Zhitong Finance learned that the US Federal Trade Commission (FTC) filed a lawsuit on Monday to block Coach's parent company Tapestry (TPR.US)'s $8.5 billion deal to acquire Michael Kors parent company Capri (CPRI.US), saying it would eliminate “direct head-to-head competition” between the two luxury handbag maker's flagship brands. Several antitrust lawyers said that the FTC's rare antitrust challenge against a high-end fashion merger could set a precedent for luxury trade regulation.

The FTC said in a statement that the merged company will have around 33,000 employees worldwide and may reduce wages and employee benefits. “The proposed merger could strip Tapestry and Capri of competition in price, discounts and promotions, innovation, design, marketing and advertising, leaving millions of American consumers unable to benefit from Tapestry and Capri's head-on competition,” the FTC said.

In an interview, Tapestry CEO Joanne Crevoiserat said the company is “proud of the wages and benefits” it provides to its employees and that competition for talent is not limited to the fashion industry. Crevoiserat said, “We believe the FTC is fundamentally misunderstanding how markets and consumers shop today, and the impact of this deal on our workers and workers in our industry. We brought in talent and lost it to a large number of competitors.”

Antitrust experts say the US luxury goods market is highly fragmented, with several differentiated brands catering to a wide range of consumer groups. They believe that traditional fashion brands usually face healthy competition from brands that are newly launched every year.

Howard Hogan, chairman of the fashion, retail and consumer business at law firm Gibson Dunn, said, “The FTC's decision to file a lawsuit was surprising because there is no shortage of competition in the fashion, apparel, and accessories sector. The committee has locked down a marketing term — 'barrier-free luxury' and sees it as a unique market that exists in a vacuum.”

The US antitrust enforcement agency issued new mergers and acquisitions guidelines in December last year to encourage a fair, open, and competitive market. Antitrust lawyers pointed out that the FTC is using a new strategy under the guidelines, believing that the merger will directly affect hourly workers, who may lose higher wages due to reduced employee competition.

Jennifer Lada, litigator at law firm Holland & Knight, said: “The revised federal merger guidelines outline potential impacts on the workforce, such as lower wages or working conditions, which are the basis for challenging mergers, so this is a new trend. It's not surprising since these agencies have announced they will do it, but this is something new to be tested in court.”

Tapestry proposed the acquisition of Capri in August, hoping to create an American fashion giant, effectively compete with larger European rivals such as Louis Vuitton's parent company LVMH (LVMHF.US), open up new fields, and possibly gain more share in the global luxury goods market. However, the FTC asked the two companies to provide more information about the deal in November.

Capri said in a statement: “Capri strongly opposes the FTC's decision. The government's challenge ignores market reality, and the vast majority of market realities indicate that this deal will not limit, reduce, or restrict competition.”

At the beginning of April this year, the two companies' deal was approved by EU and Japanese regulators, and the deal would bring top luxury brands such as Kate Spade and Jimmy Choo under one roof.

Although investors are skeptical about whether the deal will be approved, most analysts expect the deal to close before August 10, which is the deadline for the two companies to complete the deal. Capri's shares closed at $37.96 on Monday, far below Tapestry's proposed purchase price of $57 per share.

Analyst TD Cowen wrote in an early April report: “In our opinion, given the competitive nature of this category and the varying degrees of cultural relevance, we don't think the merger will hurt consumers' interests.”