The Obama administration’s first litigated merger challenge and its lasting impact on antitrust enforcement
It was around half past six on the evening of 31 October 2011: Halloween night. Members of the US Department of Justice trial team were sitting in a conference room on the seventh floor of the Liberty Square Building in downtown Washington, DC, poring over copies of the court’s opinion. Everyone was sipping champagne out of Dixie cups.
Forty minutes earlier, a law clerk for Judge Beryl Howell called to say that the judge had issued an order granting the United States’ request for a permanent injunction preventing H&R Block from acquiring TaxAct – the first litigated civil merger victory for the Antitrust Division in almost a decade. The clerk also informed us that the court had issued an opinion under seal, which we were free to pick up at the courthouse if we could get there before it closed. Tony Scicchitano, a key member of the trial team, who was in better physical shape than most of us, volunteered to run over and grab the decision. He was still catching his breath as the rest of us flipped through the 86 pages of opinion with excitement, pointing out sentences we found interesting or important.
We discussed the portion analysing the question of whether TaxAct was a “maverick”, an issue we had focused on in our post-trial pleadings. We also talked about the court’s analysis of whether other tax-preparation companies were likely to enter the market. At some point, someone asked: “Is there really nothing in here about hybrids?” In the context of the merger challenge, hybrids referred to products that blend traditional tax-preparation services with online offerings – a focus of the companies’ attempt to fend off our lawsuit and save their merger. Buried in the discussion of market definition one of us found the following words: “Based on the evidence presented at the hearing, however, it would be premature for the court to identify any trend towards hybrid products . . . The court finds it unlikely that there will be a sufficiently large-scale shift into these products” to undo the government’s arguments that the deal would ultimately hurt American taxpayers.
“Is that really it?” I asked with a tinge of disbelief, but before I could get a definitive answer, the conversation had drifted in another direction. We continued to read over the opinion for a few minutes more before taking our celebration to Bar Louie for beers and tater tots.
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To those who did not attend the trial in US v H&R Block, the court’s few sentences regarding hybrid products most likely went unnoticed. However, among those who were in the courtroom daily, the significance was obvious. Hybrid products were the major topic of the second half of the entire trial. Had the court determined that the growth of such products affected the proper market definition in the case, in all likelihood the outcome would have changed. Not only would that have halted the division’s much-publicised winning streak before it began, but also a loss on that basis might have affected numerous subsequent investigations and merger challenges during the Obama administration.
The entire discussion of hybrid products seemed to come out of nowhere. In plotting out the government’s case-in-chief, we knew there were potential pitfalls. For starters, virtually every witness we intended to call was either a current or former executive of H&R Block or TaxAct, both of which wanted the deal to go through. Accordingly, the bulk of our direct examinations would involve adverse direct questioning. That meant that Robby Robertson, our experienced opposing counsel from Hogan Lovells, would get many of his key trial themes introduced into evidence during our case as part of friendly cross-examinations. Further, we were concerned that we had decided to present our case without any customer testimony. As a result, we were asking the court to block the H&R Block/TaxAct deal without the benefit of any fact witness to testify about concerns over the transaction or harm that would ensue. And, of course, we were concerned about our economic expert testimony.
Over the previous 11 months, DOJ economists had analysed terabytes of data, including anonymised data from the IRS and documents, to understand what types of tax-preparation products people choose between and why they switch from one to another. This was done to help us define the relevant product market at issue in the merger. Even though the recently revised Horizontal Merger Guidelines de-emphasised the need to define a relevant product market during an investigation, we knew that if the matter went to court we would have to present and defend our position on the relevant market.
Our team had concluded early on that there was a distinct market for the digital tax-preparation products, used annually by approximately 35 million taxpayers to fill out and file their tax returns by themselves. While the government never wavered from that position, the target we were aiming for did change drastically. Initially, during the DOJ’s investigation, the parties had presented the idea that TaxAct was part of a “value market” for digital do-it-yourself (DDIY) tax-preparation products, while H&R Block was part of a distinct DDIY “premium market”. According to the parties, even though the two companies’ products did the same thing, they served different segments of the marketplace and hence were not substitutes – the same way that people do not really choose between purchasing a Kia and a Rolls-Royce even though both are cars that get you from A to B.
