H&R Block Antitrust Loss Is Win for U.S. Ahead of AT&T Trial

H&R Block Inc. (HRB)’s decision to abandon its acquisition of the maker of TaxAct products is a victory for the U.S. Justice Department as it prepares for a trial to stop AT&T Inc.’s purchase of T-Mobile USA Inc.

H&R Block, in a filing with the Securities and Exchange Commission, said today it has ended its proposed $287.5 million purchase of closely held 2SS Holdings Inc. The decision followed U.S. District Judge Beryl Howell’s Oct. 31 ruling that the merger violates antitrust laws.

“It’s a complete victory for the Justice Department and one that AT&T has to notice,” said Jeffrey S. Jacobovitz, an antitrust litigator with McCarthy, Sweeney & Harkaway PC in Washington.

Howell’s ruling is a signal to AT&T that the government “can muster up the strength to prevail in this kind of case, Jacobovitz said.

The judge said company documents, testimony and other evidence showed that TaxAct’s competition “constrained” H&R Block’s prices, and combining the companies would probably cause prices to rise “to the detriment of the American taxpayer.”

The H&R Block case marked the first time in seven years the Justice Department has gone to trial since failing in 2004 to stop Oracle Corp. (ORCL)’s $8.4 billion purchase of PeopleSoft Inc., according to department data. The government’s case against AT&T is scheduled for a trial of four to six weeks beginning Feb. 13.

H&R Block Reaction

“While we are obviously disappointed with the decision handed down by the court, we will not appeal,” Gene King, an H&R Block spokesman, said in an e-mail. “Instead, we will put this behind us and focus on continuing to serve clients in our retail and digital channels.”

The company doesn’t expect any termination penalties, it said in the SEC filing.

Howell’s 86-page opinion -- while not as binding as a decision by the U.S. Court of Appeals for the District of Columbia -- will probably still be considered by the judge overseeing the government’s case against AT&T because some of the antitrust issues are similar and the ruling is fresh, Jacobovitz said.

The TaxAct transaction, announced in October 2010, would have left Kansas City, Missouri-based H&R Block and Intuit Inc. (INTU), whose TurboTax product is the most widely used digital and on- line software for tax preparation, as the two dominant companies in the market, the judge wrote.

Price Effect

That could have led to higher prices due to the loss of competition and possible collusion to fix prices, she ruled.

Howell said Internal Revenue Service data showed H&R Block, Intuit, and TaxAct products accounted for about 90 percent of digital do-it-yourself federal returns filed in tax season 2010.

The judge rejected H&R Block’s argument that it was not a “close competitor” to TaxAct because they operated in separate “value and premium” segments of the market.

“TaxACT competes with capital-rich HRB and Intuit by offering high-quality products at substantially lower prices,” Howell said in her ruling.

The Justice Department sued to block AT&T’s $39 billion takeover of T-Mobile Aug. 31, alleging the transaction would “substantially reduce competition” and lead to higher prices and “an enhanced risk of anticompetitive coordination” by the remaining national players, including the industry’s leader, Verizon Wireless, owned by Verizon Communications Inc. and Vodafone Group Plc.

Same Argument

AT&T will have to defend itself from the same argument in its case, Allen P. Grunes, an antitrust lawyer at Brownstein Hyatt Farber Schreck LLP in Washington, said in an e-mail.

While T-Mobile, the fourth largest wireless carrier, may be closer in size to the industry’s No. 3 Sprint Nextel Corp., it still competes directly with AT&T, Grunes said. The attorney represents Dish Network Corp., which opposes the merger.

If the transaction is approved, the combination of AT&T and T-Mobile will create the new wireless market leader. Together, AT&T and Verizon control 80 percent of profits in the market, according to the Federal Communications Commission’s annual wireless report, published June 27.

“There appears to be a real dispute between the government and AT&T over the level of competitive interaction between AT&T and T-Mobile,” Grunes said. “The government alleges that there is a significant amount of switching by customers between AT&T and T-Mobile. AT&T, at least in its public statements, seems to regard its customers and T-Mobile customers as completely distinct and different.

Different Industries

Wayne Watts, AT&T’s general counsel, said in a statement that the H&R Block case “has nothing in common” with AT&T’s.

“It involves a different industry, a different market, and a different competitive landscape,” Watts said. “The hyper- competitive wireless industry and the enormous network efficiencies and consumer benefits that result from our merger distinguish our case from any other.”

Justice Department lawyer Joseph Wayland, who handled the H&R Block trial, is also leading the government’s case against the AT&T deal. Wayland, deputy head of the Antitrust Division, joined the government last year from Simpson Thacher & Bartlett LLP in New York.

The next hearing in the case will be on Nov. 30.

The H&R Block case is U.S. v. H&R Block, 1:11-cv-00948, and the AT&T case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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