Court Opinion

ID: 3204242
Source: CourtListenerOpinion
Date Created: 2016-05-17 20:01:35.1184+00
Date Added: 2024-06-11T09:34:16.742808
License: Public Domain

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I. Introduction

Drawing an analogy to the fate of penguins whose destinies

appear doomed in the face of uncertain environmental changes,

Defendant Staples Inc¢ (“Staples”) and Defendant Office Depot,

Inc. (“Office Depot”) (collectively “Defendants”) argue they are

like “penguins on a melting iceberg,” struggling to survive in
an increasingly digitized world and an office-supply industry
soon to be revolutionized by new entrants like Amaz0n Business.

60:l5 (Opening Statement of

Prelim. Inj. Hrg Tr. (“Hrg Tr.”)

Diane Sullivan, Esq.). Charged with enforcing antitrust laws for

the benefit of American consumers, the Federal Trade C0mmission

(“FTC”) and its co-plaintiffs, the Commonwealth of Pennsylvania

.>`-:

and the District of Columbia, commenced this action in an effort

‘ to block Defendants’ proposed merger and alleged that~the merger

would “eliminat[e] direct competition between Staples and Office

'~Depot” resulting in “significant harm” to large businesses that

purchase office supplies for their own use. Compl., Docket No. 3
at T 4. The survival of Staples’ proposed acquisition of Office
Depot hinges on two critical issues: (l) the reliability of
Plaintiffs’ market definition and market share analysis; and

(2) the likelihood that the competition resulting from new
market entrants like Amazon Business will be timely and
sufficient to restore competition lost as a result of the
merger.

Subsequent to Defendants' announcement in February 2015 of
their intent to merge, the FTC began an approximate year-long
investigation into the $6.3 billion merger and its likely
effects on competition. DefsL' Proposed Findings of Fact and
Conclusions of Law (“Defs.' FOF”) I 58. On December 7, 20l5, by
a unanimous vote, the FTC Commissioners found reason to believe
that the proposed merger would substantially reduce competition
in violation of Section 7 of the Clayton Act and Section 5 of
the FTC Act. Compl. I 34. That same day, Plaintiffs commenced
this action seeking a preliminary injunction pursuant to Section

l3(b) of the FTC Act, l5 U.S.C. § 53 (b) to enjoin the proposed

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Although

Business to be the “preferred marketplace.for all professioh§l}

DXOOO3O at l.
Amazon Business has several undisputed strengths: tremendous
brand recognition, a user-friendly marketplace,

technological innovation, and global reach.6 Hrg

President of Amazon Business, Prentis Wilson: “We actually don't

 

6 Amazon's marketplace is an online shopping experience where
customers can=browse for items and make online purchases. Hrg
Tr. 552. Amazon makes approximately half of all sales through
the marketplace.`Id. Millions of other companies-“third-party
sellers,”-make the remaining sales through the marketplace. Id.

l2

worry a lot about our competitors. Our focus has been on serving
our customers.”). Amazon Business also has several weaknesses
with regard to its entry into the B-to-B space. One weakness is
that Amazon.Business°is inexperienced in the RFP processF Amazon
Business has not bid on many RFPs and has yet to win a primary
vendor contract. Hrg Tr. 55l:ll-13 (“Q: Has Amazon Business ever
won an RFP for the role as primary supplier of office supplies?
A: No.”). Amazon Business' marketplace model is also at odds
with the B-to-B industry because half of the sales made through
the marketplace are from independent third-party sellers over
whom Amazon Business has no control: Hrg Tr: 843: 7-9 (“Q: You
have no plans to force the third parties to offer particular
prices? A: No, we'll never do that. No.”).H
III1 Legal Standards
.A.The Clayton Act
£Section § of the élayton Act prohibits mergers or

acquisitions “the effect of [which] may be substantially to
lessen competition, or to tend to create a monopoly,” in any
“line of commerce or in any activity affecting commerce in any
section of the country.” 15 U.S.C. § l8. When the FTC has
“reason to believe that a corporation is violating, or is about
to violate, Section 7 of the Clayton Act,” it may seek a
preliminary injunction under Section l3(b) of the FTC Act to

“prevent a merger pending the Commission's administrative

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competition.” 3taples, 970 F. Supp. at 1072 (citation omitted)
(internal quotation marks.omitted)1 “Proof of actual'
anticompetitive effects is not required; instead, the FTC must
show an appreciable danger of future coordinated interaction
based on predictive judgment.” FTC v. Arch Coal, Inc., 329 F.
Supp. 2d 109, 116 (D.D.C. 2004) (internal quotations omitted)F
The Courtfs task,,therefore, is to “measure the probability
that, after an administrative hearing on the merits, the
Commission will succeed in proving that the effect of the
[proposed] merger ‘may be substantially to lessen competition,
or tend to create a monopoly' in violation of Section 7 of the
Clayton Act.'” Heinz, 240 F.3d at 714 (quoting 15 U.S.C. § 18).
This standard is satisfied if the FTC raises questions going to
the merits'“so serious, substantial, difficult and doubtful as
to make them fair ground for thorough investigation, study,
deliberation and determination by the FTC in the first instance
and ultimately by the Court.of Appeals.” Id. at 714-15
(citations omitted) (internal quotation marks omitted). As
reflected by this standard, Congress' concern regarding
potentially anticompetitive mergers was with “probabilities, not
certainties.” Brown Shoe Co., 370 U.S. at 323 (other citations

omitted).

In sum, the Court “must balance the likelihood of the FTC’s

".<'

success against the equities, under a sliding scale.” F.T.C. v.

325

whole Foods Market, Inc., 548 f.3d 1028, 1035 (D:C. Cir. 2008).
The equities or “public interest” in theqantitrust contextj

include: “(1) the public interest in effectively enforcing

antitrust laws, and (2L the public interest in ensuring that the~

FTC has the ability to order effective relief if it succeeds at
the merits trial.” Sysco, 113 F. Supp. 3d at 86.

Nevertheless, “[t]he issuance of a preliminary injunction
prior to a full trial on the merits is an extraordinary and
drastic remedy.” FTC v. Exxon Corp., 636 F.2d 1336, 1343 (D.C.
Cir. 1980)(citations omitted) (internal quotation marks
omitted). The government musZ come forward with rigorous proof
to block a proposed merger because “the issuance of a
preliminary injunction blobking an acquisition or merger may
prevent the transaction from ever being consummated.” Id.

C.Baker Hdghes Burden-Shifting Framework

In United States v. Baker Hughes, Inc., 908 F.2d 881, 982-83
(D.C. Cir. 1990), the U.S. Court of Appeals for the D.C. Circuit
established a burden-shifting framework for evaluating the FTC's
likelihood of success on the merits. See Heinz, 246 F.3d at 715.
The government bears the initial burden of showing the merger
would result in “undue concentration in the market for a
particular product in a particular geographic area.” Baker
Hughes, 908 F.2d at 982. Showing that the merger would result in

a sfngle entity controlling such a large percentage of then

16

relevant market so as to significantly increase the
concentration of firms in that market entitles the government to

a presumption that the merger will substantially lessen

»-

competitionL Id.A § ‘ ;= *‘ ,

The burden then shifts to the defendants to rebut the
presumption by offering proof that “the market-share statistics
[give] an inaccurate account of the [merger's] probable effects
on competition in the relevant market.” Heinz, 246 F.3d.at 715
(quoting United States v. Citizens & S. Nat'l Bank, 422 U.S. 86
(l975) (alterations in original)). “The more compelling the
prima facie case, the more evidence the defendant must presentJ
to rebut it successfully.” Baker Hughes, 908 F.2d at 991. “A
defendant can m;ke the required showing by.affirmatively showing
why a given transaction is unlikely to substantially lessen
competition, or by discrediting the data underlying the initial
presumption in the government’s favor.” ld.

“If the defendant successfully rebuts the presumption, the
burden of producing additional evidence of anticompetitive
effect shifts to the government, and merges with the ultimate
burden of persuasion, which remains with the government at all
times.” Id. at 983. “[A] failure of proof in any respect will
mean the transaction should not be enjoined.” Arch Coal, 329 F.

Supp. 2d at ll6. The court must also weigh the equities, but if

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the FTC is unable to demonstrate a likelihood of success on the
Emerits, the equities alone cannot justify an injunction. Id.
IV. Discussion

'g The Court's analysis proceeds as follows: (A) legal §
principles considered when defining a relevant market;

(B) application of legal principles to Plaintiffs' market
definition; (C) Defendants' arguments in opposition to
Plaintiffs' alleged market; (D) conclusions regarding the
relevant market; (E) analysis of the Plaintiffs' arguments
relating to the probable effects on competition based on market
share calculati0ns; (F) Defendants’ arguments in opposition to
Plaintiffs' market share calculations; (G) conclusions regarding
Plaintiffs' market share; (H) Plaintiffs' evidence of additional
harm; (I) Defendants"response to Plaintiffs' prima facie case;
and (J) weighing the equities.