The argument, therefore, was that H&R Block’s acquisition of TaxAct was an acquisition of a complementary – rather than a competitive – product. Faced with this argument, the investigative depositions and economic work all focused on whether H&R Block and TaxAct competed with one another. The government uncovered a significant amount of evidence about consumers switching between H&R Block’s and TaxAct’s DDIY products. We also found that the companies viewed one another as rivals, and tracked each other’s offerings and performance. By the time the division’s investigation was complete, the team had amassed a wealth of evidence establishing that H&R Block and TaxAct were close competitors.
Ultimately, the team may have made too convincing a case. Once the government filed its complaint, the parties shifted strategy and began arguing that while, yes, H&R Block and TaxAct’s DDIY products did indeed compete with one another, they also competed with other forms of tax preparation, including people who fill out their forms using pen and paper, as well as assisted tax-preparation products, such as going to an accountant or a bricks-and-mortar, tax-preparation company. In other words, far from there being separate value and premium DDIY tax-preparation markets, there was not even a DDIY tax-preparation market, the companies argued – just an overall tax-preparation product market that includes all of the products and methods used by the 140 million taxpayers to do their taxes. Accordingly, the combination of the companies’ DDIY products was insignificant and would not affect the prices most consumers would pay to file and complete their tax returns. Much of the evidence and work that had gone into proving that H&R Block and TaxAct competed with one another became beside the point. More problematically, it meant that staff had to start over since the investigation had never focused on whether other types of products beyond DDIY should be included in the relevant market.
Typically, when the division challenges a transaction it has only three to four months between the date it files its lawsuit and the first day of trial. That period is always a mad dash. That was especially true in the H&R Block case as, during those approximately 100 days, staff had to come up with evidence to discredit the new definition of the tax-preparation market. The documents subpoenaed and deposition testimony elicited all spoke to a previously unexplored issue: whether people sufficiently chose between DDIY products and other forms of tax preparation for them all to be considered in the same relevant product market. Building that evidence during discovery was harrowing, but sitting in Judge Howell’s courtroom at the end of the first week of trial, it began to look as if it had all paid off.
During that first week we established with each witness that H&R Block viewed its DDIY, tax-preparation software and bricks-and-mortar businesses as separate products that did not compete with one another. We even pointed to a lawsuit H&R Block had brought against Intuit, the maker of TurboTax, alleging that Intuit had engaged in false advertising by claiming that DDIY products could offer the same experience as assisted products, like H&R Block’s core business. Moreover, Joe Wayland, head of our trial team, grilled TaxAct’s chief executive until he all but acknowledged that his company never viewed itself as competing with assisted products or any other non-DDIY forms of tax preparation.
Overall, up to that point we were convinced we were winning. The week, and our case-in-chief, were to culminate with the testimony of our economic expert, Dr Rick Warren-Boulton, whose job it was to sum up all the evidence that had been heard up to that point and present it to the court in a straightforward, digestible manner. To our delight, Warren-Bouton had done just that, and had also held up well against Robertson’s tough cross-examination.
There were only a few minutes left in the day when we began Warren-Boulton’s redirect examination. In an effort to diffuse a few of the points the defendants had scored during cross-examination, Wayland walked Warren-Boulton through a couple of documents. As he testified about the rapid growth he had observed in DDIY tax preparation, Judge Howell interrupted, commenting that the tax-preparation market “seems like a very dynamic marketplace” that had evolved to include hybrid products that were blurring the lines of “clear demarcation between assisted and DDIY”. The court continued, stating that “the relevant market, as it was even in tax season , may be changing in tax season  and .” While those of us on the DOJ side of the courtroom sat frozen, Warren-Boulton responded by providing a detailed explanation as to why he did not believe the growth of such products was a concern for product definition purposes. His retort analogised to both the difference between buying a steak to cook at home versus ordering one in a restaurant, and the quintessential, hypothetical merger between Coke and Pepsi. His answer seemed to satisfy the court for the time being, but we knew our case was in trouble. We had to dispel any notion that hybrid products were either successful or the wave of the future.
