UNITED STATES OF AMERICA v. H&R BLOCK, INC. et al

Filing 40

MEMORANDUM re 35 MOTION for Preliminary Injunction filed by UNITED STATES OF AMERICA by UNITED STATES OF AMERICA. (Attachments: # 1 Exhibit Exhibit 1, # 2 Exhibit Exhibit 2, # 3 Exhibit Exhibit 12, # 4 Exhibit Exhibit 13, # 5 Exhibit Exhibit 30, # 6 Exhibit Exhibit 37, # 7 Exhibit Exhibit 40, # 8 Exhibit Exhibit 42, # 9 Exhibit Exhibit 43, # 10 Exhibit Exhibit 56, # 11 Exhibit Exhibit 112, # 12 Exhibit Exhibit 114, # 13 Exhibit Exhibit 115, # 14 Exhibit Exhibit 116, # 15 Exhibit Exhibit 123, # 16 Exhibit Exhibit 124, # 17 Exhibit Exhibit 139, # 18 Exhibit Exhibit 157)(Buterman, Lawrence)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,
Plaintiff,
v.

Civil Action No. 11-00948 (BAH)
Judge Beryl A. Howell

H&R BLOCK, INC.;
2SS HOLDINGS, INC.; and
TA IX L.P.,
Defendants.

PLAINTIFF’S MEMORANDUM OF POINTS AND AUTHORITIES IN
SUPPORT OF ITS MOTION FOR A PRELIMINARY INJUNCTION

REDACTED VERSION
FOR PUBLIC FILING*

*The United States files this non-confidential redacted version of its Memorandum
pursuant to the Protective Order entered on June 15, 2011. The Protective Order requires
all information designated “Confidential” or “Highly Confidential” to be redacted from
the public version of the pleading filed with the court. Although Defendants designated
all information and documents cited in this Memorandum as “Highly Confidential,” most
of the information does not appear to be commercial information, the disclosure of which
would cause injury to Defendants’ businesses.

TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................................................................... iv
INTRODUCTION ...........................................................................................................................1
STATEMENT OF FACTS ..............................................................................................................4
I.

TaxACT’s History as a Maverick ............................................................................5
A.
B.

TaxACT is the First to Offer Free Federal Tax Return Preparation
and E-Filing for All Taxpayers Through its Website ..................................7

C.

TaxACT Continues to Offer Robust Digital DIY Tax
Preparation Products at Lower Prices ..........................................................9

D.
II.

TaxACT is the First to Offer Free Federal Tax Return Preparation
and E-Filing for All Taxpayers Through the Free File Alliance .................5

TaxACT Competes Through Robust Offerings and Lower Prices ............10

HRB and TaxACT Compete With One Another ...................................................10
A.
B.

III.

Defendants’ Internal Documents Reflect Aggressive
Competition Between HRB and TaxACT .................................................11
Other Industry Participants and the Public Recognize the
Competition Between HRB and TaxACT .................................................14

HRB’s Acquisition of TaxACT .............................................................................15

ARGUMENT .................................................................................................................................16
I.

The Relevant Product Market is Digital DIY Tax Preparation..............................19
A.

Digital DIY Products are Not Reasonably Interchangeable with
Unassisted Tax Preparation and Professional Tax Preparation .................20

B.

All Digital DIY Products Compete in the Same Product Market ..............23

C.

Defendants’ Claimed Distinction Between “Value” and
“Premium” Markets is Without Merit........................................................25

II.

The Relevant Geographic Market is Worldwide ...................................................29

III.

The Transaction is Likely to Result in Raised Prices and Lower Quality .............30
A.

The Challenged Acquisition is Presumptively Unlawful Because
ii

it Will Substantially Increase Concentration .............................................31
B.
C.

The Acquisition of TaxACT Will Eliminate a Maverick ..........................34

D.
IV.

Removing TaxACT From the Market Would End Aggressive Head-toHead Competition With HRB that Has Benefitted Consumers .................33

The Acquisition Will Increase the Likelihood of Actual or
Tacit Collusion Between HRB and Intuit ..................................................36

Defendants Cannot Rebut the United States’ Case Through Claims of
Easy Entry or Efficiencies Arising from the Transaction ......................................38
A.
B.

V.

Obstacles in the Digital DIY Market Prevent Companies from
Sufficiently Entering or Expanding to Prevent Anticompetitive Harm .....38
Defendants’ Claimed Efficiencies Do Not Immunize This
Anticompetitive Transaction......................................................................42

The Balance of Harms and the Public Interest Favor a Preliminary Injunction ....44

CONCLUSION ..............................................................................................................................45

iii

TABLE OF AUTHORITIES
CASES:
Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ........................................................ passim
Chi. Bridge & Iron Co. N.V. v. FTC, 534 F.3d 410 (5th Cir. 2008) ..............................................18
FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998) ......................................17, 18, 38
FTC v. Coca-Cola Co., 641 F. Supp. 1128 (D.D.C. 1986)............................................................20
FTC v. Dean Foods Co., 384 U.S. 597 (1966) ..............................................................................16
*FTC v. H.J. Heinz Co., 246 F.3d 703 (D.C. Cir. 2001) ....................................................... passim
FTC v. Libbey, Inc., 211 F. Supp. 2d 34 (D.D.C. 2002) ................................................................34
*FTC v. PPG Indus., Inc., 798 F.2d 1500 (D.C. Cir. 1986) .................................................. passim
*FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) ............................................17, 18, 19, 34
FTC v. Swedish Match, 131 F. Supp. 2d 151 (D.D.C. 2000).............................................18, 30, 32
FTC v. Univ. Health, Inc., 938 F.2d 1206 (11th Cir. 1991)...............................................31, 36, 43
FTC v. Weyerhaeuser Co., 665 F.2d 1072 (D.C. Cir. 1981) .......................................17, 31, 44, 45
FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028 (D.C. Cir. 2008) .....................................16, 18, 19
FTC v. CCC Holdings Inc., 605 F. Supp. 2d 26 (D.D.C. 2009) ............................................ passim
Gordon v. Holder, 632 F.3d 722 (D.C. Cir. 2011) ........................................................................16
HDC Medical, Inc. v. Minntech Corp., 474 F.3d 543 (8th Cir. 2007) ...........................................26
Hosp. Corp. of Am. v. FTC, 807 F.2d 1381 (7th Cir. 1986) ..........................................................36
Hynix Semiconductor Inc. v. Rambus Inc., No. CV-00-20905, 2008 WL 73689 (N.D. Cal. Jan. 5,
2008). .......................................................................................................................................20
Morgan, Strand, Wheeler & Biggs v. Radiology, Ltd., 924 F.2d 1484 (9th Cir. 1991) .................20
Rebel Oil v. Atl. Richfield, 51 F.3d 1421 (9th Cir. 1995) ..............................................................39
Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210 (D.C. Cir. 1986)...........................20
Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320 (1961).......................................................30
United States v. Cont’l Can Co., 378 U.S. 441 (1964) ..................................................................26
United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956) ........................................19
United States v. Ingersoll-Rand Co., 218 F. Supp. 530 (E.D. Pa. 1969) .......................................17
United States v. Marine Bancorp., 418 U.S. 602 (1974) ...............................................................18
iv

United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963) ..................................................18, 30, 32
*United States v. Rockford Mem’l Corp., 898 F.2d 1278 (7th Cir. 1990) .....................................36
United States v. Siemens Corp., 621 F.2d 499 (2d Cir. 1980) .......................................................17
STATUTES:
15 U.S.C. § 18 ......................................................................................................................2, 16, 18
15 U.S.C. § 25 ................................................................................................................................16
OTHER AUTHORITIES:
U.S. Dep’t of Justice and Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) ........ passim
Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ..............................................................30

v

Plaintiff United States of America (“Plaintiff” or “United States”) respectfully submits
this memorandum of points and authorities in support of its motion for a preliminary injunction,
enjoining H&R Block, Inc. (“HRB”) from closing its acquisition of 2SS Holdings, Inc.
(“TaxACT”), which is partially owned by TA IX L.P. (“TA”) (HRB, TaxACT and TA are
collectively referred to herein as “Defendants”), until this Court’s final disposition of the case.1
INTRODUCTION
The United States brings this action to block an acquisition that will substantially lessen
competition in the tax preparation industry. Currently, the three largest providers of digital do-ityourself tax preparation products (“Digital DIY”) dominate this market. The proposed
acquisition would combine HRB and TaxACT, the second- and third-largest providers, and result
in a duopoly with two companies controlling 90% of the Digital DIY market. Under the
Government’s merger guidelines and relevant case law, this extraordinary market concentration
is presumptively anticompetitive, and Defendants bear a heavy burden to rebut this presumption.
They cannot meet this burden. To the contrary, Defendants’ own documents and
testimony prove that the transaction will hurt competition. Before this transaction was
announced, Defendants’ most senior executives readily admitted that:


HRB and TaxACT fiercely compete head-to-head in the same market;



TaxACT is a “maverick” competitor, competing aggressively with low prices and
product innovation; and



TaxACT has forced competitive responses leading to lower prices for millions of
consumers.