A. Legal principles considered when defining a relevant market
As discussed supra, the burden is on the Plaintiffs to show
that the merger would result in a single entity controlling such
a large percentage of the relevant market that concentration is

significantly increased and competition is lessened. See e.g.
Baker Hughes, 908 F.2d at 982. To consider whether the proposed
merger may have anticompetitive effects; the Court must first
define the relevant market based on evidence proffered at the

'evidentiary hearing. See United States v. Marine Bancorp., 418

l8

U:S. 602, 618 (1974l (Market definition is a “‘necessaryr
predicate’ to deciding whether a merger contravenes the Clayton
Act.”). Examination of the particular market, including its
structure, history and probable future, is necessary to “provide
the appropriate setting for judging the probable anticompetitive
effects of the merger.” FTC v. Arch Coal, Inc.[ 329 F. Supp. 2d
at 116 (quoting Brown Shoe at 322 n. 28); see also United States
v. General Dynamic, 415 U.S. 486, 498 (1974). “Defining the
relevant market is critical in an antitrust case because the
legality of the proposed merger [] in question almost always
depends on the market power of the parties involved.” Cardinal
Health, Inc., 12 F. Supp. 2d at 45.

Two_components are considered when defining a relevant market:
(1) the geographic area where Defendants_compete; and (2) the

products and services with which the defendants' products

compete. Arch Coal, Inc., 329 F. Supp. 2d1 at 119. The parties

agree that the United States is the relevant geographic market.

Hrg Tr. (Shapiro) 2151:23-2152:4; see also Orszag Dep. 155:15-

19.8 The parties vigorously disagree, however, about how the

relevant product market should be defined.

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3 Defendants’ economic expert, Johnathan Orszag, produced several
expert_reports for Defendants but was not called to testify.

s

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The Supreme bourt in Brown Shoe established the basic rule

for defining a product market: “The outer boundaries of a
product market are determined by the reasonable
interchangeability of use or the cross-elasticity of demand
between the product itself and substitutes for it.” Brown Shoe,
370 U.S. at 325. In other words, a product market includes all
goods that are reasonable substitutes, even where the products
are not entirely the same. Two factors contribute to an analysis
of whether goods are “reasonable substitutes”: (l) functional
interchangeability; and (2) cross-elasticity of demand. See
e.g., Sysco, ll3 F: Supp. 3d at 25-261

As the following discussion demonstrates, the concepts of

cluster and targeted markets are critical to defining the market

` in this cases

- .a.Consumable office supplies as cluster market

Cluster markets allow items that are not substitutes for
each other to be clustered together in one antitrust market for
analytical convenience. Shapiro Report at 007 (noting that
cluster markets are “commonly used by antitrust economists.”)
The Supreme Court has made clear that “[w]e see no barrier to
combining in a single market a number of different products or

services where that combination reflects commercial realities.”

United States v. Grinnell Corp., 384 U.S. 563, 572 (l966).

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merger until the FTC's administrative proceedings1are complete.
Pls.’ Mot. Prelim. 1nj.,'Docket No. 5 at ls

This antitrust case involved an extraordinary amount of
work. As a result'of the`FTC's investigation and seven weeks of
discovery, more than fifteen million pages of documents were
produced, more than seventy depositions around the country were
taken, and five expert reports were completed. Defs."FOF T 60.
The Court presided over an evidentiary hearing and heard
testimony from ten witnesses from March 2l, 2016 to'April 5,
2016. Id. Nearly 4,000 exhibits were admitted into evidence. Id.
1 6l. Despite onerous time constraints created by the nature of
this unique litigation, lawyers for the parties and non-parties
completed this work with civility and professionalism while
demonstrating the highest le§el of sophistication and competency

in their written and oral advocacy.1 The Court commends the

lawyers and the paralegals for their outstanding work.2

1Defendants requested an expedited decision by no later than a

date certain so that financing could be secured to hold their
deal together. December 17, 2015 Tr., Docket 107 at 39. The
Court committed to ruling on the merits of this controversy‘by
no later than May 10, 2016. Id.

2As the Court stated during the hearing: “Let me extend my
appreciation to [the paralegals]. They’re the unsung heroes and
never get the credit that they deserve. 1 know how hard you work
to make us look good; 1 know that. So on behalf of everyone,W
thank you very much.” Hrg Tr. 158:8-13. 5

Here, Plaintiffs allege that items such as pens, file
folders, Post-it notes, binder clips, and paper for copiers and
printers are included in this cluster market. Compl. IT 36-37.
Although a pen is not1a functional substitute for a paperclip,
it is possible to cluster consumable office supplies into one
market for analytical convenience. ProMedica-Health Sys., Inc.
v. FTC, 749 F.3d 559, 565-68 (6th Cir. 20l4). Defining the
market as a cluster market is justified in this case because
“market shares and competitive conditions are likely to be
similar for the distribution of pens to large customers and the
distribution of binder clips to large customers.” Shapiro Report
at dO7; see also PXO2l67 (Orszag Dep. 9l:ll-l5) (“So, fbr
example, pens may not often be substitutes for notebooks in the
context of this case, but a cluster market would be the
aggregation of those two and then the analysis of those together
for, as we talked about earlier, analytical simplicity.”).

b.Large B-to-B customers as target market
Another legal principle relevant to market definition in this
case is the concept of a “targeted” or “price discrimination”
market. According to the Merger Guidelines:

When examining possible adverse competitive effects from

a merger, the Agencies consider whether those effects

vary significantly for different customers purchasing

the same or similar products. Such differential impacts
are possible when sellers can discriminate, e.g., by

w. profitably raising price to certain targeted customers
but not to others. [m]

21

When price discrimination is feasible, adverse
competitive effects on targeted customers can arise,
even if such effects will not arise for other customers.

A price increase for targeted customers may be
profitable even if a price;increase for all customers
would not be profitable because too many other customers ~
would substitute away.

U.S. Dep't of Justice & FTC Horizontal Merger Guidelines
§3 (20l0) (hereinafter Merger Guidelines).9

Defining' a market around a targeted consumer, therefore,
requires finding that sellers could “profitably target a subset of
customers for price increases . . .” See Sysco, ll3 F. Supp. 3d at
38 (citing Merger Guidelines Section 4.l.4.). This means that there
must be differentiated pricing and limited arbitrage. Dr. Shapiro
concluded that arbitrage is limited here because “it is not
practical or attractive for a large customer to purchase indirectly
from or through smaller customers.” Id.

_B.Application of, relevant_ legal principles to Plaintiffs'
market definition '

The concepts of cluster and targeted markets inform the
Court's critical consideration when defining the market in this
case: the products and services with which the Defendants'

products compete. Arch Coal, Inc., 329 F. Supp. 2d. at ll9. The

i¢_; ____

9 Although the Merger Guidelines are not binding on this Court,
the D.C. Circuit has relied on them for guidance in other merger
cases. Sysco, ll3 F. Supp. 3d at 38 (citing Heinz, 246 F.3d at
716 n.9).' ' °` ' ` '

22

parties vigorously disagree on how the market should be defined.
As noted supra, Plaintiffs argue that the relevant market is a

cluster market of “consumable office supplies” which consists of

'“an assortment of office supplies, such as pens, paper clips,

-.`;,.

notepads and copy paper, that are used and replenished
frequently.” Compl. IT 36-37. Plaintiffs' alleged relevant
market is also a targeted market, limited to B-to-B customers,
specifically large B-to-B customers who spend $500,000 or more
on office supplies annually. Hrg Tr. 3O:4-6.N
Defendants, on the other hand, argue that Plaintiffs'

alleged market definition is wrong because it is a
“gerrymandered and artificially narrow product market limited to
some, but not all, consumable office supplies sold to only the
most powerful companies in the world.” Defs.’ FOF I 4 (emphasis
in original). In particular, Defendants insist that ink and
toner must be included in a proper definition of the relevant

product market, Id. I lOl. Defendants also argue that no

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w In Plaintiffs' complaint, they alleged that the relevant
market was limited to large B-to-B customers, including, but not
limited to “those that buy $1 million annually of consumable
office supplies for their own use.” Id. TT 4l, 45. For
analytical purposes, Dr. Shapiro drew the line at large B-to-B's
that spend $500,000 or more on office supplies. Hrg Tr. 2l54:l6-
2l55:l4(Dr. Shapiro noting that 90 percent of Enterprise
customers spend at least $500,000 on office supplies and that
there is no_“magic place thatfs the right placeQ to draw the
line, but necessary for practical analytical purposes).

   

 

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n The Court is aware of the academic observation that “the
rationale for market definition in Brown Shoe was very different
from and at odds with the rationale for market definition in
horizontal merger cases today.” Phillip E. Areeda and Herbert
HoverUs.i select medical ultimately
contracted with MPS Total Print); id. at l3l6-l8 (Best Buy
confirming purchases of BOSS items from Kimberly-Clark and ink
and toner through MPS contract with Hewlett-Packard). The same
is true of other BOSS items. Hrg Tr. 168 (AEP: “. . . most of
our commercial, if not all of our commercial jan san is part of
a janitorial contract that also provides labor.”).

