- D.C. Court Grants DOJ Request to Enjoin H&R Block/TaxACT Merger
- November 21, 2011 | Authors: Clifford H. Aronson; Alec Y. Chang; Ian G. John; James A. Keyte
- Law Firms: Skadden, Arps, Slate, Meagher & Flom LLP - New York Office ; Skadden, Arps, Slate, Meagher & Flom LLP - Palo Alto Office ; Skadden, Arps, Slate, Meagher & Flom LLP - New York Office
On October 31, 2011, the U.S. District Court for the District of Columbia issued an order enjoining H&R Block, Inc.’s acquisition of a rival tax preparation software firm TaxACT. Last week, the court’s redacted memorandum opinion supporting the injunction became available.1 The opinion contains a thorough, step-by-step evaluation of the merger, with analysis that bolsters the Department of Justice/Federal Trade Commission 2010 Horizontal Merger Guidelines (Merger Guidelines) and its general methodology to challenging mergers.2
Most significantly, the court: (1) adopted the DOJ’s narrow relevant market, rejecting the defendants’ expert studies and relying on the defendants’ internal documents that identified their principal competitors; (2) rejected defendants’ arguments that fringe players could reposition to replace the competition provided by TaxACT; (3) concluded that H&R Block and its remaining significant competitor were likely to coordinate postmerger, particularly because TaxACT served as a low-price maverick in the market; (4) rejected defendants’ arguments that H&R Block and TaxACT were not close competitors in light of the evidence of direct competition between the two; and (5) rejected defendants’ efficiencies arguments because the purported efficiencies were not merger-specific or verifiable.
H&R Block and TaxACT are the second and third largest providers of digital do-it-yourself (DDIY) tax preparation software, accounting for 15.6 percent and 12.8 percent shares of DDIY sales, respectively. Intuit (TurboTax), the largest DDIY provider, accounts for 62.2 percent of DDIY sales. The rest of the DDIY market is divided among numerous smaller firms.3
On May 23, 2011, the Department of Justice (DOJ) sued to enjoin H&R Block’s proposed acquisition of TaxACT, arguing that the combination would harm competition and create “an effective duopoly” between H&R Block and Intuit in the DDIY market.4 In a full merits trial held in September, H&R Block defended the acquisition, arguing, among other things, that the relevant product market was much broader than DDIY products and should also include other tax preparation methods such as the use of tax professionals and manual “pen-and-paper” filings.5
The Court’s Analytic Framework
The court made clear “as a legal matter” that market definition is a “critical” “starting point” of antitrust merger analysis, although later noting in a footnote that “the evolving understandings in economics” suggests that market definition may not be required in some cases.6 The court concluded, as the DOJ had argued, that the relevant market was limited to DDIY products. Significantly, the court was most persuaded by the evidence concerning the defendants’ own perceptions of the market and by the distinct characteristics of DDIY products compared to other tax preparation methods. Specifically, the court found that the defendants’ own internal documents identified DDIY offerings as their primary sources of competition and demonstrated that the defendants determined their pricing and business strategies based on DDIY products, rather than other methods. The court also found it notable that DDIY products have distinct attributes compared to professional or manual tax preparation, in that they involve different technology, price, convenience level and time investment. While the defendants attempted to dispute this evidence, including with an expert report that concluded the market includes self-preparation and professionally assisted preparation, the court found the defendants’ economic analysis “unreliable” because of “severe shortcomings” in the data upon which the analysis depended.7
Prima Facie Case
Evaluating the likely competitive effects of the acquisition, the court cited D.C. Circuit case law and the Merger Guidelines to conclude that the formation of a combined firm with a 28.4 percent market share, in an already concentrated market with only three large players, created “a presumption of anticompetitive effects.” The court found the defendants’ attempts to overcome this presumption and “show that traditional economic theories” relating to market concentration were not “an accurate indicator” of the merger’s likely effects to be unpersuasive.8
Barriers to Entry
The court found that expansion by smaller firms postmerger was unlikely to offset any competitive harm where brand name and reputation were critical to competing in the DDIY market and fringe players did not have the necessary brand positions or funds to build up their brands.9