Indeed, no other evidence beyond Defendants’ admissions is necessary to prove that this
transaction will substantially lessen competition in violation of Section 7 of the Clayton Act, 15
1

In the exhibits submitted with the United States’ Motion, the relevant portions of certain documents have been
highlighted for the Court’s convenience.

U.S.C. § 18, and must therefore be enjoined. For example, TaxACT’s impact on the market is
established by admissions of its own founder and CEO that TaxACT has been a “tax industry
maverick” and a “catalyst for change in the tax preparation industry . . . . [that] has consistently
forced the tax preparation industry to become more competitive, and in doing so [has] forced
[its] competitors to change as well.”2 And Defendants’ pre-transaction internal documents refer
to each other as direct competitors and track each other’s product features and prices. HRB even
has an internal identification code, Redacted for campaigns specifically aimed at getting TaxACT
digital customers to switch to HRB.3 For its part, TaxACT has publicly acknowledged that it
competes with HRB, and touted to potential buyers that its Redacted
4

Before the transaction was disclosed

publicly, HRB recognized that a merger of the second- and third-largest competitors would
create antitrust concerns,5 and when the deal was announced, HRB’s Vice President of
Marketing boasted in an email that Redacted

6

.

Since then, Defendants have engaged in a transparent attempt to rewrite history —
disclaiming their own documents, criticizing their own executives and modifying public
disclosures to pretend that the market realities and competitive dynamics (including direct
competition between HRB and TaxACT) they previously admitted no longer exist. HRB’s
senior executives have tried to “walk[] a little tightrope on this with [antitrust approval],”7 and
have jettisoned their long-used market descriptions in favor of “the word[s] of choice to get
2

Ex. 3 (2SS-GRECe-0028581, at -83); Ex. 4 (2SS-MARKe-0083230, at 18).

3

Ex. 5 (HRB-DOJ-50184793); Ex. 6 (HRB-DOJ-00770275) Redacted

4

Ex. 7 (2SS-CORPe-0025298, at -313).

5

Ex. 8 (HRB-DOJ-00347049, at -52).

6

Ex. 9 (HRB-DOJ-50452596).

7

Ex. 10 (HRB-DOJ-00915524).

-2-

passed [sic] HSR approvals.”8 Recognizing the same concern, HRB’s attorneys rewrote the
“Competitive Conditions” section of the company’s annual Form 10-K filing in order to remove
prior language that suggested a single digital market in which HRB and TaxACT competed.9
And now, HRB even appears to be contradicting a decade’s worth of clear public statements (as
well as recent sworn testimony from its former CEO and current head of Digital), by indicating
that it believes its digital products compete with its franchisees’ brick and mortar stores.10
But the record of Defendants’ pre-transaction admissions cannot be erased. It is this
record that demonstrates that this transaction would allow HRB to eliminate a vigorous
competitor, and “regain control of industry pricing and avoid further price erosion,” as suggested
to HRB executives as early as 2009.11 The acquisition is intended to give Intuit and HRB control
of the digital market and to prevent another competitor from taking market share through a “race
to the bottom.”12
Thus, Defendants’ admissions establish the relevant market, the state of competition and
the likely effect of the transaction; these admissions are sufficient without more to require that
the transaction be blocked. Of course, as with other merger cases, the United States is also
submitting an economist’s extensive expert report, applying standard economic analysis showing
that the transaction will have anticompetitive effects. But in this case, at least, the expert is not
central to the Government’s case; his report only confirms what the Defendants’ admissions
make clear: This transaction will substantially lessen competition.
8

Ex. 11 (HRB-DOJ-50258582).

9

Compare Ex. 12 (H&R Block 10-K for Fiscal Year Ending April 30, 2011, at 4), with Ex. 13 (H&R Block 10K for Fiscal Year Ending April 30, 2010, at 4).
10

See Ex. 14 (Defendants’ Response to Plaintiff’s First Set of Requests for Admissions to All Defendants at 67); Ex. 15 (Defendants’ Response to Plaintiff’s First Set of Interrogatories to All Defendants at 1-6).
11

Ex. 16 (HRB-DOJ-00319468, at 20); Ex. 17 (HRB-DOJ-00249335, at 3).

12

Ex. 18 (HRB-DOJ-00355217).

-3-

STATEMENT OF FACTS
There are three ways for individuals to prepare their federal and state income tax returns:
(1) unassisted; (2) Digital DIY products; or (3) assistance from a tax professional. In recent
years, Digital DIY products have become an increasingly popular method of tax preparation —
used last year by an estimated 35 to 40 million U.S. taxpayers.13
Digital DIY products are offered through three channels: (1) online through an internet
browser; (2) software for a personal computer downloaded from an Internet website; and (3)
software for a personal computer on a disc, which is either sent directly to the consumer or
purchased by the consumer from a third-party retailer.
Intuit (the maker of “TurboTax”), HRB and TaxACT, known in the trade as the “Big
3,”14 collectively control approximately 90% of the Digital DIY market — Intuit with 62.2%,
HRB with 15.6%, and TaxACT with 12.8%.15 The Big 3 provide their products through all three
methods of digital distribution, while most of the fringe competitors do not. TaxHawk and
TaxSlayer, the next two largest competitors, each serve only about
market, and no other competitor serves more than

Redacted

Redacted

of the Digital DIY

of the market.16

One unique aspect of the Digital DIY market is that virtually all of the competitors
provide some product to consumers for free. For example, a company may offer a basic federal
tax return product for free, with the expectation that a consumer will pay for additional products,
such as a state tax return or the ability to transport information from one year’s return to the next
year’s return. The scope of a company’s free product offerings is a significant competitive factor.
13

Ex. 19 (HRB-DOJ-50842379, at 3).

14

See, e.g., Ex. 20 (HRB-DOJ-01003395, at 5); Ex. 21 (Newkirk Dep. 65:7-15); Ex. 22 (HRB-DOJ-00336019,
at -22); Ex. 23 (HRB-DOJ-00347837); Ex. 24 (JTH-DOJ-000001 (Liberty Decl.) ¶ 7); Ex. 25 (THK-DOJ-000001
(TaxHawk Decl.) ¶ 10); Ex. 26 (WK-DOJ-000001 (CCH Decl.) ¶ 4).
15

Ex. 27 (HRB-DOJ-00012327).

16

Id.

-4-

I.

TaxACT’s History as a Maverick
Electronic filing of tax returns goes back as far as 1986. However, it was not until the

passage of the Internal Revenue Service Restructuring and Reform Act of 1998 (“RRA98”) —
which set a target that 80% of all tax U.S. returns eventually be e-filed — that Digital DIY
products began to be used widely by consumers. At the time RRA98 was passed, Intuit and
HRB dominated the Digital DIY market and charged significant fees for their products.17 But
beginning in 1998, TaxACT entered and, over the course of several years, gained market share
by disrupting the status quo through unique product offerings at comparatively lower prices.
According to TaxACT’s founder and CEO, Lance Dunn, TaxACT was created to

Redacted

18

By 2004, through its aggressive strategy of offering consumers Redacted
TaxACT began to seriously
disrupt the two dominant market players, HRB and Intuit.19 This is a fact TaxACT fully
acknowledges: it lauds itself to the public as Redacted
20

A.

TaxACT is the First to Offer Free Federal Tax Return Preparation and EFiling for All Taxpayers Through the Free File Alliance

One of the first instances of TaxACT’s maverick behavior was in connection with the
Free File Alliance (“FFA”), a public-private partnership between the IRS and participating tax

17

Ex. 28 (Dunn Dep. 86:18-21).

18

Ex. 28 (Dunn Dep. 145:21-22; Dunn Dep. Ex. 10, at 2).

19

Ex. 7 (2SS-CORPe-0025298, at -301).

20

Ex. 3 (2SS-GRECe-0028581, at -83).

-5-

preparers to allow taxpayers to prepare and e-file their federal tax returns for free.21 The FFA
was formed in late 2002, and its members, including HRB, TaxACT and Intuit, agreed to offer
free federal tax preparation and e-filing to certain taxpayers, and the IRS agreed to link to these
offers from its website.22
Initially, FFA participants could offer free filing to any taxpayers. In practice, however,
preparers generally limited free filing to taxpayers below certain income thresholds. 23 As a
result, free filing was available to only a subset of all taxpayers.
From the outset, however, TaxACT disrupted the strategies of those other companies in
the FFA. In the FFA’s first year (2003), TaxACT set itself apart by offering its free product to
taxpayers with an income level at or above $100,000.24 The following year (2004), once
companies began matching this offer, TaxACT further Redacted

”25 by

becoming the first FFA participant to offer all taxpayers the opportunity to prepare and e-file
their federal tax returns for free, regardless of their income.26 Referred to within HRB as a

Redacted

”27 TaxACT’s maverick offer caused it to take market share at the expense
of its competitors, HRB and Intuit.28
TaxACT’s strategy of providing free federal tax preparation and e-filing to all taxpayers
generally raised concerns in the industry that it would put pressure on profits. Nonetheless,

21

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 8); Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 16); Ex. 30
(FFA000097).
22

See Ex. 30 (FFA000097, at -98).

23

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 8); Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 16).

24

Ex. 31 (IRS-DOJ-001006); Ex. 32 (IRS-DOJ-001013, at -15).