Moreover, the authority relied on by Defendants is readily

distinguished. Defendants rely on Brown Shoe to support a focus

37

on the “commercial realities of the industry.” However,
Defendants rely;on Brown Shoe’s discussion of the proper

geographic boundaries of a market, which is distinct from Brown

Shoe’s discussion of°the relevant product market. Brown Shbe 370*

U.S. at 336-37 (“The geographic market selected must, therefore
both ‘correspond to the commercial realities of the industry’
and be economically significant.”). To the extent that the
“commercial realities of the industry” are important in this
case, the Court agrees with Plaintiffs that the commercial
realities are “that Defendants are the largest and second-
largest office supplies vendors in the country; they are each
other's closest competitor for large business customers; bid
data show that they lose bids most often to each other; and,
large customers currently benefit greatly from their head-to-
head competition.” Pls.' FOF I 288.

Defendants also rely on PepsiCo, Inc. v: Coca Cola Co., a
case brought by Pepsiéo under Section 2 of the Sherman Act
alleging that Coca Cola had monopolized, or attempted to
monopolize, the market of fountain syrup distributed by
independent food service entities. 114 F. Supp. 2d 243 (S.D.N.Y,
2000). PepsiCo is distinguishable for a number of reasons.
First, the critical question before the Court in PepsiCo was

whether the evidence supported a finding that the distribution

channel of fountain syrup through independent foodservice

38

distributors should be recognized as a relevant market. Id. at
»249-50. The Court=rejected PepsiCo’s proposed relevant market
because the evidence showed that “while customers view fountain

”wsyrup delivered through independent foodservice distributors as
preferential and advantageous, they view fountain syrup
delivered through other means as acceptable.” Id.

Here, the record evidence shows that large B-to-B customers
do not view any alternative sources for bulk procurement of
basic office supplies that would retain the current competitive
conditions of the market. Hrg Tr. 349 (AEP) (“I think our team
would be very good at finding alternatives to provide pens and
pencils; however, they cannot create competition.”); Id. 486
(McDonalds)(“We would attempt to look for alternatives. We find
ourselves, though, back to a situation where we don't have
another national player that has a retail footprint nationwide
that stocks everything we need . . .”) In contrast, large B-to~B
customers not only view alternative vendors for ink, toner and
BOSS as adequate, they increasingly contract with MPS,
furniture, and janitorial companies for their primary purchase
of these distinct products. See e.g., Hrg Tr. 1019 (Select
Medial) (after considering MPS bids in 2013 from Office Depot,

OfficeMax, Staples, Total Print and Weaver, Select Medical

entered into a contract with Total Print for its MPS needs). In

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.-.`a:

light of these distinctions, PepsiCo does not support a finding
that Plaintiffs' alleged market is in error.

In sum, inclusion of ink, toner and BOSS items by large
companies in the bundle‘of goods they?wantéto have the option of
purchasing through their primary vendor does not mean that those

goods are subject to the same competitive conditions.

b.Consideration of ink and toner during 1997 and 2013
investigations

Next, Defendants argue that the Plaintiffs' alleged market
is inconsistent with how the FTC defined the market during its
investigation of the Staples and Office Depot proposed merger in -
l997 and the Office Depot and Office Max merger in 20l3. Defs.'
FOF 1 l13yll6.

In l997, the proposed merger between Staples and Office
Depot was enjoined by this 0ourt. FTC v. Staples, 970 F. Supp.
lO66, 1070 7D.D.C. l997) (J. Hogan), At that time, FTC included
ink and toner in its definition of consumable office supplies.
Id. at l080. However, scant precedential value can be gleaned
from comparing the defined market in that case and the
Plaintiffs' alleged market in this case. The 1997 case is nearly
twenty years old, and the office supply market has changed
dramatically since that time. For example, as discussed in

Section IV.B.l.a. supra, the rise of MPS services as a

competitive force has occurred in the last several years.

40

in large part on the prospect that Amazon Business will replace
any competition lost because of the merger. Although Ama2on
Business may transform how some businesses purchase office
supplies, the evidence presented during the:hearing fell‘shorc
of establishing that Amazon Business is likely to restore lost
competition in the B-to-B space in a timely and sufficient
manner. For the reasons discussed in Section IV infra,
Plaintiffs' Motion for Preliminary Injunction is GRANTED.4
In Section ll of this Memorandum Opinion, the Court sets

forth important background information, including many critical
findings of fact underpinning the Court's analysis. Section IlI
establishes the relevant legal standard pursuant to the Clayton
Act. The Court!s analysis in Section IV proceeds as follows:

(A) legal principles considered when defining a relevant market;
(B) application of legal principles to Plaintiffs' market
definition; (C) Defendants' arguments in opposition tod
Plaintiffs' alleged market; (D) conclusions regarding the

relevant market; (B) analysis of the Plaintiffs' arguments

   

4The Court appreciates the tremendous amount of time, money
and effort Defendants put into this case, and understands that
they genuinely believe this merger would be best for their
companies, the industry and the public. While the Court's
decision is surely a great disappointment to Defendants, the
Court is optimistic that Defendants will find ways to innovate,
evolve and remain relevant in the rapidly changing office supply
industry. ' l

Moreover, the 1997 Staples case was a retail case that focused
on how the proposed merger would affect the average consumer.
The case before the Court today is a contract channel case

focused on large B-to-B custom§rs.

In 2013, after a seven month investigation, the FTC did not
challenge Office Depot's proposed acquisition of Office Max. See

FTC’s Closing Statement (“2013 Closing Statement”),

 

   

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Because the Commission cited to the definition of consumable

.’.

office supplies from Staples in its Closing Statement,
Defendants argue that ink and toner should be included in the
relevant market because Plaintiffs “presented no evidence
whatsoever that the ‘competitive conditionsQ are different in

any way from November 2013.” Defs.’ FOF I 116.

.\

The Court rejects this argument. In the 2013 Closing
Statement, one of the rationales for allowing the proposed

merger to proceed was because:

large customers use a variety of tools to ensure that
they receive competitive pricing such' as ordering
certain products (like ink and toner) directly from
manufacturers and sourcing (or threatening to source)
certain categories of office supply products from

multiple firms.

2013 Closing Statement at 3. The FTC’s decision recognized

that “yesterday’s market dynamics may be very'different ,

41

;htt s;/Lwww.ftc;gov/s stem[files/documents/ ubli ;§§atemen;s§§L§_

ill

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, .

from market dynamics of today.” Id. Plaintiffs' decision to

not include ink and toner in their proposed relevant market ,
in this case is therefore entirely consistent with the 2013
decision to not challenge the Office DepotWand Office Max

3593 closing

(Plaintiffs'

See also, Hrg Tr.

merger.
argument noting that the 2013 decision is “wholly

consistent with what we’re doing here. It's exactly the

same thing. We did not see a reason to challenge ink and

toner based on the evidence that was developed in the

investigation.”).
c.Dr. Shapiro and the FTC worked collabdratively to
determine that ink and toner should be excluded

Finally, Defendants challenge the propriety of excluding
ink and toner from the alleged cluster market based on Dr.
Shapiro's testimony indicating that the decision to exclude ink
and toner resulted from a collaborative process with the FTC and

that he did not perform a market share analysis including ink

The Court is not persuaded by

and toner. Defs.' FOF T l2l~l24.

First, the fact that the FTC works

Defendants' argument.

collaboratively with its experts to determine what products
should be included in an antitrust market is not problematic.

The FTC’s own economists contribute to the FTC's decision

.regarding the relevant market prior to the time the expert

witness for trial is retained. See e.g. Hrg Tr@ 2907‘(Ms.

42

'Q

Reinhart: “The amount of work that went into this investigation

-is huge.'And these staff attorneys,-they're experts themselvesI

They know the antitrust laws, they know the antitrust economics

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Further, Defendants take Dr. Shapiro’s testimony regarding
market shares of Defendants for ink and toner out of context.
Defs.' FOF T l24. Defendants' highlight Dr. Shapiro’s statement
that if one were to calculate market shares for ink and toner,
Defendants' share would be significantly smaller. Id. Defendants
seek to imply that Dr. Shapiro agrees that Defendants' market
shares in the alleged market would be smaller if ink and toner
were included. However, Dr.'Shapiro's comment was referring to
his earlier statement that:
1 think that beth the FTé eha staples end office Depet
agree, as far as 1 can tell, that if you took Staples
and Office Depot's market share in ink and toner, it
" would be significantly lower than it is in core office
supplies and paper. To me that is confirmation that it's
correct not to include ink and toner in the cluster.
Hrg Tr. 2783. In other words, because there are more companies
that sell ink and toner, Defendants' market share in an ink
and toner market would be lower than they are in the alleged
market.

All of the above arguments are advanced by Defendants

to bolster their assertion that the Plaintiffs have

-“gerrymandered the market”-to inflate Defendants' market

43

share. Defs.’ FOF I 4. As discussed supray voluminous
record evidence supports excluding ink, toner and BOSS
products from the relevant cluster market. To the extent
Defendants sought to show that exclusion of ink and toner°
radically altered Defendants' market share, Defendants
could have presented expert testimony to support that
proposition.