After court ended that day, we headed back to the office and called an emergency meeting. We huddled in a conference room – the same conference room in which we would celebrate when we read the court’s decision. Those not in the courtroom that afternoon were trying to find out what had sent everyone into such a sullen mood. Those who had been there were trying to make sense of what had happened and decide how bad it was. After debriefing, I believed there was a chance we’d lose.
Prior to the judge’s question to Warren-Boulton, the word “hybrid” had barely been uttered. The only references to H&R Block’s hybrid product, known as Best of Both, were in the context of listing the company’s offerings. Never had the merging parties articulated that H&R Block’s hybrid product was particularly successful or significant to their future plans. And, certainly, they had not suggested the industry was moving in that direction for product market definition purposes. But we knew that from that moment forward, the trial would hinge on these hybrid products.
The plan then was simple. We needed to find every email, analysis and piece of data regarding hybrid products among the more than 1 million pages produced between the investigation and litigation, and have them ready to use by the time court resumed on Monday morning. Working around the clock that weekend, a team of DOJ lawyers pored over the entire record, from the first documents produced by the parties to every last investigative and litigation deposition transcript and piece of data. What they uncovered was document after document showing that, despite multiple efforts over the course of a decade, hybrid products had not gained popularity in the marketplace and were used by an insignificant number of consumers.
When Monday came and the defendants began to present their case, witnesses spoke of hybrid products and how they were the future. On direct examination, the defendants’ expert, Christine Meyer, testified that competition between digital and assisted tax-preparation products would intensify, and that hybrid products were the proof. Meyer testified that, based on the growth of those hybrid products and H&R Block’s plans to continue them, it would be wrong to suggest that DDIY and assisted were in separate product markets. But, under cross-examination, Meyer was confronted with the evidence the DOJ staff had collected over the weekend. Documents were presented showing that hybrid products were just not being used by consumers, and were no more than a fringe product in H&R Block’s line. The cross-examination on that point was devastating to the defence – and a serious blow to their expert’s credibility – which the court noted in its opinion.
The work done by the DOJ’s trial team to rebut the notion that hybrid products were blurring the distinction between digital and assisted forms of tax preparation was critical to the case. While H&R Block and TaxAct were the second- and third-largest DDIY tax-preparation product providers, combined they only sold approximately 30% of such products in the United States. In the context of prior challenges, those market-share figures were at the low end of what the division and the FTC traditionally viewed as problematic. But, if there were an overall tax-preparation market, the numbers would have been much smaller. In an overall tax-preparation market, the acquisition of TaxAct by H&R Block would have combined a negligible 8% of the marketplace. In that world, the transaction would be seen as having little effect on competition, and the government would have likely failed in its challenge.
In the days and weeks after the H&R Block opinion came down, discussion focused on discerning the larger import of the decision, which was not readily apparent. The tax-preparation market was not likely to have a lot of merger activity in the coming years, so the decision would not fundamentally change the industry. And in the broader sense, it is hard to review the court’s opinion, which contains a quite traditional Section 7 analysis, and find new or unique legal holdings to guide practitioners moving forward. Even within the division, the “postgame” focused less on what the decision meant for antitrust doctrine as it did for the division’s antitrust enforcement.
That effect cannot be overlooked. The work done by the trial team in H&R Block reshaped the way the division was viewed as a whole. From within, a litigation “fever” swept through the halls of Liberty Square. Whereas before the case there only were a handful of senior division attorneys who had ever gone to trial, H&R Block solidified a new group of talented litigators armed with successful trial experience. The ability to plug these lawyers into ongoing antitrust investigations and litigations gave the division’s front office confidence that no matter how formidable the potential adversary, the government could meet the challenge. Key members of the H&R Block trial team, including Danielle Hauck, Mary Strimel, Adam Severt and David Gringer, all went on to lead or have critical roles in many of the division’s other successful civil and criminal trials, including US v Bazaarvoice, US v Apple and US v Anthem, as well as numerous other matters that were resolved prior to trial.