25

Ex. 33 (HRB-DOJ-00503167, at -68).

26

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 8); Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 16).

27

Ex. 34 (HRB-DOJ-50687973); Ex. 35 (HRB-DOJ-00912870, at -71).

28

Ex. 36 (HRB-DOJ-50682747); Ex. 29 (DOJ-INT-000001 (Intuit Decl.) at -33).

-6-

many of TaxACT’s competitors, including HRB and Intuit, matched TaxACT,29 and competition
began to intensify around the quality of free offerings. Again, TaxACT led the way by providing
a more robust and high-quality free product.30
Internally, HRB feared that TaxACT’s offer was not only impacting the FFA, but also
“creat[ing] a huge disruption in the paid side of the business.”31 Publicly, HRB complained that
the industry movement to Redacted

”32 Seeking to limit this

competitive threat, HRB and Intuit successfully lobbied for strict limitations on the number and
kind of taxpayers eligible for free FFA filing.33 These limitations became effective in October
2005.34
B.

TaxACT is the First to Offer Free Federal Tax Return Preparation and EFiling for All Taxpayers Through its Website

No longer able to make its free-for-all offer through the FFA website, TaxACT decided
to pursue an even more aggressive strategy through, as Intuit referred to it, a Redacted
35

In December 2005, TaxACT became the first company to offer all taxpayers,

regardless of income, the ability to prepare and e-file a federal tax return for free directly through
its own website, bypassing the FFA website.36 According to TaxACT, this Redacted

29

Ex. 37 (H&R Block Amended 10-K for Fiscal Year Ending April 30, 2005, at 4); Ex. 29 (DOJ-INT-000001
(Intuit Decl.) ¶ 8).
30

Ex. 38 (2SS-CORPe-0002404, at -07).

31

Ex. 39 (HRB-DOJ-50704549, at -50).

32

See Ex. 40 (Kirkham, Chris, Online Tax Filing No Longer Free For All, WashingtonPost.com, dated Jan. 26,
2006, available at http://www.washingtonpost.com/wp-dyn/content/article/2006/01/25/AR2006012501786.html (last
visited July 30, 2011)).
33

Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 16); see also Ex. 41 (HRB-DOJ-50695185, at -86).

34

Ex. 42 (FFA000091); Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 16); Ex. 29 (DOJ-INT-000001 (Intuit
Decl.) ¶ 9).
35

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 11).

36

Ex. 43 (Press Release, TaxACT Users Can Now Prepare, Print and E-File Returns Without Charge, dated
Dec. 12, 2005, available at http://www.taxact.com/press/press-release-12-12-2005.asp (last visited July 30, 2011)).

-7-

Redacted

.37
TaxACT’s competitors quickly followed. In particular, HRB recognized that TaxACT’s

growth was the primary driver for “[t]he growth in Free Federal Offers Online” from other
companies, resulting in “price compression” for tax preparation products.38 A few months after
TaxACT introduced free-for-all on its website, HRB executives convened specifically Redacted
39

This was only the beginning

of active deliberations within HRB on how best to respond to the TaxACT threat.40
While HRB was considering the appropriate response, “TaxACT’s success in gaining
market share propelled Intuit to offer” its own free product.41 Finally, HRB, Redacted
”42 and in order “to stem online share loss to Intuit and
TaxACT,”43 introduced its own free online product outside of the FFA. The year HRB
introduced its free product, its average sale price per customer across all of its Digital DIY
products declined by approximately

Redacted

.44

The launch of a free federal product even had a significant impact on prices and demand
for HRB’s downloadable and retail software. According to HRB, the emergence of online free
federal Digital DIY products Redacted

37

See id.; Ex. 28 (Dunn Dep. 135:21-136:4; 168:15-22); Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 12).

38

Ex. 20 (HRB-DOJ-01003395, at 11-12).

39

Ex. 44 (HRB-DOJ-50200815).

40

See, e.g., Ex. 45 (HRB-DOJ-50098528); Ex. 46 (HRB-DOJ-50230434); Ex. 47 (HRB000833, at -46).

41

Ex. 48 (HRB-DOJ-00182356, at -61); see also Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 13); Ex. 49 (HRBDOJ-00524530, at 3).
42

Ex. 50 (HRB-DOJ-00823783).

43

Ex. 51 (HRB-DOJ-00902949, at -53); see also Ex. 52 (HRB-DOJ-00250069).

44

Ex. 19 (HRB-DOJ-50842379, at 8).

-8-

Redacted

45

TaxACT’s maverick conduct posed an even larger concern for HRB:

But

Redacted

46

C.

TaxACT Continues to Offer Robust Digital DIY Tax Preparation Products
at Lower Prices

Over the years, TaxACT has continued to disrupt the market and gain share through its
maverick behavior and strategy of offering highly functional products at comparatively low
prices. Most recently, TaxACT offered taxpayers the ability to use all federal e-fileable forms
with its free federal product in January 2010.47 In presentations, HRB recognized that, “[h]aving
disrupted the digital tax prep market with cheaper, lower-end solutions, TaxAct [was] surpassing
[HRB’s] TaxCut in market share and continuing to improve quality (surpassing TaxCut in some
press reviews in 2009).”48 This sentiment was shared by key HRB executives who were
49 Redacted

Redacted

”50. In response,
HRB executives recommended Redacted
51

Ultimately though, HRB

would determine that purchasing TaxACT was a better way to “eliminate” TaxACT’s

45

Ex. 53 (HRB-DOJ-50022313, at 2).

46

Ex. 54 (HRB-DOJ-50196491, at 36).

47

Ex. 55 (Grief Dep. 83:5-84:6); Ex. 56 (Press Release, TaxACT 2009 Raises the Bar Higher on Free and
Affordable Tax Preparation Solutions, dated Jan. 7, 2010, available at http://www.taxact.com/press/2010/pressrelease-01-07-2010-affordable.asp (last visited July 30, 2011)).
48

Ex. 57 (HRB-DOJ-00251349, at 6). H&R Block’s Digital DIY product in 2009 was called TaxCut. It is now
referred to as H&R Block at Home.
49

Ex. 58 (HRB-DOJ-00348453).

50

Ex. 59 (HRB-DOJ-50716606).

51

Ex. 60 (HRB-DOJ-50564563).

-9-

“disrupt[ive]” maverick conduct.52
D.

TaxACT Competes Through Robust Offerings and Lower Prices

In 2010, TaxACT continued its maverick behavior by entering the retail segment of the
Digital DIY market, offering boxed software at Staples, HRB’s Redacted

retailer.53

According to the partnership proposal between TaxACT and its distributor, Redacted
54

TaxACT sought to

accomplish that goal by offering its customers free electronic filing of state returns, unlike Intuit
and HRB who charge an additional fee for filing state returns.55
Though only in the first year, it appears that TaxACT’s presence in Staples is impacting
HRB’s bottom line. HRB noted internally that its “[r]etail volumes at Staples [were] at risk due
to introduction of TaxACT Retail software on combined display.”56 And, Intuit’s analysis
confirms that Redacted

”57 If these trends continue, HRB will

once again be forced to match TaxACT’s offerings, or continue to lose market share.
II.

HRB and TaxACT Compete With One Another
As the history of TaxACT’s maverick conduct and the competitive responses by Intuit

and HRB described above make clear, HRB and TaxACT have a long and deep history of
competition. This competition is evident not only from the documents and testimony of
Defendants’ current and former employees and executives, but also is clear from media reviews,
industry analysts, and competitor statements.
52

Ex. 16 (HRB-DOJ-00319468, at 20); Ex. 57 (HRB-DOJ-00251349, at 6).

53

Ex. 28 (Dunn Dep. 383:18-384:4); Ex. 61 (Houseworth Dep. 252:9-253:7); Ex. 62 (2SS-PETK-0000267, at -

323).
54

Ex. 63 (2SS-ARALe-0016784).

55

Ex. 64 (2SS-GREC-001358, at -404); Ex. 61 (Houseworth Dep. 270:17-271:8).

56

Ex. 65 (HRB-DOJ-00337419, at -20).

57

Ex. 66 (INT-DOJ0000038, at 5).

- 10 -

A.

Defendants’ Internal Documents Reflect Aggressive Competition Between
HRB and TaxACT

HRB internally concluded that it was in direct competition for its Digital DIY tax
preparation business with TaxACT no later than early 2005.58 In January 2006, HRB’s

Redacted

explicitly stated that in the digital business, HRB’s “[o]nly real direct competitors are
turbotax in san diego and taxact in cedar rapids.”59 In February of 2006, HRB’s Redacted
echoed Mr. Redacted

statement when he commented that HRB was losing market share

and that Redacted

”60

Within HRB, Intuit, HRB, and TaxACT were known as the “Big 3 Competitors” in the
Digital DIY tax preparation market.61 HRB monitored the number of references to TaxACT on
the internet,62 tracked TaxACT’s share of the Digital DIY market,63 analyzed and compared
TaxACT’s customer base with its own64 and studied why customers were switching from HRB’s
digital products to TaxACT.65 HRB specifically considered TaxACT’s customers to be within
HRB’s Redacted

”66 and at times lamented that TaxACT was surpassing HRB in the

digital marketplace.67

58

See, e.g., Ex. 67 (HRB-DOJ-50698926) Redacted
Ex. 33 (HRB-DOJ-00503167, at -83); Ex. 68 (HRB-DOJ-50697962); Ex. 69 (HRB-DOJ-50758528).