2.Antitrust laws exist to protect competition, not a
particular set of consumers

Defendants' second primary argument in opposition to
Plaintiffs' proposed;relevant market is that “there is no
evidence to support Plaintiffs' claim that large B-to-Bs should
be treated as a separate market.” Defs’ FOF I 77. Defendants.
maintain that Plaintiffs’ attempt to protect “mega companies” is
misplaced because the merger “indisputably will benefit all
retail customers, and more than 99 percent of business
customers.” Defs.’ FOF I l.

Antitrust laws exist to protect competition, even for a
targeted group that represents a relatively small part of an
overall market. See Merger Guidelines § 3 (“When price
discrimination is feasible, adverse competitive effects on
targeted customers can arise, even if such effects will not
arise for other customers.”). lndeed, the Supreme Court has

recognized that within a broad ma§ket, “well-defined submarkets

44

l."’.'

h

_‘.

may exist which, in themselves, constitute product markets for
antitrust purposes.” Brown Shoe Co., 370 U.S. at 325, (1962);
Cardinal Health, Inc., 12 F. Supp. 2d at 47 (concluding that
“the services provided‘by wholesalers in fact.comprise a
distinct submarket within the larger market of drug delivery.”);
See e.g. Sysco, 113 F. Supp: 3d at 40 (holding that “the
ordinary factors that courts consider in defining a market-the
Brown Shoe practical indicia and the Merger Guidelines’ SSNIP
test-support a finding that broadline distribution to national
customers is a relevant product market.”); see also United `
States v: Phillipsburg Nat'l Bank § Trust Co.; 399 d.S. 350, 360
(1970) (“[I]t is the cluster of products and services ... that
as a matter of trade reality makes commercial banking a
distinct”`market).

As discussed in Section lV.A.2.a-c supra, the nature of how
large B-to-B customers operate, including the services they
demand, supports a finding that they are a targeted customer
market for procurement of consumable office supplies. There is
overwhelming evidence in this case that large B-to-B customers
constitute a market that Defendants could target for price
increases if they are allowed to merge. Significantly,
Defendants themselves used the proposed merger to pressure B-to-
B customers to lock in prices based on the expectation that they

would lose negotiating leverage if the merger were approved. See

45

. _r.
a u_'

e.g., PX05236 (ODP) at 001 (“This offer is time sensitive. If
and when the purchase of Office Depot is approved, Staples will

have no reason to make this offer.”); PX05249 (ODP) at 001

(“[The merger] will remove your`ability to evaluate your program.*

with two competitors. There will only be one.”); PX055l4 (ODP)
at 003 (“Today, the FTC announced 45 days for its final
decision. You still have time! You would be able to leverage the

competition, gain an agreement that is grandfathered in and

.drive down expenses!”).

D.Conclusions regarding the definition of the relevant market

The “practical indicia” set forth by the Supreme Court in
Brown Shoe and Dr. Shapiro’s expert testimony support the
conclusion that Plaintiffs’ alleged market of consumable office

supplies (a cluster market) sold'and distributed by Defendants

.to large B-to-B customers (a targeted market) is a relevant

market for antitrust purposes. The Brown Shoe factors support
Plaintiffs’ argument that the sale and distribution of
consumable office supplies to large B-to-B customers is a proper
antitrust market because the evidence supports the conclusion
that: (l) there is industry or public recognition of the market
as a separate economic entity; (2) B-to-B customers demand
distinct prices and demonstrate a high sensitivity to price
changes; and (3) B-to-B customers require specialized vendors

that offer value-added services. Dr. Shapir5's unrebutted

46

testimony also supports Plaintiffs’ alleged market definition
because, in his-opinion, “the elimination of competition would

lead to a significant price increase to large customers,” which

*implies the HMT is satisfied. Finally, for the reasons“discussed

in detail in Section IV.C supra, Defendants arguments against

Plaintiffs' market definition fail.

E.Analysis of the Plaintiffs’ arguments relating to probable
effects on competition based on market share calculations

Having concluded that Plaintiffs have carried their burden
of establishing that the sale and distribution of consumable
office supplies to large B-to-B customers'in the United States
is the relevant market, the Court now turns to an analysis of;
the likely effects of the proposed merger on competition within
the relevant market. “If the FTC can make a prima facie shpwing
that the acquisition in this case will result in a significant
market share and an undue increase in concentration” in the
relevant market, then “a presumption is established that [the
merger] will substantially lessen competition.” Swedish Match,
l3l F. Supp. 2d at 166. The burden is on the government to show
that the merger would “produce a firm controlling an undue
percentage share of the relevant market” that would result in a
“significant increase in the concentration of firms in that

market.” Heinz, 246 F.3d at 7l5.

47

The Plaintiffs can establish their prima facie case by
showing that,the merger will result in an increase in markets
concentration above certain levels. Id. “Market concentration is
a function of the number‘of firms in a market and their
respective market shares.” Arch Coal, 329 F. Supp. 2d at l23.
The Herfindahl-Hirschmann Index (“HHI;) is a tool used by
economists to measure changes in market concentration. Merger
Guidelines § 5.3. HHI is calculated by “summing the squares of
the individual firms' market shares,” a calculation that “gives

proportionately greater weight to the larger market shares.” Id.

'An HHI above 2,500 is considered “highly concentrated”; a market

with an HHI between l,500 and 2,500 is considered “moderately
concentrated”; and a market with an HHI below l,500 is_
considered “unconcentrated”f Id. A merger that results in a

highly concentrated market that involves an increase of 200

l points will be presumed to be likely to enhance market power;”

Id.; see also Heinz, 246 F.3d at 7l6-l7.

l. Concentration in the sale and distribution of
consumable office supplies to large B-to-B customers

Dr. Shapiro estimated Defendants’ market shares by using
data collected from Fortune l00 companies (“Fortune l00 sample”
or “Fortune l00”). Shapiro Report at Ol7. During the data
collecting process, 8l of the Fortune 100 companies responded

with enough detail to be used in Dr. Shapiro's sample. Id.; see

48

also Hrg Tr. 2294:3-19. The critical data provided by the
companies wa§ fiscal year 2014 information on: (1Y their overall
spend on consumable office supplies; (2) the amount spent on
consumable office supplies from Staples; and (3) the amounts
spent on consumable office supplies from Office Depot. Shapiro
Report, Exhibit 5A. Some Fortune 100 companies have an
established primary vendor relationship withLStaples or Office
Depot. Id. For example, Staples has 100 percent of the market

.'s spend on consumable office

share relating to 

supplies and Office Depot has 100 percent of the market share

 

relating to  's spend on consumable office

supplies§ Id. Other Fortune 100 customers purchase office

supplies from a mix of vendors. For examp1e, Staples accounted,

for twenty~seven percent of' 'l's spend on

consumable office supplies in 2014 and Office Depot accounted

'r§\'

for twenty-one percent. Id.

Defendants’ market share of the Fortune 100 sample as a
whole is striking: Staples captures 47.3 percent and Office
Depot captures 31.6 percent, for a total of 79 percent market
share. Shapiro Report at 017 and Ex. 5B. The pre-merger HHI is
already highly concentrated in this market, resting at 3,270.
Id. at 021. Put another way, Staples and Office Depot currently
operate in the relevant market as a “duopoly with a competitive

`.»1

fringe.” Id. If allowed to merge, the HHI would increase nearly

49

i`."

3,000 points, from 3,270 to 0,265. Id. This market structure
would constitute one dominant firm with a competitive fringe.
Id. Staples' proposed acquisition of Office Depot is therefore
presumptively illegal because the HHI increases more than,200
points and the post-merger HHI is greater than 2;500. Shapiro
Report at 021; see also Heinz, 246 F.3d at 716 (noting that the
pre-merger HHI for baby food was 4775, “indicative of a highly
concentrated industry” and the 500 point post-merger HHI
increase “creates, by a wide margin, a presumption that the

merger will lessen competition in the domestic jarred baby food

market.”)

F.Defendants' arguments in opposition to Plaintiffs’ Market
Share Calculations

Defendants make several arguments in opposition to Dr.
Shapiro's market share methodology and calculation. See Defs.'
FOF TI 125-131. Defendants argue that: (1) the Fortune 100
sample overstates Defendants' actual market share; (2) treatment
of Tier 1 diversity suppliers and paper manufacturers was
error;N and (3) Dr. Shapiro underestimates leakage, inflating
Defendants' market shares. Id. However, despite significant time

spent cross-examining Dr. Shapiro with regard to his

 

3 Tier 1 diversity suppliers are minority or veteran owned
businesses that are regional in nature and generally-rely on
large nationwide office supply companies like Staples and Office
Depot to service their customers. Hrg Tr. 1379 (PDME).

