The Justice Department’s antitrust division has prevailed in its first trial opposing a merger since its defeat by Bay Area giant Oracle in 2004. In an order issued on October 31, D.C. District Court Judge Beryl Howell granted the government’s motion to enjoin H&R Block’s $287.5 million acquisition of 2SS Holdings Inc., the maker of TaxAct, a popular do-it-yourself (“DIY”) software program.
In its complaint filed in May of this year, the DOJ alleged that the transaction would violate Section 7 of the Clayton Act, because were the merger permitted to proceed, it would have combined the second- and third- largest firms in the DIY tax preparation market, effectively resulting in a duopoly consisting only of H&R Block and Intuit, maker of TurboTax.
To show a violation of the Clayton Act, the department bore the burden of showing that the transaction may “substantially . . . lessen competition.” The department focused heavily on the intense competition between 2SS Holdings and the other players, noting that its “disruptive” behavior had prompted H&R Block and Intuit to lower prices and offer free services.
The parties disagreed not only about the effects of the merger, but about which “relevant market” the court should consider for purposes of antitrust. The Justice Department argued that the relevant market was strictly the DIY digital tax preparation market – a market in which Intuit, H&R Block, and 2SS account for 90% of all sales. At trial, however, H&R Block insisted that DIY digital preparation products are only a part of a larger industry also consisting of in-store tax preparation, as well as those tax payers who self-file without software or accountants.
In an 86-page decision released November 10, Judge Howell agreed with the Justice Department’s position that the relevant market consisted solely of DIY digital tax preparations, emphasizing that H&R Block’s own internal documents identified the market as such. “HRB identified the proposed transaction as a way to grow its digital ‘market share’ and has measured TaxACT’s market share in a DDIY (digital do-it-yourself) market,” Judge Howell noted in rejecting H&R Block’s invitation to construct the relevant market in broader terms.
Judge Howell also appeared to have been persuaded by the department’s characterization of the effects of the merger. Emphasizing the ways in which the TaxACT’s market-disrupting behavior has acted to constrain competitor pricing, Judge Howell concluded that the likely effect of a market “dominated by two large players” would be a rise in prices operating to the detriment of consumers.
Berkeley Law professor and economist Prasad Krishnamurthy says he agrees with the outcome of the case and in particular with the court’s skepticism that the merger would have given rise to new low-cost alternatives. “[Tax preparation] firms bargain with the IRS each year as to things like pricing and IRS subsidization . . . if you only have two [firms] talking to the IRS . . . it’s too easy for them to tacitly coordinate and you could have collusive or anticompetitive behavior.” According to Krishnamurthy, “There just wasn’t any strong evidence of the efficiencies [H&R Block and TaxACT] were claiming . . . it’s pretty clear that these companies are disciplining each other.”
The district court, likewise, noted the considerable ‘disciplining’ effect TaxACT had on larger players. “Not only did TaxACT buck prevailing pricing norms by introducing the free-for-all offer, which others later matched,” Judge Howell wrote, “it has remained the only competitor with significant market share to embrace a business strategy that relies primarily on offering high-quality, full-featured products for free with associated products at low prices.”
Commentators have seized upon the decision as a potential preview of the DOJ’s upcoming case to block AT&T’s merger with rival T-Mobile. Although the cases obviously have differing facts, the similarities are notable. Both cases involve large megaliths seeking to buy out “disruptive” low-cost competitors and allege nearly identical violations. Further, both cases were filed in the same district court and former Simpson Thatcher partner Joseph Wayland, the deputy head of the Justice Department’s antitrust division, is lead attorney on both matters. Finally, the government will advance a similar argument about the “relevant market” in the AT&T case, seeking to narrow the court’s focus to the national wireless market, as opposed to a collection of local markets. However, even if the H&R Block matter does not prove to be a litmus test for the AT&T merger, it still represents a symbolic victory for the long-dormant antitrust division.