms in a highly concentrated market violates Section 7 of the Clayton Act when it creates a duopoly, eliminates an aggressive competitor that constrains prices, and where the defendants fail to show that low barriers to entry or verifiable, merger-specific efficiencies would counteract the likely anticompetitive effects.
Facts:
- The U.S. market for tax preparation services includes assisted preparation (hiring a professional), manual preparation (pen-and-paper), and digital do-it-yourself (DDIY) software.
- The DDIY market was dominated by three firms: Intuit (TurboTax) with 62.2% market share, H&R Block (HRB) with 15.6%, and TaxACT with 12.8%, collectively controlling about 90% of the market.
- TaxACT, founded in 1998, operated as a 'value' competitor, pioneering high-quality, free DDIY product offerings that exerted downward pressure on the prices of its competitors, including HRB.
- After HRB and Intuit successfully lobbied the IRS to restrict broad free offers through the Free File Alliance (FFA), TaxACT became the first company to offer a completely free federal DDIY product for all taxpayers directly on its own website.
- On October 13, 2010, HRB entered into an agreement to acquire TaxACT's parent company, 2SS Holdings, Inc., for $287.5 million.
- HRB's stated post-merger plan was to maintain both brands, positioning its own DDIY product as a 'premium' offering and TaxACT as its 'value' brand focused on free and low-cost products.
Procedural Posture:
- The United States Department of Justice (DOJ) filed an action against H&R Block, Inc. and 2SS Holdings, Inc. (TaxACT) in the United States District Court for the District of Columbia, a court of first instance.
- The DOJ sought a permanent injunction to prevent the proposed acquisition, alleging it violated Section 7 of the Clayton Act.
- The DOJ initially filed a motion for a preliminary injunction.
- The parties subsequently agreed to forgo the preliminary injunction phase and proceed directly to a trial on the merits of the action.
- A nine-day bench trial was held before the district court.
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Issue:
Does the proposed merger between H&R Block and TaxACT violate Section 7 of the Clayton Act by substantially lessening competition in the market for digital do-it-yourself (DDIY) tax preparation products?
Opinions:
Majority - Beryl A. Howell
Yes, the proposed merger violates Section 7 of the Clayton Act because it is reasonably likely to substantially lessen competition in the digital do-it-yourself (DDIY) tax preparation product market. The court defined the relevant product market as DDIY tax preparation products, excluding assisted and manual preparation methods. The court found DDIY products are distinct from other methods in terms of technology, price, and consumer experience, and that consumers of DDIY products are not likely to switch to other methods in response to a small but significant price increase. Within this highly concentrated market (pre-merger HHI of 4,291), the merger would create a duopoly where the combined HRB/TaxACT and Intuit would control approximately 90% of the market, increasing the HHI by 400 to 4,691. This established a prima facie case of anticompetitive effects. The defendants failed to rebut this presumption. The court found significant barriers to entry, primarily the cost and time required to build a trusted brand, making it unlikely that smaller competitors could counteract the merger's effects. The court also concluded the merger would likely lead to anticompetitive coordinated effects by eliminating TaxACT, an aggressive competitor whose low-price strategy constrained the market, and making it easier for the two remaining firms to tacitly coordinate on pricing and quality. Furthermore, the elimination of head-to-head competition would likely result in unilateral effects, giving the merged firm the incentive to raise prices or reduce the quality of TaxACT's offerings to avoid cannibalizing its more profitable HRB products. Finally, the defendants' claimed post-merger efficiencies were not cognizable because they were not proven to be both merger-specific and verifiable.
Analysis:
This case provides a modern application of traditional merger analysis to the digital software and services market, emphasizing that antitrust concerns about price, quality, and innovation are critical even when 'free' products are central to the business model. The court's meticulous definition of the relevant product market—narrowing it to only DDIY software—was pivotal to the outcome and illustrates how courts distinguish between theoretically substitutable products and those that are practical substitutes in the minds of consumers. The decision powerfully reaffirms the government's ability to block 'three-to-two' mergers that create a duopoly in highly concentrated markets, particularly when the acquired firm is an aggressive 'maverick' competitor that disciplines the pricing of larger rivals. It sets a high bar for defendants seeking to justify such a merger, requiring strong, verifiable proof of efficiencies and low barriers to entry.
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