50

relating to the probable effects on competition based on market
share calculations; (F1 Defendants' arguments in opposition_to "
Plaintiffs' market share calculations; (G) conclusions regarding
Plaintiffs’ market share; (H) PlaintiffsQ:evidencePof additional
harm; (I) Defendants’ response to Plaintiffs' prima facie case;
and (J) weighing the equities. In Section V, the Court concludes
that the proposed merger must be enjoined due to the likelihood
of anticompetitive effects that would result were the merger to
be consummated.
II. Background

A_ Ov;,,vi;w

Every day millions of employees throughout the United
States utilise office supplies in the course of fheir daily
work. To sustain employees' use of pens, Post-it notes and
paperclips, large companies purchase more than two billion
dollars of office supplies from Defendants annually. Hrg Tr.
lO:23-24, (Opening Statement of Tara Reinhart, Esq.). Companies
that purchase office supplies for their own use operate in what
the industry refers to as the B-to-B space. B-to-B customers
prefer to work with one vendor that can meet all of the
companies' office supply needs. Hrg Tr. at 204:l-éO (Gregg
O'Neill, Category Manager for Workplace Services at American
Electric Power (“AEP”) testifying that because the company

spends two million dollars on office supplies, its leVerag§`with

methodology, Defendbnts produced no expert evidence during the
hearing to rebut that methodology. Moreover, it is significant
that Defendants' final 100-page brief devotes only seven

paragraphs to challenging Dr.=Shapiro’s market share

calculations. Id.

1.The Fortune 100 is a trustworthy sample to calculate
Defendants' market shares

Defendants' first argument in opposition to Dr. Shapiro's
focus on the Fortune lO0 is that his failure to take a sample of
the other approximate ll0O companies in the relevant market is
error because:it~results in “dramatically inflated“market
shares.” Id. I l26. Dr: Shapiro conceded that the data he
analyzed is imperfect because it does not include all large B-
to;B customers. Shapiro Report at 0l7. however, Qr. Shapiro was
confident that “there is no reason to believe [the market
shares] are biased when it comes to estimating the market shares
of Staples and Office Depot.” Id. To test whether his analysis
of the Fortune lO0 might have overstated Defendants’ market
shares because the Fortune 100 companies are especially large,
Dr. Shapiro measured the market share of the top half of his
sample separate from the bottom half. Id. at 0l8. The range of
spending on consumable office supplies among the companies
analyzed in Dr. Shapiro's analysis is vast: from less than

$200,000 per year on the low end, to more than $33 million per w

51

year on the high end. Id., Ex. 5A. The combined market share for
Defendants is seventy-nine percent among the top half of the
Fortune 100 and eighty-nine percent among the bottom half. Id.
at 018. Thus, Dr; Shapiro states that he is “confiden[t] that
the market shares for Staple[s] and Office Depot reported in
Exhibit 5B are not overstated.” Id.

Defendants' second challenge relating to the Fortune 100
sample focuses on the fact that only eighty-one of the 100
companies responded with enough data to be included in Dr.
Shapiro's analysis. Defendants argue that the nineteen omitted
“are the most likely to purchase supplies from vendors other
than Staples and Office Depot.” Id. I 125. Defendants highlight
Costco as an example, a company that charges each department
with procuring-its own office supplies, whether from Costco or
other vendors. Id. The fact that Costco is able to purchase
office supplies from Costco itself makes that company’s
procurement of office supplies an anomaly. Because Defendants
did not present a case, they do not provide the Court with an
analysis of the nineteen Fortune 100 companies excluded from Dr.
Shapiro's analysis to show that their exclusion skewed
Defendants' market shares in a way favorable to Plaintiffs.
Antitrust economists rely on data from third parties through

surveys, and therefore the measure of market shares is “normally

imperfect.$'Id.y fn 43. Perhaps Judge Mehta said it best: “The

52

`ra

v

FTC need not present market shares and HHI estimates with the
precision of a NASA_scientist.” Sysco, 113 F. Supp. 3d at 5%;
see also H & R Block, 833 F. Supp. 2d at 72 (stating that a
“reliable, reasonable, close approximation of relevant market
share data is sufficient.”). For all of these reasons, and in
view of the absence of expert testimony offered by the
Defendants, the Court is persuaded that Dr. Shapiro's analysis
of the Fortune 100 represents a reasonable and reliable

approximation of the Defendants' market share.

Z,Dr. Shapiro's treatment of Tier 1 diversity
3 suppliers and paper manufacturers-who rely on _
Defendants is consistent with commercial realities
Next, Defendants challenge the manner in which Dr. Shapiro
dealt with Tier 1 diversity suppliers and paper manufacturers.
Defs.’ FOF I 127. Defendants contend that the sales made by'Tiér
1 diversity suppliers and paper manufacturers are improperly
attributed to Defendants. Id.
1n the normal course, Defendants treat accounts served by
Tier 1 diversity partners toward their own revenue. Pls.' FOF
102. Moreover, Tier 1 diversity suppliers cannot serve large B-
to~B customers without partnering with Defendants. Id. For these
reasons, Dr. Shapiro attributed Tier 1 revenues to Defendants.
Hrg Tr. 2309:11-2310:6; 2795:2-2796:3; See also Hrg Tr. 379
(McDona1ds) (“Our understanding is that Tier 1s are generally

, .
\., .¢

53

.'.9

- - » l
regional players and may not have the size or scale to handle

large geographically-distributed business.”)
With regard to paper manufacturers, some large companies
_ purchase paper through-Defendants and others purchaseBdirectly
from a manufacturer. Id. 2305-O6. Dr. Shapiro included sales of
paper that are made through Defendants toward Defendants'
revenue. Id. ln these situations, Staples or Office Depot
distributes the paper. Id. at 2306. “In cases where the paper _
manufacturer directly sells and delivers the paper to the
customer,” Dr. Shapiro “attribute[d] the sales to the paper
manufacturer.” fd. Thus, the Court is satisfied that Dr.
Shapiro's treatment of Tier l diversity suppliers and some paper
manufacturer's revenue is consistent with commercial realities
and does not overstate Defendants' market shares.
3.Dr. Shapiro accounted for leakage in his analysis
Finally, Defendants contend that Dr. Shapiro did not

adequately account for “leakage” in his market share analysis.
Id. I l29. Leakage refers to unreported discretionary employee
purchases of office supplies. Shapiro Report at Ol8. Dr. Shapiro
requested an estimate of leakage from the Fortune l00. Shapiro
Report at 0l9. Of the eighty-one companies included in his
market-share analysis, twenty-six reported on leakage. Id.
Appendix E. Twelve of the twenty-six indicated that leakage

spend was §de minimis” or “immaterial”. PXO630d: Ex. RC2. In

.@,\ 

l _ _
these cases, Dr. Shapiro assumed that one percent of the

companies* spend on office supplies was leakage. Defs.’ FOF T
l29.

§ Testimohy from:fact witnesses-during the hearing made itv
clear that even the largest companies in the world are either
not concerned enough about leakage to track it or do not have a
reliable way of tracking it. See e.g. Hrg Tr. 344:2-4 (AEP: “We
have a methodology [to track leakage] which is an audit process
which is ran [sic] on a monthly basis. We choose not to include
office supplies every month.”); 464-65 (McDonalds became aware
of how to track leakage through {P-card” spend during
communications with the FTC in this case; and “data for the P-
cards really wasn't available to procurement, at least we
weren't aware of that:”).N These same companies have tremendous
incentive to ensure that their employees spend on contract.
Purchases made by employees online or from a brick and mortar

store are £ '| to :_ _'  in percent higher than the
‘_ _T_ d :;_ l i

contract price paid by large companies. Shapiro Report at Ol9.

    

Most companies with a primary-vendor contract have an official

policy that requires employees to purchase office supplies

  

B “P-Cards” or “procurement cards” are the equivalent of company
credit cards that allow goods to be purchased without using a

-traditional purchasing process.

55

_<'¢

3 E§E_ ".

through the contract. See e.g., Hrg Tr. 464-65 (McDonalds'
policy is that corporate'stores must purchase on contract §
through Office
employees ahout
l2l4.

For all of these reasons, the Court is confident that Dr.
Shapiro accounted for any impact leakage has on Defendants'

market shares in this case.

of showing that the merger
would result in “undue concentration” in the relevant market of
the sale and distribution of consumable office supplies to large
B-to-B customers in the United States. The relevant HHIHwould

increase nearly 3,000 points; from 327O to 6265. These HHI

numbers far exceed the,200 point increase and post-merger

vconcentration level of 2500 necessary to entitle Plaintiffs to a

presumption that the merger is illegal. The Court rejects
Defendants' arguments in opposition to Dr. Shapiro’s market
analysis for the reasons discussed in detail in Section IV.F
supra. Nevertheless, to strengthen their prima facie case,

Plaintiffs presented additional evidence of harm, which the

Court analyzes next.

H.Plaintiffs' evidence of additional harm

Sole reliance on HHl.calculations cannot guarantee litigatipn

56

victories. Baker Hughes, 908 F.2d at 992. Plaintiffs therefore
highlight additional evidence, including bidding data (Vbid
data”), ordinary course documents, and fact-witness testimony.
This additional evidence substantiates Plaintiffs"claim that
this merger, if consummated, would result in a lessening of
competition.

Mergers that eliminate head-to-head competition between
close competitors often result in a lessening of competition.
See Merger Guidelines § 6 (“The elimination of competition
between two firms that results from their merger may alone
constftute a substantial lessening of competition.”); see also

Heinz, 246 F.3d at 717-19; Swedish Match, 131 F. Supp. 2d at

169; Staples, 970 F. Supp..at 1083. Plaintiffs’ evidence

,_.

