Judge Grants Preliminary Injunction, Staples-Office Depot Call Off $6.3 Billion Deal

Skadden, Arps, Slate, Meagher & Flom LLP

Clifford H. Aronson Matthew P. Hendrickson Maria Raptis Kenneth B. Schwartz Steven C. Sunshine

On May 10, 2016, Judge Emmet G. Sullivan of the U.S. District Court for the District of Columbia released his highly anticipated decision in the matter of Staples’ acquisition of Office Depot, granting the Federal Trade Commission’s (FTC) request for a preliminary injunction and effectively bringing the $6.3 billion deal to an end. Both parties to the transaction announced their intention to abandon the deal shortly after the ruling was issued.

Judge Sullivan’s decision (the opinion has not yet been released to the public) marks the latest chapter of an 18-year standoff between the FTC and the office supply superstores (OSS). Staples first sought to acquire Office Depot for $4 billion in 1996. Although the two companies only accounted for roughly 5.5 percent of all U.S. sales of office supplies at the time, the FTC successfully argued in federal court that the deal would cause unilateral price effects in the relevant product market of “consumable office supplies sold through office supply superstores.” By proving a narrow market definition, the FTC convinced Judge Thomas F. Hogan of the D.C. district court in 1997 that Staples and Office Depot were two of only three major retailers in the OSS space (with Office Max as the third); as a result, Judge Hogan enjoined the transaction.

Fast forward to 2013, when Office Depot sought to acquire Office Max for $1.2 billion. Again, the key antitrust question was the definition of the relevant market — and the participants in that market. In stark contrast to its position in 1996, the FTC cleared the transaction based on the conclusion that the market for the retail sale of consumable office supplies had broadened to include competition from big-box stores and online retailers. In its closing statement concerning the proposed merger, the commission specifically noted that the parties had “shown that the market for the sale of consumable office supplies has changed significantly in the intervening years,” and that as a result, office supply superstores “today face significant competition [such that] the proposed merger is unlikely to substantially lessen competition in the retail sale of consumable office supplies.”

Perhaps seeing renewed opportunity given the shifting industry dynamics and the FTC’s conclusion in Office Depot-Office Max, Staples and Office Depot decided to attempt another merger in February 2015. Although the competition from non-OSS players cited by the FTC in 2013 had only increased in strength and intensity, the FTC again sued to block the deal. This time however, the FTC’s complaint rested on concern for the “business-to-business” segment, an alleged relevant product market distinct from the retail consumer market that was at issue in the past. “Business-to-business” customers (also known as “B-to-B” customers) are large customers who buy consumable office supplies in large quantities and under long-term contracts that also include services such as nationwide delivery, dedicated customer service, customized online catalogs, procurement system integration and utilization reports. Specifically, the complaint alleged that “Staples and Office Depot are the only two office supply vendors that can provide on their own the low prices, nationwide distribution, and combination of services and features that many large B-to-B customers require,” and that entry or expansion into the market by other vendors, manufacturers, wholesalers or online retailers of office supplies would not be timely, likely or sufficient to counteract the anti-competitive effects of the merger.

The FTC made its case over the course of a two-week trial, presenting evidence and witnesses. During that time, the FTC staff encountered several stumbling blocks, including the exclusion of some expert testimony from its economist (Carl Shapiro) regarding Amazon’s nascent B-to-B business unit’s future projections and ability to compete. Judge Sullivan also appeared at times to be highly skeptical of the case. In addition, when the OSS retailers offered a mid-trial settlement, which included the promise of a three-year price freeze for B-to-B customers, the judge encouraged the agency to seriously consider the offer.

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