AAI Says DOJ Complaint in H&R Block/TaxACT Merger Provides Transparency on Maverick Firms

11:10

May

2011

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The American Antitrust Institute (AAI) today commended the U.S. Department of Justice’s (DOJ’s) complaint to block the proposed merger of H&R Block and TaxACT.

“The complaint provides antitrust practitioners and policymakers with valuable insight into how the antitrust agencies evaluate mergers that eliminate mavericks, or disruptive firms,” said the AAI’s President Albert Foer.

Filed on May 23rd, the complaint alleges that the proposed merger would eliminate TaxACT, a maverick in the market for digital do-it-yourself online and software-based tax preparation products.
The complaint alleges that TaxACT has competed aggressively, resulting in lower prices, improved quality, and innovation. The combination of H&R Block and TaxACT would eliminate head-to-head competition between the two rivals. This would effectively create a duopoly with only H&R Block and rival Intuit remaining in the market, paving the way for anticompetitive coordination.

The 2010 revised Horizontal Merger Guidelines stress the usefulness of direct evidence, such as eliminating a maverick, in showing that a merger will potentially harm competition. Much of the supporting evidence cited in the DOJ complaint comes from internal company documents produced in response to the government’s civil investigative demands.

“The DOJ built a case that TaxACT behaved aggressively over time and repeatedly forced its rivals to improve quality and lower prices,” explained Diana Moss, an economist and AAI Vice President. Previous DOJ complaints built around the maverick theory (e.g., Alcan/Pechiney S.A.) are not as expansive as H&R Block/TaxACT.

The complaint quotes internal communications showing that TaxACT views itself as a maverick and a “catalyst for change.” It also cites to H&R Block’s awareness of TaxACT’s aggressive competitive strategy and success in getting a competitive response from its rivals. For example, incumbents were forced to match competitive offerings and lower their own prices as a result of TaxACT’s disruptive presence in the market. Internal company documents cite to the need to “stem” online market share loss to TaxACT and preserve “at risk” sales. More important, communications reveal that the merger was motivated by H&R Block’s strategy to “…eliminate the [TaxACT] brand to regain control of industry pricing and avoid further price erosion.”

In the past, the AAI has highlighted the antitrust agencies’ actions when they promote transparency regarding the enforcement process. Outside observers and analysts spend a good deal of time “reading the tea leaves” when it comes to understanding and predicting how the antitrust agencies think about certain competition issues, explained Foer. “A strongly-developed complaint like H&R Block/TaxACT provides useful transparency for the public,” he said.

The AAI noted that proponents of the H&R Block/TaxACT merger might argue that the merger simply produces a larger, stronger competitor to rival the leading firm, Intuit. "That would be very dangerous for competition and the consumer," said AAI's Moss. "We need to resist markets being ‘duopolized’ as a result of that kind of argument. When the DOJ has solid evidence that a company plays a critical, material role in forcing its rivals to behave competitively, the court will have a very hard time dismissing the government's concerns." Whether the DOJ’s action to block the merger will withstand judicial scrutiny remains to be seen.