; supports the conclusion that Defendants compete head-to-head for

large B-to-B customers.

1;Bidding Data

Dr. Shapiro analyzed five sets of bid data including:
(1) Defendants’ win-loss data; (2) data on Defendants’ top wins
and top losses; and (3) Fortune 100 bid data. Pls.' FOF 1 109.
Defendants often bid against each other for large B-to-B

contracts. See, e.g., PXO5028 (ODP) at 001 (of five bids for

's RFP, Staples and Office Depot had the best bids);

 

PX05255 (ODP) at 001 (“1t is down to OD and Staples”); PX02167

(Orszag Dep. 173:11-18, 194:23-195:10) (“We do observe in the

57

3 l v :
data that [Staples and Office Depot] are often the last two
bidding against each other for the_- for large customers'as

well.”).

The bid data also shows that Defendants win large B~to-B
customer bids more frequently than other bidders. Hrg Tr.
2334:l0-2l. The B-to-B contract market accounts for
approximately thirty-five percent of Defendants' sales. Compl.

TI 29 and 30. According to Dr. Shapiro, the sale of consumable

office supplies accounts for about percent of

Defendants' B-to-B customer revenues. Shapiro Report at O06.

Staples CEO Mr. Sargent describes the B:to-B contract business
as a “cornerstone” of Staples' business. PX04023 (SPLS) at 005

(“This year, [B-to-B sales] will1account for almost_40% of

company sales . .”); PX O4630 (SPLS) at 007 (for B-to-B,

Staples is the “clear industry leader_and gaining share”)

(emphasis in original). ln fact, seventy-eight percent of Office'_

Depot bid losses are to Staples. PX06500 (Shapiro Demonstrative)
at 048. Similarly, eighty-one percent of Staples' bid losses
were to Office Depot. Id. at 049. Defendants compete
aggressively for the others’ business, exemplified by Staples'

2014 “Operation Take Share,” a campaign that£sought to capture

some of Office Depot’s market share. PX04432 (SPLS) at 003.

58

.'_1`».

2.0rdinary Course Documents
Defendants' own documents created in the'ordinary course of

their business show that Defendants view themselves as the most

viable@office supply vendors for large businesses in the United'

States. See, e.g. PX04082 (SPLS) at 029 (“[T]here are only two
real choices for them. Us or Them.”); PX04042 (SPLS) at 024;
PX053ll (ODP) at 00l. Not surprisingly, Defendants view
themselves as each other's fiercest competition. See, e.g.,
PX04322 (SPLS) at 001 (identifying only Office Depot as “Key
Competitor[]”); PX044l4 (SPLS) at 008 (“For core office supplies
we often compare ourselves to our most direct competitor, ODP”);
PX05229 (ODP) at 149 (stating that Staples is Office Depot's
“[t]oughest and most aggressively priced national competitor.”).
Defendants consistently compete head-to-head with each

other to win large B-to-B contracts. For example, in-early 20l5,
H9G began negotiations with Staples. Hrg Tr. l896:9-l898rl4,
l90l:2-l6. Staples' initial price reduction was retracted until
Office Depot was invited to bid. Id. Pitting Defendants against
each other, HPG received substantial price concessions from

both. Id. In November 20l4, Staples increased its up-front

    
 
 

§ from switching to Office Depot. PX04034 (SPLS) at

rounds of bidding. PX05234 (ODP) at 00l). Ultimately, Office

59

Depot could not meet the six percent core list savings necessary
to win the contract from Staples. Id.
3.Fact Witness Testimony

..Large B-to-B customers view Defendants as their*best option
for nationwide sale and delivery of consumable office supplies.
See e.g. Hrg Tr. 225:25-226:5 (AEP: “Q: And after Office Depot
and Staples, what’s the -- what’s the next best option aftery
that? A: Then we're in trouble. We don’t have a good - I donft
think we have a good option after that.”); l205:l7-20 (Best Buy
“Q: So today Best buy has a contract with Office Depot. Who does
Best Buy consider to be its next best option for general office
supplies and copy paper? A: Staples.”); l938:l4-l939:l8 (HPG
“There's two nationally capable office supply vendors, from‘our
perspective. One is`Staples and one is Depot. And they control,
roughly -- when l say control, they own 80 percent of the market
in terms of revenue.”); 36l:2-215 373:9-l5; 4§2:3-7'(McDonalds’A
noting its consideration of Staples and Office Depot, but
ultimately did not invite Staples to submit an RFP because the
company was able to “recognize immediate savings” by not going
through an expensive bid process.); l0l8:l-l3 (Select Medical, a
company that contracts with Office Depot, testified that it has
concerns about the merger going through because “l believe it’s
important to have that competition to be able to properly

service our national footprint, our national presence, and to

60

one vendor is greater than it would be if it utilized twenty
vendors); Id. at.1617:1-1618:4 (Leo J. Meehan, III, CEO of WB

Mason testifying about the benefits of utilizing one primary

vendor, including lower prices, growth rebates, assistance with

controlling leakage, etc.).

To establish a primary vendor relationship,-companies in
the B-to-B space request proposals from national suppliers like
Staples and Office Depot. See e.g., Hrg Tr. (AEP) 194: 10-
195:16. The request for proposal (“RFP”) process typically

results in a multi-year contract with a primary vendor that

_,}.

guarantees prices for specific items, idcludes an upfront lump-
sum rebate, and a host of other services. Pls.' Proposed
Findings of Fact and Conclusions of Law (“Pls§Y FOF”) TI 41-46.
Because the office supplies consumed by large companiesEare
voluminous, such companies typically pay only half the price for
basic supplies as compared to the average retail consumer.
Plaintiffs’ E§hibit (“PX”) 06100, Pls.' EXpert Dr. Carl

Shapiro's Report (“Shapiro Report”) at 019.5

;¢__= _,=_

5 Dr. Shapiro, Plaintiffs' expert economist, is a Professor of
Business Strategy at the Haas School of Business at the
University of California at Berkeley. Shapiro Expert Report
(“Shapiro Report”), PXO6l0O~OO3. In addition to teaching, Dr.
Shapiro has served in government in various capacities during
his professional career, including as a member of the
President’s Council of Economic Advisers from 2011 to 2012, and
as an advisor at the Department of Justice from'l995 to 1996 and
again from 2009 to 2011. Id. Dr. Shapiro testifies for
Plaintiffs and Defendants in antitrust matters. Id.

7

also be able to provide the best possible pricing.”). This
testimony shows that absent Office Depot, large B-to+B customers
would lose tremendous leverage and likely have to pay higher
prices for consumable office supplies. Shapiro Report at 069-lO.
This additional evidence strengthens Plaintiffs’ claim Ehat
harm will result in the form of loss of competition if Staples
is permitted to acquire Office Depot.
I.Defendants' response to Plaintiffs’ prima facie case
Defendants’ sole argument in response to Plaintiffs’ prima
facie case is that the merger will not have anti-competitive
effects because Amazon Business, as well as the existing
patchwork of local and regional office supply companies, will
expand and provide large B-to-B customers with competitive
alternatives to the merged entity. Defs.’ FOF TT l32-203.

Plaintiffs argue that there is no evidence that Amazon or

f o.

existing regional players will expand in a timely and sufficien€
manner so as to eliminate the anticompetitive harm that will
result from the merger. PlsJ“ FOF IT l52-207. For the reasons
discussed below, Defendants’ argument that Amazon Business and
other local and regional office supply companies will restore
the competition lost from Office Depot is inadequate as a matter

.’_.

of law.

“The prospect of entry into the relevant market will

alleviate concerns about adverse competitive effects only if

61

such entry will deter or counteract any competitive effects of
concern so the merger will not substantially harm oustomers.”
Merger Guidelines § 9. Even in highly concentrated markets,
Plaintiffs"prima facie case may be rebutted if'there is ease of
entry or expansion such that other firms would be able to
counter any discriminatory pricing practices. Cardinal Health,
12 F. Supp. 2d at 54-55. Defendants carry the burden of showing
that the entry or expansion of competitors will be “timely,
likely and sufficient in its magnitude, character, and scope to
deter or counteract the competitive effects of concern.” H&R

Block, 833 F. Supp. 2d at i3. The relevant time frame for

.consideration in this forward looking exercise is two to three

years. Hrg Tr. 2660-2662 (Dr. Shapiro confirming that two to_
three years is the relevant temporal scope for the %ourt to
consider the effects of new entrants or expansion of existing
competitors).

1.Amazon_Business

Defendants seize on Amazon’s lofty vision for Amazon
Business to be the “preferred marketplace for all professional,
business and institutional customers worldwide” to support their
contention that Amazon not only wants to take over the office
supply industry, but desires to “take over the world.” Hrg Tr.
3010 (Ms. Sullivan's Closing Argument). Amazon Business may

eventually transform the B-toeB office supply space. See e.g.

62

 

f.

DX05284 at 43 (Mr. Wilson's 2016 presentation in Baltimore:
`“It's still Day One.” Amazon Business_plans to “improve"with:
more selection; an increasing number of produce and business
products [sic]; better personalizationp_a purchasing experience
even better tailored for businesses.”); Hrg Tr. 2662: 9-l4. The
Court’s unenviable task is to assess the likelihood that Amazon
Business will, within the next three years, replace the
competition lost from Office Depot in the B-to-B space as a
result of the proposed merger.