59

Ex. 70 (HRB-DOJ-00516352).

60

Ex. 71 (HRB-DOJ-50094259).

61

See, e.g., Ex. 20 (HRB-DOJ-01003395, at 5); see also Ex. 21 (Newkirk Dep. 65:7-15); Ex. 22 (HRB-DOJ00336019, at -22); Ex. 23 (HRB-DOJ-00347837) Redacted
62

Ex. 72 (HRB-DOJ-00431805).

63

Ex. 49 (HRB-DOJ-00524530, at 3).

64

Ex. 73 (HRB-DOJ-00999589) Redacted

65

Ex. 74 (HRB-DOJ-00553898, at 6).

66

Ex. 75 (HRB-DOJ-50009015, at -20); see also Ex. 76 (HRB-DOJ-50083822, at -30-32) Redacted

67

Ex. 77 (HRB-DOJ-00971052) Redacted

- 11 -

Not only did HRB keep track of TaxACT and its products, it also frequently changed its
business strategies, products, and prices in response to TaxACT. For example, after TaxACT
introduced its free federal product on its website, HRB soon began considering how it could
respond. The company began planning to test Redacted

in

February 2006,68 and specifically modified the appearance of its website for these tests in order
to better compete with TaxACT.69 The reason for HRB’s response to TaxACT’s free product
was made clear by the then-head of the digital division:

Redacted

70

HRB’s competitive responses to TaxACT were not limited to its offering of a free
product. For example, HRB brought in an internet marketing vendor to help craft its search term
advertising strategy Redacted
71

In 2008, HRB’s Vice President of Marketing for its

digital division recommended increasing its online advertising Redacted
72

In fact, HRB even advertised on its website to

TaxACT customers that Redacted
”73 These are but a few of the hundreds of documented examples of HRB formulating its

Redacted

68

Ex. 78 (HRB-DOJ-00187065, at 22).

69

Ex. 79 (HRB-DOJ-01009830) Redacted

70

Ex. 80 (HRB-DOJ-00516176).

71

Ex. 81 (HRB-DOJ-50198834).

72

Ex. 82 (HRB-DOJ-00952577); see also Ex. 83 (HRB-DOJ-00510602, at 21); Ex. 84 (HRB-DOJ-00255294,
at 30); Ex. 85 (HRB-DOJ-00008519); Ex. 86 (HRB-DOJ-00105026); Ex. 87 (HRB-DOJ-00364310); Ex. 88 (HRBDOJ-00339950, at 25).
73

Ex. 89 (2SS-MARKe-0060278).

- 12 -

pricing decisions,74 improving its products,75 increasing its marketing,76 making changes to its
websites,77 and competing aggressively to attract customers from TaxACT.78
Indeed, if the Court enjoins the transaction, there is no doubt that HRB will continue to
compete aggressively against TaxACT. Right before signing the deal, HRB’s Redacted

”79
TaxACT also focused heavily on HRB as a primary competitor. As far back as 1999,
TaxACT publicly claimed that Redacted
80

Internal TaxACT presentations reflected this sentiment as

well, including its “Competitive Analysis: TY 2009,” where TaxACT discusses HRB’s product
offerings.81 TaxACT also made pricing decisions,82 changed its marketing,83 and competed

74

See, e.g., Ex. 90 (HRB-DOJ-00170956) Redacted
.

75

See, e.g., Ex. 91 (HRB-DOJ-00282548, at -55); Ex. 92 (HRB-DOJ-00012773, at -74); Ex. 93 (HRB-DOJ00190106).
76

See, e.g., Ex. 94 (HRB-DOJ-50496362, at -63).

77

See, e.g., Ex. 95 (HRB-DOJ-50495449, at 10, 12).

78

See, e.g., Ex. 96 (HRB-DOJ-50184789); Ex. 89 (2SS-MARKe-0060278); Ex. 97 (HRB-DOJ-00457538, at 39); Ex. 98 (HRB-DOJ-00347829); Ex. 87 (HRB-DOJ-00364310); Ex. 99 (HRB-DOJ-50030902); Ex. 100 (HRBDOJ-00155381, at -82).
79

Ex. 101 (HRB-DOJ-00007730, at -31).

80

Ex. 102 (2SS-GRECe-0038547); see also Ex. 103 (2SS-GRECe-0038731) Redacted

81

Ex. 104 (2SS-PETKe-0314664); see also Ex. 105 (2SS-GRECe-0024871, at 9); Ex. 106 (2SS-MRKTe0103983, at 4, 7, 8).
82

See, e.g., Ex. 107 (2SS-PETKe-0136388); Ex. 108 (2SS-MARKe-0017599, at 1, 9).

83

See, e.g., Ex. 28 (Dunn Dep. 306:8-307:20); Ex. 109 (2SS-MARKe-0012718) Redacted

- 13 -

aggressively to attract customers from HRB.84 And, in June of 2010, TaxACT even conducted a
“brand analysis” in which it specifically compared its brand to those of its Redacted
”85
B.

Other Industry Participants and the Public Recognize the Competition
Between HRB and TaxACT

HRB and TaxACT are not alone in believing they are in competition with one another
and Intuit. Competitors, such as Intuit, also regularly monitored and responded to TaxACT,86
which Intuit characterized as Redacted
”87 Indeed, Intuit makes it clear in its public filings with the SEC
that it faces “intense competition from H&R Block . . . [and] TaxACT” whose “competing offers
subject [Intuit] to significant price pressure.”88 Other industry participants, including TaxSlayer,
TaxHawk and CCH, also recognize that HRB and TaxACT compete with one another.89 As
Liberty Tax Service90 in particular notes, Redacted
”91
Moreover, independent product reviewers also believe that HRB and TaxACT compete
with one another. For example, reviews of products available during this past tax season noted
that the products sold by Intuit, HRB and TaxACT are “the three leading programs,” and
concluded that
84

See, e.g., Ex. 28 (Dunn Dep. 181:9-185:13, Ex. 12).

85

Ex. 110 (2SS-KINJe-0002225, at -29).

86

See, e.g., Ex. 111 (INT-DOJ0018867, at 18, 39).

87

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 7).

88

See Ex. 112 (Intuit Inc. 10-K for Fiscal Year Ending July 31, 2010, at 12).

89

Ex. 113 (RHO-DOJ-000121 (TaxSlayer Decl.) ¶¶ 7-8); Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶¶ 1011); Ex. 26 (WK-DOJ-000001 (CCH Decl.) ¶ 4).
90

Liberty, in addition to its brick-and-mortar tax preparation business, offers the eSmartTax digital DIY tax
preparation product. Ex. 24 (JTH-DOJ-000001 (Liberty Decl.) ¶ 3).
91

Ex. 24 (JTH-DOJ-000001 (Liberty Decl.) ¶ 8).

- 14 -

[f]or people with straightforward finances — a salary and some investment
income, a mortgage and common deductions — any of the leading ones should
work. All three — TurboTax, H&R Block at Home and TaxAct — use a
question-and-answer format to guide you through your return and then plug your
responses into the appropriate places on the I.R.S.’s many forms.92
Like the media, industry analysts — who are tasked with providing expertise on an
industry and its competitors — view HRB and TaxACT as digital competitors.

Redacted

, for

example, in covering HRB’s acquisition of TaxACT, stated that the acquisition Redacted

”93 HRB’s
own competitive monitoring reports, which it commissioned from Redacted

entitled

“Competitive Intelligence Monitoring Service,” identify both Intuit and TaxACT as HRB’s
digital competitors.94

Redacted

provided its own opinion on the impact of

consolidating these two players in the Digital DIY tax preparation market:

Redacted

”95
III.

HRB’s Acquisition of TaxACT
After a long history of aggressive competition between HRB and TaxACT that benefitted

millions of taxpayers, HRB and TaxACT declared a truce on October 13, 2010, with a $287.5
92

Ex. 114 (Gray, Tim, Tasting Three Flavors of Tax Software, The New York Times, dated Feb. 13, 2011,
BU11, available at http://www nytimes.com/2011/02/13/business/yourtaxes/13review.html (last visited July 30,
2011)); see also Ex. 115 (Rosenberg, Eva, Five Top Online Tax-Prep Services, MarketWatch, dated Jan. 28, 2011,
available at http://www marketwatch.com/Story/story/print?guid=370EE742-2A61-11E0-A215-00212804637C (last
visited July 30, 2011)); Ex. 116 (Carroll, Sean, Online Tax Prep Services, PC Magazine, dated Apr. 14, 2011,
available at http://www.pcmag.com/article2/0,2817,2359077,00.asp (last visited July 30, 2011)).
93

Ex. 117 (HRB-DOJ-00134903).

94

See, e.g., Ex. 118 (HRB-DOJ-00989633, at -33, -48, -55).

95

Ex. 119 (HRB000210).

Redacted

Ex. 61 (Houseworth Dep. 281:15-282:14).