Those appearing before the division also began seeing the institution differently. Prior to the H&R Block case, lawyers representing merging companies could tell their clients that the government rarely litigated and was more likely to “blink” and agree a settlement, rather than go to trial. After the victory those same lawyers had to take any statement that staff was contemplating litigation as a serious threat. To the division, the abandonment of a potentially anticompetitive merger is considered just as successful as a litigated trial win and, in that regard, it is noteworthy that some of the largest and most high-profile mergers investigated by the division after H&R Block were ultimately abandoned by parties in the face of government challenges. Even if H&R Block did not transform the antitrust landscape, it put in place the tools for the division to do so in future cases.
However, it would be a mistake to limit the import of the victory to trial capabilities and momentum. Rather, a significant impact came from the court’s analysis and handling of the issue of hybrid products. As Judge Howell correctly noted in that portion of her opinion, what constitutes a relevant market for antitrust purposes can change over time; at the heart of those potential changes lie advancements in technology. Dealing with the significance of these technological developments is a challenge the division regularly faces.
To be sure, there are companies that attempt to merge or acquire a competitor because they want to dominate their existing market space. But there are also companies that engage in such transactions because they see their existing market space changing and want to strengthen their position in anticipation of that evolving landscape. Sometimes, the only difference may be time. When Staples and Office Depot attempted to merge in 1996, they were touted as two of the three largest office supply superstores, merging to create economies of scale and price reductions through increased market power; when they attempted to merge in 2015, they analogised themselves in their opening argument to desperate penguins on a melting iceberg, working together to stave off disaster.
Determining whether and how technology affects market definition is not an easy task, and the division has traditionally taken a conservative approach. For instance, people for years advocated that traditional print media and advertising compete with various digital and online forms of media and advertising. Yet, in 2016, the division sued to block the publisher of the Los Angeles Times from acquiring competing newspapers in Orange and Riverside counties on the grounds that there were distinct product markets for English-language, local daily newspapers, as well as advertising in English-language, local daily newspapers. In announcing the lawsuit, assistant attorney general Bill Baer stated: “[N]ewspapers continue to play an important role in the dissemination of news and information to readers and remain an important vehicle for advertisers. The Antitrust Division is committed to ensuring that competition in this important industry is protected.”
Looked at through that lens, the most significant effect of the H&R Block decision is that it permitted the division to maintain a cautious approach in crediting technological advancements in defining relevant markets. While it is true that the antitrust analysis in the H&R Block opinion is “traditional”, that is only because staff was successful in convincing the court that it need not be concerned about an evolving product market. That traditional approach was then utilised by other courts in other DOJ merger challenges, including Bazaarvoice/PowerReviews, GE/Electrolux and the health insurance mergers. Had the division failed to convince the court to disregard hybrid products, those subsequent courts could easily have taken a more forward-looking approach to market definition that could have undone those challenges.
Antitrust enforcement, however, is not immune to Newton’s Third Law, and the division’s approach to market definition has had significant, and perhaps unintended, consequences. To see them, one need look no further than AT&T. Immediately after the H&R Block case concluded, many of the team members moved on to the government’s challenge of AT&T’s proposed acquisition of T-Mobile, an even greater endeavour. As in H&R Block, the government rejected arguments about the changing nature of the telecommunications business, and viewed the transaction as a straightforward horizontal merger among competitors that would reduce the number of major companies in the industry from four to three. Ultimately, the work of the division led to the abandonment of that transaction.
Since then, AT&T has chosen to address the convergence of the media and telecommunications industries by acquiring DIRECTV and announcing its plans to acquire Time Warner Cable. These mergers, in part due to the way the division previously defined the relevant market, are considered vertical transactions, bringing together complementary business units. Irrespective of how the division views these deals, the reality is that vertical transactions are traditionally much more difficult for the government to challenge.
By taking a cautious approach to market definition – and rejecting the notion that companies should be allowed to consolidate in their current industry because of a changing technological landscape – the division may thus be spurring on the changing market definitions it has been fighting against. Of course, the Obama administration is now over and it is yet to be seen whether the new administration will take a similar approach to horizontal merger enforcement. However, by establishing a body of case law, starting with that “traditional” 86-page opinion in H&R Block, the division may have set the wheels in motion to make such transactions more difficult to consummate regardless of the DOJ’s leadership.