Staples Legal Strategy Backfired in U.S. Office Depot Trialby and
Companies’ failure to defend deal fueled court win for FTC
Judge outlines his rationale for blocking office-supply merger
Staples Inc.’s bid to defeat a U.S. antitrust lawsuit against its planned takeover of rival Office Depot Inc. was undermined by its own legal strategy, according to the judge who blocked the merger last week.
In a 75-page opinion made public Tuesday, U.S. District Judge Emmet Sullivan in Washington called out the office-supply companies for failing to put up a defense of their $6.3 billion deal. Because their legal teams made the surprise move to rest their case during the trial without calling witnesses, they didn’t overcome the government’s arguments that the merger would harm competition, he said.
The evidence offered by the companies “was inadequate as a matter of law,” the judge wrote.
The ruling, the latest in a string of successful government efforts to block big takeovers, suggests that a loss by Staples and Office Depot may not have been inevitable. It delivered a critique of Staples’ legal strategy, serving as a warning to other companies facing down government antitrust officials.
In the trial, the Federal Trade Commission argued that the merger between the nation’s No. 1 and No. 2 office suppliers would harm competition in the office-supply business because Amazon Business, a unit of Amazon.com Inc. that sells office supplies to companies, wasn’t ready to compete. After Sullivan spent much of the trial picking at the government’s case, Staples elected not to present its own evidence -- saying instead that the government had failed to meet its burden.
‘Rolling the Dice’
“They were really rolling the dice with that decision and it did clearly backfire,” said Seth Bloom, an antitrust lawyer at Bloom Strategic Counsel in Washington.
Staples and Office Depot spokesmen didn’t respond to requests for comment. Matt Reilly, a lawyer at Simpson Thatcher & Bartlett LLP who represented Office Depot, declined to comment. Diane Sullivan at Weil Gotshal & Manges LLP, who represented Staples, didn’t respond to a request for comment.
Sullivan last week blocked the acquisition, keeping his reasoning secret until the companies redacted confidential business information from the opinion. His three-page order, which prevented the companies from merging pending a full-blown trial at the FTC’s administrative court, prompted Office Depot and Staples to announce they were calling off the deal. The companies previously had said the merger wouldn’t survive a drawn-out administrative process.
The FTC claimed the combination would have eliminated intense competition between the companies in supplying pens and paper to corporate clients, leading to higher prices. Staples and Office Depot argued Amazon was transforming the market and would easily fill the void left by Office Depot.
Sullivan rejected that argument. Amazon Business isn’t a viable alternative to Staples and Office Depot for corporate customers and won’t be for three years, he said.
“The evidence presented during the hearing fell short of establishing that Amazon Business is likely to restore lost competition,” Sullivan said. If Amazon Business was more developed “the outcome of this case very well may have been different.”
Shares of both companies have tumbled since the merger was rejected last week. That leaves the retailers trying to manage declining businesses with cost-cutting and online investments. Office Depot said it has hired Bain & Co. to explore alternatives to the merger.
Staples on Wednesday showed some progress, reporting profit and sales that topped analysts’ estimates. Earnings were 17 cents a share, beating analysts’ average projection of 16 cents. And while revenue fell 3.1 percent to $5.1 billion, that surpassed the $5.08 billion average estimate.
The case is Federal Trade Commission v. Staples Inc., 15-cv-2115, U.S. District Court, District of Columbia (Washington).