- 15 -

million payment to TaxACT’s shareholders.96 If the acquisition is permitted, HRB’s 15.6%
market share would be consolidated with TaxACT’s 12.8% market share, thus leaving the
combined company with over 28% of the market.97 With Intuit’s 62.2% market share,98 the two
companies would collectively control over 90% of the Digital DIY market. As HRB’s Chief
Information Officer remarked, Redacted
99

The United States brought this

antitrust suit on May 23, 2011 to permanently enjoin HRB from acquiring TaxACT. As the facts
above make clear, the proposed acquisition would substantially lessen competition in the Digital
DIY market in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18.
ARGUMENT
Section 15 of the Clayton Act authorizes courts to grant preliminary relief to prevent
violations of the antitrust laws. 15 U.S.C. § 25. The purpose of preliminary relief is “to avoid
the need for intrusive relief later, since even with the considerable flexibility of equitable relief,
the difficulty of ‘unscrambl[ing] merged assets’ often precludes an effective order of
divestiture.” FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1034 (D.C. Cir. 2008) (quoting
FTC v. Dean Foods Co., 384 U.S. 597, 607 n.5 (1966)). The preferred relief in merger litigation
is a full stop injunction. FTC v. PPG Indus., Inc., 798 F.2d 1500, 1506-07 (D.C. Cir. 1986).
“A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on
the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the
balance of equities tips in his favor, and that an injunction is in the public interest.” Gordon v.

96

Ex. 120 (TA 3d-1).

97

See Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part IV); Ex. 27 (HRB-DOJ-00012327).

98

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part IV); Ex. 27 (HRB-DOJ-00012327).

99

Ex. 122 (HRB-DOJ-00012401).

- 16 -

Holder, 632 F.3d 722, 724 (D.C. Cir. 2011). Where, as here, the United States seeks to enjoin an
antitrust violation, “irreparable harm [] should be presumed.”100 Thus, preliminary relief should
be granted where “the Government has shown a reasonable likelihood of success on the merits
and whe[re] the balance of equities tips in its favor.” United States v. Siemens Corp., 621 F.2d
499, 505 (2d Cir. 1980).
In assessing the reasonable likelihood of success, the Court’s task is not to make a final
determination on whether the proposed acquisition violates Section 7, but rather to make only a
preliminary assessment of the acquisition’s impact on competition. FTC v. Staples, Inc., 970 F.
Supp. 1066, 1070-71 (D.D.C. 1997). To make the sufficient showing, “it is well settled” that the
United States need only show “a reasonable probability” that the proposed acquisition would
substantially lessen competition. FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 45 (D.D.C.
1998).
“The principal public equity weighing in favor” of injunctive relief “is the public interest
in effective enforcement of the antitrust laws.” FTC v. H.J. Heinz Co., 246 F.3d 703, 726 (D.C.
Cir. 2001). In contrast, private equities are afforded “little weight.” Id. at 727 n.25. Where the
United States shows a reasonable likelihood of success, “a countershowing of private equities
alone would not suffice to justify denial of a preliminary injunction barring the merger.” Id.
Because HRB’s proposed acquisition of TaxACT would eliminate a maverick in the
Digital DIY market and substantially reduce competition, the United States has a substantial
likelihood of succeeding on the merits of its claim.

100

United States v. Siemens Corp., 621 F.2d 499, 506 (2d Cir. 1980); see also FTC v. Weyerhaeuser, 665 F.2d
1072, 1082 & n.22 (D.C. Cir. 1981 (R.B. Ginsburg, J.) (holding Section 13(b) of the Clayton Act, expressly
disavowing irreparable harm requirement where case was brought by FTC, was a codification of existing law,
including in merger cases brought by the United States); United States v. Ingersoll-Rand Co., 218 F. Supp. 530, 545
(E.D. Pa. 1969) (“The Congressional pronouncement in section 7 [of the Clayton Act] embodies the irreparable
injury of violations of its provisions.”).

- 17 -

Under Section 7 of the Clayton Act, a merger is illegal “where in any line of commerce in
any section of the country, the effect of such acquisition may be substantially to lessen
competition or tend to create a monopoly.” 15 U.S.C. § 18 (emphasis added). Under the law,
the Court is charged with assessing the future effects of an acquisition and, accordingly, its
assessment necessarily concerns “probabilities, not certainties.” Brown Shoe Co. v. United
States, 370 U.S. 294, 323 (1962). Thus, the United States need only show “that the merger
create[s] an appreciable danger of [anticompetitive] consequences in the future.” Heinz, 246
F.3d at 719.101
Merger analysis typically involves the determination of (1) the relevant markets and (2)
the transaction’s probable effect on competition in those markets. See, e.g., FTC v. Swedish
Match, 131 F. Supp. 2d 151, 156 (D.D.C. 2000). Undue concentration and a significant market
share in the relevant markets establish a presumption that the transaction is unlawful. See United
States v. Phila. Nat’l Bank, 374 U.S. 321, 365-66 (1963); Swedish Match, 131 F. Supp. 2d at
166-67. Once the presumption is established, the burden of rebutting Plaintiff’s prima facie case
shifts to Defendants. United States v. Marine Bancorp., Inc., 418 U.S. 602, 613 (1974); Whole
Foods, 548 F.3d at 1035; Swedish Match, 131 F. Supp. 2d at 167. To satisfy their burden,
Defendants must show that the evidence of concentration “give[s] an inaccurate prediction of the
proposed acquisition’s probable effect on competition.” Id. (quoting Staples, 970 F. Supp. at
1083). If Defendants offer sufficient evidence to rebut the presumption, the United States must
prove that the acquisition is likely to substantially reduce competition. Heinz, 246 F.3d at 715.
101

See also Staples, 970 F. Supp. at 1072 (“[T]he government need only show that there is a ‘reasonable
probability’ that the challenged transaction will substantially impair competition.”); U.S. Dep’t of Justice & Fed.
Trade Comm’n, Horizontal Merger Guidelines (2010) § 1.0 (“Most merger analysis is necessarily predictive,
requiring an assessment of what will likely happen if a merger proceeds as compared to what will likely happen if it
does not.”). While not binding on this Court, PPG Indus., 798 F.2d at 1503 n.4, the Merger Guidelines have been
considered by courts to be persuasive authority. Chi. Bridge & Iron Co. N.V. v. FTC, 534 F.3d 410, 434 n.13 (5th
Cir. 2008); Cardinal Health, Inc., 12 F. Supp. 2d at 53.

- 18 -

I.

The Relevant Product Market is Digital DIY Tax Preparation
A relevant product market in an antitrust case includes those “commodities reasonably

interchangeable by consumers for the same purposes.” United States v. E.I. du Pont de Nemours
& Co., 351 U.S. 377, 395 (1956). More specifically, the pivotal question in product market
definition is whether a price increase in the proposed market would “drive [enough] consumers
to an alternate product” to render such a price increase unprofitable. Whole Foods Mkt., 548
F.3d at 1038. To answer that question, courts frequently apply the hypothetical monopolist test
from the U.S. Dep’t of Justice and Fed. Trade Comm’n, Horizontal Merger Guidelines (2010),
available at http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf (“Merger Guidelines”),
and ask whether a profit-maximizing monopolist likely would impose a “small but significant
and nontransitory” price increase on at least one product sold by the merging firms. See, e.g.,
Whole Foods Mkt., 548 F.3d at 1038; Staples, 970 F. Supp. at 1076 n.8; see also Merger
Guidelines § 4.1.1.
Digital do-it-yourself tax preparation products for the preparation of U.S. federal and
state individual tax returns (referred to herein as “Digital DIY”) is a relevant product market.
The market is no larger than Digital DIY products because consumers view neither unassisted
tax preparation nor hiring tax professionals as reasonable alternatives to Digital DIY products.
And the product market is no smaller than Digital DIY because all Digital DIY products provide
similar functionality, are reasonably interchangeable, and compete with one another. A
hypothetical Digital DIY monopolist could impose a small but significant price increase for the
products.
Courts also rely on various practical indicia to assess the appropriate market definition,
Brown Shoe Co., 370 U.S. at 324-28, including “the nature of the products” that the merging
parties principally sell, “the outlets they employ” to distribute their product to the end-user, “how
- 19 -

the market is perceived” by the companies themselves, FTC v. Coca-Cola Co., 641 F. Supp.
1128, 1132 (D.D.C. 1986), vacated as moot, 829 F.2d 191 (D.C. Cir. 1987), and public or
industry perception of those markets. See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines,
Inc., 792 F.2d 210, 218 n.4 (D.C. Cir. 1986) (“[P]ublic recognition . . . of the [market] as a
separate economic unit matters because we assume that economic actors usually have accurate
perceptions of economic realities.”). Because market definition can be a “highly technical
economic question,” Morgan, Strand, Wheeler & Biggs v. Radiology, Ltd., 924 F.2d 1484, 1490
(9th Cir. 1991), courts also regularly look to expert testimony to define the scope of, and
delineate the participants in, a relevant product market, see, e.g., Hynix Semiconductor Inc. v.
Rambus Inc., No. CV-00-20905, 2008 WL 73689, at *10 (N.D. Cal. Jan. 5, 2008).
Here, Defendants’ admissions as to their own perception of the market establish that the
relevant market is all Digital DIY products and not some recently concocted subset of
“premium” and “value” products. Our expert’s similar conclusion leaves no doubt that the
relevant market is Digital DIY products.
A.

