FTC 'Ginned Up' Case Against Office Depot Deal, Staples Says
By Michael Macagnone
Law360, Washington (March 21, 2016, 8:24 PM ET) — Staples laid into the Federal Trade Commission on Monday as a D.C. federal court mulled whether to pause the company's Office Depot merger, accusing the agency of “gerrymandering” and not crediting competition from Amazon and other office supplies providers in opposing the deal.
At opening arguments Monday of a two-week hearing, Staples and Office Depot pushed back against the FTC’s argument for a preliminary injunction against the retailers' $6.3 billion merger. Staples' counsel Diane Sullivan of Weil Gotshal & Manges LLP said that the FTC has contorted the office supply market by excluding thousands of business customers and whole categories of products, to find a “narrow, rigged, artificially inflated view of the world that has nothing to do with reality” and to challenge the deal.
Sullivan blasted the FTC’s “tunnel vision,” which allegedly focused on the amount of supplies such as paper and pens that Office Depot and Staples provide for Fortune 100 companies while ignoring the competition for office furniture and printer ink and the growing trend of off-contract “leakage" to companies like the new Amazon Business service.
“The FTC here, focused on a litigation win, has focused on protecting the most powerful, richest companies on Earth … they have all kinds of ways to make sure they get the best price from their vendors,” Sullivan said.
The agency, according to Sullivan, ignored the immense size disparity between the proposed new entity and its largest customers, as well as the threat that Amazon.com Inc. could pose after taking up a large portion of the retail market for office supplies by offering a wide variety of products at a low profit margin.
“The landscape of history is littered with companies that have been killed or bankrupted by Amazon and other digital companies, and [Staples and Office Depot] don’t want to be one of those,” she said.
Sullivan said the FTC’s case against the tie-up contradicted agency statements approving the 2013 merger between Office Depot and OfficeMax Inc., where the FTC included products like printer ink in the office supply market and found “robust competition” from online retailers such as Amazon and broader retailers such as Wal-Mart Stores Inc. and Target Corp.
The FTC, meanwhile, defended its administrative complaint, which focused on business-to-business office supply contracts. Legal theories similarly focused on national accounts have helped the federal government win victories over previous big-ticket mergers, including AT&T Inc.'s proposed acquisition of T-Mobile USA Inc. in 2011 and Sysco Corp.'s proposed merger with rival broadline food distributor US Foods Inc. in 2015.
Using that successful strategy, the FTC had alleged in its December administrative complaint and subsequent preliminary injunction motion that the existing competition between Staples and Office Depot led to lower prices and better service in the B-to-B market, and that those virtues would be lost if the companies were to join forces. The FTC's attorney Tara Reinhart continued that argument in pushing for the preliminary injunction Monday, saying that Staples and Office Depot routinely compete with each other, lowering prices for those businesses.
“No matter how you slice it, Staples and Office Depot are the primary suppliers to these businesses, and that belies the notion that leakage is a significant phenomenon now or that it will be in the future,” Reinhart said.
She pushed back against the notion that a new player like Amazon could quickly move in to grab market share from the newly combined company, pointing to granular order tracking, customized Web portals and other functionalities unique to those two big players in the industry.
“Another fringe player is not going to do the trick. Another fringe player increasing their market share is not going to be enough,” Reinhart said.
Monday’s opening arguments teed up a battle over the bounds of the market for office supplies, both in the customers served and the products considered, as the FTC looks to preserve its list of the largest business customers — 79 percent of which are served by Staples or Office Depot currently — as well as categories of “consumable office supplies” that includes items like pens and paper but excludes printer ink and toner.
In addition, the threat posed by Amazon’s new business-focused product, launched after the merger announcement last year, looks like it will become a frequent topic, with the first Amazon executive scheduled to testify as part of the government’s case against the Staples-Office Depot deal.
The FTC is represented in-house by Tara L. Reinhart, Alexis Gilman, Amanda Lewis, Angel Prado, Charles A. Loughlin, David E. Owyang, Haidee L. Schwartz, Helder Agostinho, Joshua Smith, Kelly A. Horne, Kevin Hahm, Kimberley G. Biagioli, Krisha A. Cerilli, Maria M. DiMoscato, Rohan Pai, Ryan Quillian, Stelios S. Xenakis, Stephanie Greco and Thomas Hankins Brock.
Staples is represented by Diane Sullivan, Jeffrey Perry and Carrie Mahan Anderson of Weil Gotshal & Manges LLP. Office Depot is represented by Matthew J. Reilly, Andrew M. Lacy and Peter C. Herrick of Simpson Thacher & Bartlett LLP.
The case is Federal Trade Commission v. Staples Inc., case number 1:15-cv-02115, in the U.S. District Court for the District of Columbia.