Coordinated and Unilateral Effects
The court also agreed with the DOJ that the merger was “reasonably likely” to facilitate price coordination between H&R Block and its remaining significant competitor, Intuit, citing historical cooperation between H&R Block and Intuit and noting that TaxACT currently played a “special role” in the market by serving as a low-price leader. Likewise, the court concluded that the acquisition gave H&R Block a unilateral incentive to raise prices postmerger independent of what Intuit was likely to do, following a detailed unilateral effects analysis that considered, among other factors, the merger simulation performed by the DOJ’s economic expert.10
Finally, the court concluded that the defendants’ purported merger efficiencies were insufficient to rebut the presumption of likely anticompetitive effects. It noted that “[h]igh market concentration levels require proof of extraordinary efficiencies,” and defendants’ predicted cost savings appeared to be achievable without the merger and were based on unverifiable projections rather than estimates that could be confirmed through independent analysis. In rejecting the claims, the court also highlighted H&R Block’s failure to achieve projected efficiencies in past transactions.11
The decision is a reminder that courts will continue to require the agencies to properly define relevant markets.12 At least in the D.C. Circuit, however, courts appear to be willing to find narrow markets and structural presumptions based on internal business documents and testimony and require merging parties to present strong evidence to overcome the presumption.13
The decision also lends support to the types of econometric analyses discussed in the Merger Guidelines, which typically suggest an adverse competitive effect. The DOJ’s economic expert performed critical loss and merger simulation analyses (in addition to providing testimony that the court found persuasive in support of the DOJ’s proposed market definition and competitive effects conclusions). Despite some questions about the appropriateness of the data used by the expert, the court credited his merger simulation analysis as probative evidence in support of the court’s conclusion that the transaction was likely to result in adverse unilateral effects. In so doing, the court rejected the defendants’ expert analysis as unreliable in that it was based on flawed customer surveys. The court’s analysis of the expert reports and testimony highlights the importance of sound econometric analyses based on robust data, particularly where concentration levels are high and there is evidence of significant direct (and perhaps unique) competition between the merging parties.
Finally, the court’s rejection of the parties’ efficiency claims reflected the skepticism with which courts generally have viewed efficiencies claims in mergers in highly concentrated markets.
In sum, the decision is another indication that the courts remain willing to block transactions where the government can present a strong structural case, evidence of high entry barriers, few moderate sized firms to fill the void and econometric analyses demonstrating anticompetitive effects.
1 U.S. v. H&R Block, Inc., Civil No. 11-00948 (November 10, 2011).
2 See Skadden memorandum, “Revised Horizontal Merger Guidelines: Acknowledging Current Agency Practice,” April 21, 2010; Skadden memorandum, “FTC and DOJ Issue Revised Horizontal Merger Guidelines,” August 23, 2010.
3 U.S. v. H&R Block, Mem. Op. at 5.
5 Id. at 5-6, 18-19.
6 Id. at 72-73, n.35.
7 Id. at 19-32.
8 Id. at 50-53.
9 Id. at 53-60.
10 Id. at 60-80. Notably, however, the court relied on its finding of coordinated effects to predict that Intuit was unlikely to reposition to defeat any price increase by the merged firm. As such, the court’s “unilateral effects finding is not strictly ‘unilateral’ in the sense that it does take coordination into account.” Id. at 79.
11 Id. at 80-85.
12 In dicta, the court suggested market definition may not be necessary in Section 7 cases: “The court is not aware of any modern Section 7 case in which the court dispensed with the requirement to define a relevant market, although Judge Brown’s opinion in Whole Foods may be read to endorse this possibility in accordance with the evolving understandings in economics.” Id. at 72, n.35. Separately, the court cites favorably the FTC and DOJ Commentary on the Horizontal Merger Guidelines several times and even refers to the two-year timelines for entry from the 1992 FTC and DOJ Horizontal Merger Guidelines, suggesting that those materials will continue to carry influence. Id. at 54, n.28, 66, 71, 73, n.36.
13 See e.g., Federal Trade Commission v. Lundbeck, Inc., Civil No. 08-6379 (August 31, 2010).