Digital DIY Products are Not Reasonably Interchangeable with Unassisted
Tax Preparation and Professional Tax Preparation

Digital DIY products greatly simplify the tax return process compared to unassisted
preparation, such as the “pen-and-paper” method.102 Digital DIY products walk customers
through an easy-to-understand interview process that uses layman’s terms. They request

102

Pen-and-paper includes both tax preparation by hand, and preparation with the IRS’s free file fillable forms
and any state equivalents. Free file fillable forms are simply electronic versions of paper tax forms, allowing
individuals the ability to fill out their tax returns manually on the computer. See Ex. 123 (Free File Fillable Forms,
available at https://www.freefilefillableforms.com/FFA/Gateway/FED.htm (last accessed July 30, 2011) (“These
online forms are electronic versions of paper IRS tax forms.”)). Because free file fillable forms do not offer any of
the advantages of Digital DIY products, such as guidance and generally understandable instructions, they are more
appropriately categorized as unassisted tax preparation. See Ex. 124 (Free File Fillable Forms: Frequently Asked
Questions, available at http://www.irs.gov/efile/article/0,,id=226829,00 html (last accessed July 30, 2011)) (“The
Fillable Forms option is the tool for you if you are comfortable filling out tax forms and schedules without software
help. This FREE forms-based program provides you with an experience comparable to paper forms . . . .”).

- 20 -

information customers might not otherwise realize was relevant (such as information for certain
tax deductions), perform and error check necessary calculations, and fill in the appropriate tax
forms. Digital DIY customers need not comprehend the tax code, know which forms to file, or
understand how to complete them. For most taxpayers, filing tax returns unassisted is a much
more complicated, time-consuming, and error-prone process than using Digital DIY products.103
Redacted

”104 Defendants’
internal documents and communications reflect little, if any, concern that consumers would
switch to pen-and-paper in response to an increase in Digital DIY prices. Finally, industry
executives, participants, and empirical evidence make clear that unassisted tax preparation is not
in the same product market as Digital DIY products.105 As a result, too few consumers would
switch to pen-and-paper to prevent a small but significant non-transitory increase in price for
Digital DIY goods.
Having considered the market conditions, Dr. Warren-Boulton has also concluded that
unassisted tax preparation is not in the same product market as Digital DIY products.106 Dr.
Warren-Boulton bases this conclusion in his expert report on several different factors. First, he
notes the shift of a significant number of taxpayers over the past several years from pen-andpaper to Digital DIY products, suggesting that this method of tax preparation does not pose a
103

Ex. 125 (TA 4c-9, at 6).

Redacted
104

Ex. 126 (HRBDOJ-00138815, at -27).
105

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Parts III.C.i & iii).

Redacted

See, e.g., Ex. 113 (RHO-DOJ000121 (TaxSlayer Decl.) ¶ 9).
106

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.i).

- 21 -

competitive constraint on Digital DIY products.107 He also highlights the testimony of industry
executives stating that they do not perceive any competitive threat to Digital DIY products from
pen-and-paper.108 Next, Dr. Warren-Boulton recognizes that, to the extent switching occurs
between these two methods of tax preparation, it occurs often due to changes in the complexity
of an individual’s tax return, rather than for competitive reasons such as price.109 Finally, Dr.
Warren-Boulton noted that changes in the price of Digital DIY products over time do not
correspond to switching by taxpayers between the tax preparation methods, again failing to
indicate that these products are in the same product market.110
Similarly, hiring professional tax preparers, such as certified public accountants (CPAs)
and tax professionals in HRB’s brick-and-mortar stores, is not a reasonable substitute for Digital
DIY products and is not in the same product market.111 Professional tax preparation provides
customers with one-on-one professional tax guidance, which is generally unavailable with
Digital DIY products. Professional tax preparation is therefore typically much more expensive
than Digital DIY products, and consumers are unlikely to switch to assisted tax preparation in
sufficient numbers to prevent a small but significant non-transitory increase in price for Digital
DIY products.112 Indeed, HRB has consistently made clear both publicly and internally that
assisted tax preparation and Digital DIY products do not compete with one another.113 As HRB
explained in an internal presentation, Redacted
107

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.i.1).

108

Id.

109

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.i.2).

110

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.i.3).

111

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.ii).

112

Consumers sometimes switch from Digital DIY to professional assistance, though usually because of a
change in life events that has made their taxes more complicated (e.g., buying a home or having a child), rather than
the prices of the products. Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.ii.3).
113

See, e.g., Ex. 127 (Bennett Dep. 98:9-99:9); Ex. 61 (Houseworth Dep. 35:1-36:3).

- 22 -

Redacted

”114
Dr. Warren-Boulton has also concluded that assisted tax preparation is not in the relevant

product market with Digital DIY products.115 He again bases this conclusion on several factors.
The first is that HRB and other industry players, through their testimony and ordinary business
documents, have frequently come to the conclusion that Digital DIY products are not taking
share from assisted tax preparation products, and that assisted is therefore not a competitive
constraint on Digital DIY products.116 And as with pen-and-paper, Dr. Warren-Boulton
recognizes both that switching between Digital DIY products and assisted products occurs
primarily due to changes in the complexity of an individual’s tax return,117 and that absence of a
correlation between consumer switching across Digital and assisted and the relative changes in
price of these products suggest that they are not in the same product market.118
B.

All Digital DIY Products Compete in the Same Product Market

The “boundaries of the relevant market must be drawn . . . to recognize competition
where, in fact, competition exists.” Brown Shoe Co., 370 U.S. at 326; see also Heinz, 246 F.3d
at 718 (product market definition “focuses solely on demand substitution”). Defendants’
business decisions, internal documents, and public statements make clear that HRB and TaxACT
compete in a single Digital DIY product market. Thus, the relevant product market is Digital
DIY products.
As discussed above, TaxACT and HRB have engaged in vigorous head-to-head
competition for years. Both companies have identified each other as competitors, made pricing
114

Ex. 128 (HRB-DOJ-00359542, at 9).

115

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.ii).

116

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.ii.1).

117

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.ii.2).

118

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.ii.3).

- 23 -

decisions, improved their products, and increased their marketing in efforts to attract one
another’s customers. TaxACT’s innovative and aggressive price cutting has reduced HRB’s
Digital DIY market share while causing price compression across all Digital DIY products.119
HRB’s acquisition of TaxACT aims to undo this damage: HRB views this acquisition as a
Redacted

”120

Simply put, HRB is seeking to acquire TaxACT because they compete in the same product
market.121
Indeed, TaxACT competes with HRB because, Redacted
”122 TaxACT’s
President, Lance Dunn, agreed, saying that his company’s Redacted
123

It is not surprising, then, that

there are no observable differences in characteristics between the customers of various Digital
DIY providers, such as adjusted gross income, tax complexity, or age.124
Thus, while TaxACT’s Digital DIY products are less expensive than those of HRB and
Intuit, their quality is just as good. TaxACT’s lower prices reflect its innovative and aggressive
competition, by offering products with Redacted
125

119

Ex. 20 (HRB-DOJ-01003395, at 12).

120

By offering such high-quality

Ex. 129 (HRB-DOJ-00576608, at 6).

121 Redacted

122

Ex. 131 (HRB 30(b)(6) Dep. 123:17-22); see also Ex. 132 (HRB 4c-02, at 18).

123

Ex. 28 (Dunn Dep. 152:20-153:12); see also Ex. 28 (Dunn Dep. 266:15-267:13; 303:13-20).

124

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part V.A.iii).

125

Ex. 131 (HRB 30(b)(6) Dep. 222:14-223:3); see also Ex. 104 (2SS-PETKe-0314664).

- 24 -

products with such aggressive pricing, TaxACT has caused “price compression” across all
Digital DIY products.126 With HRB, TaxACT, and other digital firms engaging in direct
competition, the product market in this case is Digital DIY products.127
Not surprisingly, HRB’s and TaxACT’s documents are confirmed by the empirical
studies conducted by Dr. Warren-Boulton. For example, Dr. Warren-Boulton calculated a
hypothetical Digital DIY monopolist’s critical loss for a 10% increase in price and compared that
to the aggregate diversion ratio for each of the Big 3 firms. Based on this study, Digital DIY is a
relevant product market.128
C.

Defendants’ Claimed Distinction Between “Value” and “Premium” Markets
is Without Merit

Defendants claim that the transaction will not substantially lessen competition because
HRB is in a “premium” segment of the market and TaxACT is in a separate “value” segment of
the market.129 This contention is without merit and is simply a construct for this case.
Throughout their many years of vigorous competition — starting in 2004 with TaxACT’s
free-for-all FFA offer and continuing through 2010, when TaxACT offered free state e-filing
through Staples — Defendants have recognized that their products compete in a single Digital
DIY market. Defendants’ public statements, internal analyses and business decisions have been
based on that understanding of the market. The fact that HRB and TaxACT have different
strategies in appealing to consumers, such as different prices, does not mean that Defendants are
not in competition. On the contrary, TaxACT itself recognized that its Redacted

126

Ex. 20 (HRB-DOJ-01003395, at 12).

