FTC Spars With Tapestry, Capri Over Legal Test for Merger Freeze

A recent Supreme Court ruling curbing a labor agency’s power to win immediate court orders is at the center of a tiff in the Federal Trade Commission’s bid to block a deal in the fashion accessories sector.

Tapestry Inc. and Capri Holdings Ltd., which control such labels as Michael Kors and Versace, argue the opinion adds to the burdens the FTC must meet to get a court order temporarily freezing the $8.5 billion deal. The FTC has countered that the case, which deals with the National Labor Relations Board, is irrelevant.

The procedural squabble comes before the FTC’s challenge of the merger goes to trial Sept. 9 in the US District Court for the Southern District of New York. The FTC alleges that Tapestry’s takeover of Capri will eliminate strong competition between their rival brands’ luxury handbags, ultimately hurting consumers and workers.

In such matters, the FTC regularly pushes for a preliminary injunction pausing the deal until proceedings in its administrative tribunal conclude. To demonstrate a likelihood of success necessary for injunctions, the FTC must raise “‘serious questions’ that warrant thorough investigation in the first instance,” the commission said in a Tuesday filing.

Tapestry and Capri argued last week that such an interpretation is “is wrong under recent Supreme Court law.” They cited the June 13 high court opinion in Starbucks Corp. v. McKinney, which stemmed from a Starbucks challenge of a temporary order to reinstate a group of pro-union workers.

The Supreme Court held that all NLRB petitions must be analyzed under a traditional four-factor test that other plaintiffs must meet for preliminary injunctions. Some courts had previously applied a more lenient two-part standard when assessing NLRB cases involving temporary reinstatement of workers.

The effect of the ruling is that a federal agency “must make a ‘clear showing’ of a likelihood of success on the merits” in a federal court in order to win a preliminary injunction, Tapestry and Capri said in a Aug. 20 motion.

The FTC, however, rebutted that the Supreme Court case focused on a section of the National Labor Relations Act and “did not overturn five decades of precedent that is specific to the FTC Act.”

“Simply put, the statute at issue in Starbucks and Section 13(b) are not the same,” the FTC said, citing a provision that permits it to seek preliminary injunctions. “The text of the latter directs the court to ‘consider’ the FTC’s likelihood of success and weigh it with the equities to determine whether granting an injunction would be in the public interest.”

‘Whole Picture’

Tapestry and Capri have fiercely fought the case, arguing the FTC lawsuit filed in April is divorced from “marketplace realities.”

It is unsurprising that the retailers would try their luck with the Starbucks argument, said Stephen Calkins, a Wayne State University law professor and former FTC general counsel.

“When the Supreme Court says an especially permissible standard is not going to cut it, of course any defendant in an FTC case will say this shouldn’t cut it for the FTC either,” Calkins said. “It is part of the whole picture of administrative agencies slowly losing the advantages they used to have.”

Still, Calkins said it’s hard to know how much impact the “actual phrasing of the standard” has in merger cases.

The challenge likely hinges on whether company documents support the FTC’s theories, Bloomberg Intelligence said in an April post.

Tapestry is represented by Latham & Watkins LLP. Capri is represented by Wachtell Lipton Rosen & Katz.

The case is FTC v. Tapestry Inc., S.D.N.Y., 1:24-cv-03109-JLR, 8/27/24