.Amazon Business has a number of impressive strengths. For
example, Amazon Business already enjoys great brand recognitibn
and its consumer marketplace has a reputation as user-friendly,
innovative and reliable. Amazon Business' strategy documents
also reveal a number df priorities that, if successful, may

revolutionize office supply procurement for large companies. For

 _"_ Dx05033 at 4a 

63

ip among other innovative technologies. Hrg lr.

 

o67:2§;568:2; 7f§:l1-25;'744:l-23a

However, several significant institutional and structural
challenges face Amazon Business. Plaintiffs point to a long list
of what they view as Amazon Business’ deficiencies, including,

but not limited to: (l) lack of RFP experience; (2) no

\" _ ' _:__

(3) lack of ability to control third-party price and delivery;
(4) inability to provide customer-specific pricing; (5) a lack
of dedicated customer service agents dedicated to the B-to-B
space; (6) no desktop deliveryf (7) no proven ability to provide
detailed utilization and invoice reports; and (8) lack of
product variety and breadth. Pls.' FOF I 19l. although Amazon
Business may successfully address some of these alleged

weaknesses in the short term, the evidence produced during the

-`¥~`

'evidentiary hearing does not support the conclusion that Amazon
Business will be in a position to restore competition lost by

the proposed merger within three years.
First, despite entering the office supply business fourteen

years ago, large B-to-B customers still do not view Amazon

Business as a viable alternative to Staples and Office Depot.

 

Business’ participation in RFPs has been Klimited.” Hrg Tr.
546:18-547:4;`see also l943:l4-l947:9 (HPG)(noting that HPG’s
membership and advisory board would require proof of Amazon
Business’ demonstrated success in serving large B-to-B customers
before considering Amazon Business as a primary vendor).
Signficantly, Amazon Business also has yet to successfully bid
to be a large B-to-B customer's primary vendor. Hrg Tr. 55l:1l-
l3;_see also Hrg Tr. 206-207 (AEP)(testifying that Amazon

Business did not have all services required to be its primary

vendor when it was considered by AEP in 2015). When Amazon

 

Id. 55l:ll-552:5; 85l:2l-852:8; McDevitt Dep.

 

186:6-1|__6. (Amazon's prices to - were E% higher than lowest

`bid).

The Court has considered whether Amazon Business’ newly
energized focus on the B-to-B space could transform the office'
supply industry for B-to-B customers in such a dramatic way that
the RFP process may be “what dinosaurs do” in the future. Hrg
Tr. 2693:l9-2694:9 (Ms. Sullivan’s cross of Dr. Shapiro: “You
know Dr. Shapiro, [Amazon Business] intends to make the RFP
process obsolete.). However, during Mr. Wilson's depositiod, he
testified that Amazon Business does not seek to change the RFP

pr@céSS. Px02125 . During cross-

!:_
¢

examination, Defendahts addressed this point with Mr. Wilson
directly:

Ms. Sullivan: And anybody that's been watching what's
been going on in the world understands that the way
the old companies are doing things, running around,“
trying to get RFPs and a contract is kind of the old
world. The new world is going to be procurement
officers sitting at their desks using platforms like
the one you're developing?

Mr. Wilson: I don't know -- I mean, that's maybe one
vision of what may happen. We'll see how the
technology sort of evolves and where things land.

Ms. Sullivan: But that's your plan, that that's going
to be the new world? ‘

Mr. Wilson: Well, our plan is to bring.Amazon Business

shopping experience to customers. And we would like

for them to be able to -- to leverage it, and we would

like to create a solution that they like.
Hrg Tr. 692:ll-25. Mr. Wilson's testimony does not support
the conclusion that Amazon Business seeks to make the RFP
process obsolete. Defendants did not offer testimony from
other'industr; experts or offer any other credible evidence “
that the RFP process will become obsolete within the next
three years. The evidence before the Court simply does not
support a finding that Amazon Business will, within the
next three years, either compete for large RFPs in the same
way that Office Depot does now, or so transform the
industry as to make the RFP process obsolete.

Second, Amazon Business' marketplace model is at odds with

the large B-to-B industry. Similar to Amazon’s consumer

66

warketplace, half of all sales on Amazon Business are servFbed

by Amazon"directly, while the other half are serviced by third-”_
party sellers. Hrg Tr. 552. Amazon does not control the price or
delivery offered by third-party sellers. Id. 8A§:l4:-Mr. Wilson.“
confirmed that this will not change. Id. 843: 7-9 (“Q: You have
no plans to force the third parties to offer particular prices?

§: No, we'll never do that. No.”). Amazon Business’ lack of_

. control over the price offered by third-party sellers

contributes to Amazon éusiness' inability to offer guaranteed

pricing. Mr. Wilson also testified that Amazon Business will not

“8'219=9-12 
c v c 

  
 
  

____ T::__ _Pg guaranteed pricing is

  

these features, which are fundamental to the current office

supply industry for large B-to-B customers, the record is devoid
of evidence to support the proposition that large business would

shift their entire office supply spend to Amazon Business in the

next three years.

Finally, although Amazon Business' 2020 revenue projection

iii

is an impressive1| k percent of that"

 

is forecast to come from the sale of office supplies; Hrq Tr.
856:5-l6j PX 06J00 (Shapiro Reply) at O28, This level of revenue
for office supplies would give Amazon Business only a very small
share in the relevant market. Shapiro Hrg Tr; 2432:ll-l9;

2436:l5-l9 (Dr. Shapiro: “So, in the end, no, l don't think over

the next two years or so that they will - are likely to step in

and provide sufficient additional competition to protect large

  

 ` ` r . ` .
launch oft lis uncertain

 park D@P~
-- - |-'-‘- _ 1 -_ - ::_

 

At the conclusion of Mr. Wilson’s testimony, the Court

 

 

1 . _ |H

Id. at"`:859=22-23; simiia§riy, during

68

 
   

l
 
en

   

Mr. Wilson's testimony about Amazon Business' ability to compete
|

for RFPs, the Court engaged in this exchange:

THE COURT: So, if one wer§ to predict -- if a vice
president were to predict five years from now, you'd be
fin a much better position to respond}_just predicting?'_

THE WITNESS: That's our point, yes.

THE COURT: Right. And that -- the strength of that
prediction is based upon what?

- THE WITNESS: Investment in resources.

THE COURT: Right. And that's something that, I guess
from a business point of view, you plan to do?

THE WITNESS: l plan to request the resources.

THE CO@RT: Right. Because you want to be as successful
as you possibly can and compete, right?

THE WITNESS: Absolutely.
Hrg Tr. 553:l-l7.

Critically, howeVer, when the Court asked whether Mr.

 

This answer, considered in light of Amazon Business' lack of

demonstrated ability to compete for RFPs and the structural and
institutional challenges-of its marketplace model, leads the
Court to conclude that Amazon Business will not be in a position
to compete in the B-to-B space on par with the proposed merged

entity within three years. Just as it would be “pure

69

!-`£rz__\_

speculationb for an Amazon Business employee to give a date

 

sheer speculation, based on the evidence, for the Court to

conclude otherwise. If Amazon Business was more developed and

 

may have been different.M

2.WB Mason and other competitors
Brief discussion is necessary with regard to the ability of
existing;competitors to fill the competition gap that would be
left in the wake of this merger. WB Mason is the third largest
office supply company in_the U.S., but is a distant third behind

Defendants, retaining less than one percent_market share in the

relevant market. PXO302l (WB Mason Decl.) L 6. WB Mason has nine

customers in the Fortune lOOO. Hrg Tr. 16ll:2l-l6llt24. WB mason

and other regional and local office supply vendors are at a

 

M Throughout the hearing Defendants argued that the FTC’s
declaration drafting process, especially as it pertained to Mr@
Wilson, was “wrong.” Hrg Tr. 30l6:ll-l4. As is routine in
antitrust cases, the FTC began drafting declarations based on
the interviews that were conducted. The companies and the FTC
then engaged in a back-and-forth process of edits. Some
companies found the FTC’s drafts to be accurate, others, like
Amazon, sought significant edits. Although the Court expressed
its concern about this process at various times during the
hearing, no evidence of an improper motive on the part of the
FTC-was ever presented. Hrg Tr. 30l6?30l8. v

70

j .

B. Defendants Staples and Office pepot
' Established as big-box retail stores in the l980s,

Defendants are the primary B-to-B office supply vendors in the
United States today. Hrg Tr. 59.JPlaintiffs allege that'
Defendants sell and distribute upwards of seventy-nine percent
of office supplies in the B-to-B space. Hrg Tr. 20-2l. Since the
2013 merger of Office Depot and Office Max, Defendants
consistently engage in head-to-head competition with each other
for B-to-B contractsZ See, e.g., PX04322 Staples (“SPLS”)
001 (identifying only Office Depot as “Key Competitor[]”).