127

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.B).

128

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part III.C.iii).

129

Ex. 133 (Defs.’ Answer at 2-3). It is not clear to the United States what a “segment” of the market is.

- 25 -

”133 Regardless of their strategy, HRB, Intuit, and TaxACT all offer similar products to the
same group of customers,134 ultimately seeking to be more effective competitors in the Digital
DIY market.
At its heart, Defendants’ argument that they compete in separate “value” and “premium”
segments of the market is based entirely on the fact that HRB and TaxACT offer their products
at different prices.135 However, the Supreme Court has held that a price differential alone is
insufficient to infer two separate product markets. “[P]rice is only one factor in a user’s choice
between one [product] or the other. That there are price differentials between the two products . .
. are relevant matters but not determinative of the product market issue.” United States v. Cont’l
Can Co., 378 U.S. 441, 455 (1964); see also Brown Shoe Co., 370 U.S. at 326; HDC Medical,
Inc. v. Minntech Corp., 474 F.3d 543, 547-48 (8th Cir. 2007) (rejecting proposed product market
where market definition was based solely on a “substantial price differential” between two

130

Ex. 134 (2SS-CORPe-0001833, at -51) (emphasis added).

131

Id.

132

Id.

133

Id. at -35.

134

Ex. 61 (Houseworth Dep. 38:20-39:2); Ex. 127 (Bennett Dep. 115:12-19).

135

See, e.g., Ex. 61 (Houseworth Dep. 186:9-21) Redacted

- 26 -

products). Indeed, antitrust law expressly recognizes that “[p]roducts competing against one
another in a differentiated product market may have widely different prices.” FTC v. CCC
Holdings Inc., 605 F. Supp. 2d 26, 42 (D.D.C. 2009) (internal quotation omitted). This is
because inherent in the definition of a differentiated product market like Digital DIY tax
preparation is that sellers of the product “compete along more dimensions than price.” Id. at 42
n.19 (internal quotation omitted). Thus, it is hardly surprising that Defendants’ own business
documents, as opposed to their arguments in this case, recognize that each Defendant is a
primary competitor of the other. Indeed, far from being in a distinct premium separate segment
of the market, HRB internally admits Redacted
136

Only in 2010, when it became clear to HRB that its acquisition would face close antitrust
scrutiny, did Defendants start referring to these separate “value” and “premium” markets. As
noted above, on October 11, 2010 — a few days before the deal was announced — HRB’s

Redacted

though not yet identifying these “value” and “premium” markets,
began formulating how to describe the market: “Are we calling this the digital category or
online category. I was thinking online category were [sic] the word of choice to get passed [sic]
HSR approvals, so you’ll notice those changes within the docs.”137
After the United States opened an investigation into the acquisition, Defendants
repeatedly sought to articulate proposed market definitions that, though frequently inconsistent,
had one common factor — each market definition indicated that the competition between HRB
and TaxACT was limited or even nonexistent.

136

Ex. 51 (HRB-DOJ-00902949, at 14).

137

Redacted

Ex. 11 (HRB-DOJ-50258582).

- 27 -

Redacted

141

Defendants have

been unable, however, to explain what functional differences there are between value and
premium products,142 let alone why Defendants have repeatedly referred to one another as
competitors over the years if they do not compete.143
HRB’s lawyers, as well as its executives, have been struggling to recast the market to
support its claims in this case. When HRB released its most recent 10-K filing to its investors
138

See Ex. 135, at 15.

139

See Ex. 136, at 2.

140 Redacted

141

Ex. 28 (Dunn Dep. 25:21-26:2).

142

Ex. 137, at 7-8.

Redacted

143 Redacted

- 28 -

five weeks ago, it included new language embracing the “value” and “premium” distinction. In
prior years, the “Competitive Conditions” section of HRB’s 10-K contained standard language
referring to competition with “a number of companies” and increasing competition due to, inter
alia, “offers of free tax preparation services.”144 When HRB released its most recent 10-K in
June, these passages no longer appeared. Instead, a new passage was included for the first time
referring to competition “among value and premium products.”145

Redacted

146

Obviously, Defendants’ current argument about “value” and “premium” markets cannot
be squared with the extensive pre-transaction record;147 ultimately, the extensive competitive
interactions between HRB and TaxACT documented in that record speak for themselves. A
market definition that placed HRB and TaxACT in different markets would ignore the
competitive dynamics of the Digital DIY market and, as a result, the substantial lessening of
competition that would occur if HRB acquired TaxACT.
II.

The Relevant Geographic Market is Worldwide
The relevant products, Digital DIY products, are used to prepare U.S. federal and state

tax returns. Digital DIY products cannot be used to file tax returns for foreign jurisdictions, nor
can similar products designed for foreign jurisdictions be used to prepare U.S tax returns.
However, Digital DIY products (which are often provided online) can be supplied from outside
144

See, e.g., Ex. 13 (H&R Block 10-K for Fiscal Year Ending April 30, 2010, at 4); Ex. 139 (H&R Block 10-K
for Fiscal Year Ending April 30, 2009, at 4).
145

Ex. 12 (H&R Block 10-K for Fiscal Year Ending April 30, 2011, at 4).

146

Ex. 140 (Defendant H&R Block, Inc.’s Response to Plaintiff’s Second Set of Interrogatories to Defendant
H&R Block, Inc.).
147

For example, the entire foundation of Defendants’ argument — that people choose to pay more for HRB’s
products because of the brand’s reputation and features — is dubious Redacted
Ex. 141
(HRB-DOJ-00551872, at 4).

- 29 -

the United States, and the customer base includes taxpayers who are in the U.S. and those who
are filing U.S. tax returns from abroad. Thus, “the area of effective competition,” Tampa Elec.
Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961), is worldwide. We do not understand
Defendants to contest the validity of the proposed geographic market.
III.

The Transaction is Likely to Result in Raised Prices and Lower Quality
A showing that a firm controls an “undue percentage share of the relevant market”

establishes a “presumption that the merger will substantially lessen competition.” Heinz, 246
F.3d at 715. Mergers that significantly increase concentration “must be enjoined in the absence
of evidence clearly showing that the merger is not likely to have such anticompetitive effects.”
United States v. Phila. Nat’l Bank, 374 U.S. at 363 (a merger giving one single firm 30% of the
market and four firms 78% is “inherently likely to lessen competition substantially”).
Courts generally analyze the likely anticompetitive effects from a proposed acquisition
using one of two frameworks: coordinated and unilateral effects.
Unilateral effects analysis examines whether the acquiring firm will have the incentive to
raise prices or reduce quality after the acquisition, independent of the competitive response from
rival firms. See, e.g., Swedish Match, 131 F. Supp. 2d at 169. For a unilateral price increase to
be profitable, the brands at issue need not be the closest substitutes for all consumers. See Phillip
E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 914 (“[U]nilateral effects theories do not
require that the output of the two merging firms be the closest possible substitutes for one
another.”). Instead,“[e]conomic theory [] suggests that [the acquiring firm] will raise prices as
long as the profit gained by the higher prices of the [acquiring firm’s] products in addition to the
profit diverted to the [acquired firm’s] brands is greater than the profit lost through diversion” to
other suppliers. Swedish Match, 131 F. Supp. 2d at 169.

- 30 -

Coordinated effects refer to the tendency of “oligopolistic market structures” to result in
“tacit coordination.” Heinz, 246 F.3d at 725. An acquisition is likely to result in coordinated
interaction where: (1) the merger would significantly increase concentration and lead to a
moderately or highly concentrated market; (2) that market shows signs of vulnerability to
coordinated conduct; and (3) there is a credible basis to conclude that the acquisition may
enhance that vulnerability. Merger Guidelines § 7.1.
To assess whether either type of anticompetitive effects are likely, courts examine the
“structure, history, and probable future” of the market in question.” Brown Shoe, 370 U.S. at
322 n.38. The first two are assessed primarily through fact evidence — predominantly the
testimony of industry participants and company documents. Weyerhaeuser Co., 665 F.2d at
1080. Assessments of the “probable future” of the relevant market rely primarily on economic
analysis conducted by expert witnesses. Id. Both types of evidence in this case indicate that
HRB’s acquisition of TaxACT will likely lead to higher prices and lower quality Digital DIY
products for taxpayers. The Defendants’ documents, testimony from the Defendants and other
industry participants, and the overall structure of the market are clear: Prior to the acquisition,
Defendants engaged in substantial head-to-head competition that benefitted consumers, and if
this transaction is allowed to go forward, that competition will not be replaced. The result will
be higher prices and lower quality products for consumers. Dr. Warren-Boulton’s expert report
comes to the same conclusion. The elimination of TaxAct – the market’s maverick – is likely to
result in both HRB and Intuit raising prices.
A.