Staples and Office Depot are publicly traded corporations.
Compl. IL 29 and 30. Staples is the largest office supplier of

consumable office supplies to large B-to-B customers in the

United States and-operates in three business segments:-(l) North

American stores and online sales; (2) North American commercial;
and (3)qinternational ope§ationsKFId. I 29. fn fiscal year 20l4,
Staples generated $22@5 billion in sales, with more than half of
all sales coming from office supplies. Id. In fiscal year 20l3,

34.8 percent of Staples' total revenue came from the North

American commercial segment. Id.

Office Depot is the second largest office supplier of
consumable office supplies to large B-to-B customers in the
Unites States. Id. I 30. Like Staples, Office Depot operates in

similar businéss segments: (l) North America retail; (2) North

jo

competitive disadvantage because they do not have the resources
to serve large customers nationwide."Id. at 160l: 3-8, l687:l3-
22, l697:2-8. Although WB Mason is confident in its ability to
compete'with Staples,in Masonville, it,does not bid on largeJ
RFPs outside of Masonville. Hrg Tr. (Meehan “We'll respond to
RFPs that are inside of Masonville, that are headquartered in
Masonville, that the majority of the business is inside of
Masonville.”).

lt is significant that WB Mason does not have the desire
or the ability to compete with the merged entity outside of
Masonvflle. Pls.’ FOF IF4h. As WB Mason's EEO Mr. Meehan
testified, “we don't have any plans to expand [outside of

Masonville] . . . We’re going to focus on Masonville.” Hrg Tr.

Meehan, l67l. After establishing that it would take

'for WB Mason to expand nationwide, the Court asked Mr.
_ ___-_--' '.'a .;3-. _

Meehan “If [§efendants] gave you :

 

.§ would you accept

 

it to be competitive with them?” He answered “I don't know if 1
would. That's a big challenge. I mean, that's if I even want to

¢ .

do this, right? Become this. I - no, I would definitely think
about it, Your Honor.” Id. l790.

Like WB Mason, other regional and local office'supply
companies also face the structural disadvantage of purchasing
from wholesalers instead of manufacturers. Id. Hrg ?r. l584:23-

lo85:2. This means their costs are higher than those of'

71

11
;-

DefendantsM Further, because their overall volumes are lower,,

1 they cannot offer the deep discounts that Defendants are able to

offer. Pls.’ FOF T l68. There was simply no other evidence

:dpresented during the hearing that supports DefendantsQ assertion

that utilizing a collection of regional or local office supply
companies would meet the needs of large B-to-B customers.
J.Wéighing the Equities

Although Plaintiffs are entitled to a presumption in favor
of injunctive relief for the reasons discussed, Section l3(b);s
“public interest” standard still requires the Court to weigh the
public and private equities of enjoining Xhe merger. Heinz,'246
F. 3d at 726. The public interests to be considered include: (l)
the public interestJin effectively enforcing antitrust laws; and
(2) the public interest in ensuring that the FTC has the ability
to order effective relief if it succeeds at the merits trial.
lSee e.g. Sysco, 113 F. Supp. 3d at 8o. Both factors weigh in
favor of granting Plaintiffs' Motion for Preliminary Injunction.

First, the “principle public equity weighing in favor of
issuance of preliminary injunctive relief is the public interest
in the effective enforcement of the antitrust laws.” Swedish
Match, l3l F. Supp. 2d at l73. Because the law is clear that

this merger is likely to lessen competition in the relevant

market, it is in the public’s interest for the merger to be

"'enjoined. Second, preserving the FTC’s ability to order

72

effective relief after the administrative hearing also weighs in
favor of enjoining the proposed merger. As discussed at some
length during the parties' summations, it is “impossible to
recreate pre-merger competition”’if the parties arejallowed to
merge pending the administrative hearing. Sysco, ll3 F. Supp. 3d
at 87 (quoting Swedish Match, l3l F. Supp. 2d at l73); see also
Hrg Tr. (Ms. Reinhart: “There's no doubt about it, the eggs
would be scrambled. Once that happens, it's very difficult to
get the companies apart.”). Thus, the second public interest
consideration also weighs in favor of enjoining the merger.

Defendants argue that the equities favor allowing the
merger to proceed because “it is undisputed that the
overwhelming majority £more than 99%) of B2B_pustomers and all -
retail customers will benefit-or at least not be harmed-from
this merger.” Defs.’ FOF I 297. This argument is the same as
Defendants' argument in opposition to Plaintiffs' alleged
relevant market, for which Defendants cite no persuasive
authority. The Court rejects the argument for the same reasons
discussed in Section IV.C.2. supra.

Because Defendants have not made a showing of public
equities that favor allowing the merger to proceed immediately,
the Court should go no further because “[w]hen the Commission
demonstrates a likelihood of ultimate success, a counter showing

of private equities alone [does] not suffice to justify denial

of-a preliminary injunction barring the merger.” F.T.C. v: Whole
Fbods Mkt., 1nc., 548 F.3d 1028, 1050 (D.C. Cir. §008) (quoting
FTC v. Weyerhaeuser, 665 F.2d 1071, 1083 (D.C. Cir. 1981). 3

V. Conclusion . 4

As Judge Mehta observed in Sysco, “There can be little doubt
that the acquisition of the second largest firm in the market by
the largest firm in the market will tend to harm competition in
that market.” 113 F. Supp. 3d at 88 (quoting J. Tatel in Whole
Fo0ds, 548 F.3d at 1043). The Court concludes that Plaintiffs

have met their burden of showing by a “reasonable probability”

'that Staples’ acquisition of Office Depot would lessen`

competition in the sale and distribution of consumable office
supplies in the large B-to-B market in the United States. The
evidence'offered.by Defendants to rebut Plaintiffs’ showing of
likely harm was inadequate as a matter of law. Plaintiffs have
therefore carried their ultimatedburden of showing that they`are

likely to succeed in proving, after a full administrative

hearing on the merits, that the proposed merger “may be

_=_ _

5 Defendants bear the burden of showing that any proposed remedy
would negate any anticompetitive effects of the merger and that
their claimed efficiencies are: (1) merger specific; and (2)
reasonably verifiable by an independent party. H&R Block, 833 F.
Supp. 2d at 89. Because Defendants rested at the close of
Plaintiffs' case-in-chief and called no witnesses to support
their arguments related to remedies or;efficiencies, they&have
not met their burden. ' '

74

~.l

 

 

 

75

 

 

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¢

American business solutions; and (3) an international division.
Id. In fiscal year 20l4, Office Depot made $l6.l billion in
revenue, with nearly half of those sales coming from office
supplies and 37.4 percent of overall sales from'B-to-B business.
Id.

Staples' “commercial” and Office Depot’s “business
solutions” segments focus on the B-to-B contracts at issue in
this case. While both companies serve businesses of all sizes,
this case focuses on large B-to-B customers, defined by
Plaintiffs as those that spend $500,000 br more per year on
office supplfes. Hrg Tr. 30:4-61 Approximately l2bO corporations
in the United States are included in this alleged relevant
market. Hrg Tr. 2473:l7+l8.

C.FTC Invéstigation

On February 4, 20l5, Defendants entered into a merger
agreement in which Staples would acquire Office Depot for a
combination of cash and Staples' stock. Compl. I 32. Shortly
after the merger was announced, the FTC launched an
investigation into the competitive effects of the proposed
merger. Defs.’ FOF T 58. Ultimately, the FTC commissioners filed
an administrative complaint before an FTC Administrative Law
Judge (“ALJ”) and also authorized the Plaintiffs to seek a

preliminary injunction to prevent the Defendants from

E: _ .. . ,_.

consummating the merger to maintain the status quo pending a

¢

full hearing on the merits. Compl. I 34. Plaintiffs filed this

‘suit the same day; Pls.f Mot. Prelim. Inj,

D.Regional and local vendors

Regional andvlocalJoffice supply vendors exist throughdut

the country. Hrg Tr. 84:2. However, they typically do not bid

for large B-to-B contracts. Hrg Tr. 907:7-14 (James Moise,

Senior Vice President and Chief Sourcing Officer for Fifth Third

Bank testifying that regional suppliers Office Essentials and WB

Mason declined to bid on their RFP); Hrg Tr. l94l:l8-20 (Leonard

¢ .

Allen Wright, Vice President of Strategic Sourcing for Health

Trust Purchasing Group (“HPG&) noting that neither WB Mason nor

MyOfficeProducts could meet HPG's needs nationwide). When

regional office supply vendors_compete for large4RFPs, they are

rarely awarded the contract. PX02l38 (Sears (RealOqY) DepF

15-2l, l9l:6-l7) (“.

_/r)

ability to service the entire country

l56:

I was concerned about [WB Mason’s]

WB Mason is a regional supplier that targets its business

to thirteen northeastern states plus the District of Columbia

(known in the industry as “Masonville”). Id. WB Mason “ranks a

distant third” behind Staples and Office Depot. PXO302l-O02,

Meehan Decl. T 6. ln fiscal year 20l5, WB Mason generated
approximately $l.4 billion in total revenue. Id. WB Mason

customers in the Fortune 100 and only nine in the Fortune

':Hrg Tr. l6ll:21-1éll:24: According to WB Mason's CEO, Leo

10

has no

1000.