The Challenged Acquisition is Presumptively Unlawful Because it Will
Substantially Increase Concentration

A central concern of antitrust law and policy is that “increased concentration raises a
likelihood of interdependent anticompetitive conduct.” PPG, 798 F.2d at 1503; see also FTC v.
- 31 -

Univ. Health, Inc., 938 F.2d 1206, 1218 n.24 (11th Cir. 1991) (“Significant market concentration
makes it easier for firms in the market to collude, expressly or tacitly, and thereby force price
above or farther above the competitive level.”). The proposed acquisition will significantly
increase the already high level of concentration in the Digital DIY market. In 2010, the Big
Three had 90% of the market — Intuit (62.2%), HRB (15.6%), and TaxACT (12.8%).148 Market
concentration as measured by the Herfindahl-Hirschman Index (“HHI”) is currently 4,291,
indicating a highly concentrated market.149
The proposed acquisition will give HRB and Intuit collectively 90% of the market.150 It
will increase the HHI by approximately 400, resulting in a post-acquisition HHI of 4,691. The
merger should therefore be presumed to have anti-competitive effects. See, e.g., Phila. Nat’l
Bank, 374 U.S. at 363; Heinz, 246 F.3d at 716 (3 to 2 merger that would have increased HHI by
510 points from 4,775 created by “wide margin” presumption of anticompetitive effects); PPG,
798 F.2d at 1502-03, 1506 (53% market share and post-merger HHI of 3,295 left “no doubt that .
. . Commission [was entitled] to some preliminary relief”); Swedish Match, 131 F. Supp. 2d at
166-67 (60% market share and 4,733 HHI established presumption).

148

See Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part IV); Ex. 27 (HRB-DOJ-00012327). 2010
is the most recent year for which accurate data on market shares and concentration currently is available. E-filing
figures are used for purposes of calculating market share and concentration because they are the most accurate
figures currently available industry-wide. See Ex. 21 (Newkirk Dep. 126:7-19) Redacted

149

The HHI for a market is calculated by summing the squares of the individual market shares of all firms
participating in the market. Under the Merger Guidelines, markets with an HHI above 2,500 are considered “highly
concentrated.” Merger Guidelines at ¶ 5.3. In cases where the post-merger market is “highly concentrated,” and the
acquisition would result in an increase of more than 200 points in the HHI, the transaction is “presumed to be likely
to enhance market power.” Id. ¶ 5.3.
150 Redacted

- 32 -

B.

Removing TaxACT From the Market Would End Aggressive Head-to-Head
Competition With HRB that Has Benefitted Consumers

Beyond the presumptions that arise from the HHI calculations, the acquisition of
TaxACT would eliminate head-to-head competition between these two companies, leading to
higher prices and lower-quality Digital DIY products. As discussed above, HRB and TaxACT
have fiercely competed over the past several years, resulting in substantial benefits for
consumers, including their current ability to prepare and e-file their federal tax returns for free.
With this acquisition, HRB is specifically considering actions that would reverse those benefits,
including using TaxACT to Redacted

”151

In his analysis of the proposed transaction, Dr. Warren-Boulton has concluded that
eliminating the head-to-head competition between HRB and TaxACT will likely result in higher
prices and lower quality Digital DIY products. In particular, HRB will have the independent
incentive to raise prices of its Digital DIY products by a significant amount if it acquires
TaxACT.152 Intuit will likely respond by increasing its own prices, providing HRB with an even
greater incentive to raise prices or lower the quality of its Digital DIY products even further.153
Based on Dr. Warren-Boulton’s merger simulation analysis, the combined HRB/TaxACT and
Intuit will raise prices, likely resulting in an aggregate loss to consumers, before offsetting for
any claimed efficiencies, of tens of millions of dollars annually.154 This amount does not take
into account the loss to consumers associated with the elimination of TaxACT as a maverick,
including the value of a robust free product offering, or other coordinated effects of the merger.

151

Ex. 143 (HRB-DOJ-50819576).

152

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part V.A.v.2).

153

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part V.A.v.3).

154

Id.

- 33 -

C.

The Acquisition of TaxACT Will Eliminate a Maverick

As courts have recognized, an “important consideration when analyzing possible anticompetitive effects” is whether the acquisition “would result in the elimination of a particularly
aggressive competitor in a highly concentrated market.” FTC v. Libbey, Inc., 211 F. Supp. 2d
34, 47 (D.D.C. 2002) (quoting Staples, 970 F. Supp. at 1083). HRB’s acquisition of TaxACT
would eliminate the driving force behind every major competitive development in the Digital
DIY market over the past seven years, leaving two incumbent companies to control almost 90%
of the Digital DIY market.
As described above, since 2004, TaxACT has been the “tax industry maverick”155 and a
“catalyst for change”156 in the Digital DIY market. Intuit has characterized TaxACT as Redacted
”157
And HRB referred to TaxACT’s conduct on multiple occasions as having a “disrupt[ive]” effect
on the Digital DIY market,158 by

Redacted

”159

Defendants are already considering the possibility of reducing the impact of TaxACT’s
maverick behavior.

Redacted

155

Ex. 3 (2SS-GRECe-0028581, at -83).

156

Ex. 4 (2SS-MARKe-0083230, at 18).

157

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 7).

158

See, e.g., Ex. 57 (HRB-DOJ-00251349, at 6); Ex. 35 (HRB-DOJ-00912870, at -71).

159

Ex. 144 (HRB-DOJ-00529134, at -41).

160

Ex. 55 (Grief Dep. 317:16-318:16).

Redacted

Ex. 131 (HRB 30(b)(6) Dep. 55:22-56:6)).

- 34 -

Redacted

161

only hints of the likely effects of the transaction.

These examples are

Redacted

”162
Redacted

”163
This evidence is supported by economic theory and market data.

.164

Redacted

Redacted

Accordingly, Dr. Warren-Boulton believes the merger “will threaten
the benefits consumers have already gained as well as benefits consumers may receive in the
future from [TaxACT] . . . because there will no longer be a firm in the market to play the role of
the market maverick.165

161

Ex. 28 (Dunn Dep. 60:4-17).

162

Ex. 119 (HRB000210).

163

Ex. 16 (HRB-DOJ-00319468, at 20).

164

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part VI.E.i.2).

165

Ex. 121 (Expert Report of Dr. Fredrick Warren-Boulton, Part VI.E, at 68).

- 35 -

D.

The Acquisition Will Increase the Likelihood of Actual or Tacit Collusion
Between HRB and Intuit

This acquisition would give two firms — Intuit and HRB — 90% of the market for
Digital DIY products. Such significant market concentration makes it “easier for the firms in the
market to collude, expressly or tacitly, and thereby force price above or farther above the
competitive level.” United States v. Rockford Mem’l Corp., 898 F.2d 1278, 1282-83 (7th Cir.
1990) (Posner, J.) (quoting Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1386 (7th Cir. 1986)); see
also Univ. Health, 938 F.2d at 1218 n.24. And “[w]ith only two dominant firms left in the
market, the incentives to preserve market shares would be even greater, and the costs of price
cutting riskier, as an attempt by either firm to undercut the other may result in a debilitating race
to the bottom.” CCC Holdings, 605 F. Supp. 2d at 67.
HRB executives quickly saw that buying TaxACT would change incentives in the
market. As one HRB executive observed, Intuit and HRB would have significant incentives to
raise prices and no longer increase the quality of their products in the absence of the industry
maverick: “Intuit and HRB together would have 84% of the digital market and we both
obviously have great incentive to keep this channel profitable. Other potential TA purchasers
could decide to cut their prices even further to see if they could make large market share gains &
build short-term profitability by ‘winning the race to the bottom.’”166 Another HRB executive
agreed: “One could also argue that there is value in taking control of this ‘segment’ by not
encouraging a race to free, which Intuit would have no interest in doing, and therefore has value
to HRB by preventing it through the acquisition.”167 HRB’s Chief Information Officer summed
up the advantages of the acquisition for his company:

166

Ex. 18 (HRB-DOJ-00355217).

167

Id.

- 36 -

Redacted

Redacted

”168 In contrast to all of the benefits HRB could expect from the deal, its

internal documents reflect a swift assessment of the benefits consumers could expect: “None.”169
Indeed, post-acquisition, coordination between Intuit and HRB would be fairly simple.
The companies already have ample opportunities to meet and communicate. The Digital DIY
market has a fairly small number of products, with similar functionality, which are sold at a
small number of price points. Furthermore, the current prices of Digital DIY products are
available on the websites of the various providers,170 allowing providers to monitor and enforce
coordinated pricing. See Heinz, 246 F.3d at 724 (expressing concern that firms could use
industry-wide scanner data to monitor coordination); cf. CCC Holdings, 605 F. Supp. 2d at 62-64
(assessing transparency of prices in industry); Merger Guidelines § 7.2. Indeed, HRB already
closely tracks the prices offered by Intuit.

Redacted

”171 More importantly, some internal HRB
communications already suggest there have been attempts by HRB at coordination with Intuit.172
Finally, the market for Digital DIY products provides little check on coordinated
behavior because sales are made to millions of individual consumers making relatively small
individual purchases. Because Digital DIY can only be used for a single tax year, consumers
must pay for a new product for each tax season, resulting in tens of millions of yearly
168

Ex. 122 (HRB-DOJ-00012401).

169

Ex. 16 (HRB-DOJ-00319468, at 24).

170

Pricing for retail software sold through third-party retailers is somewhat less transparent, as providers do not
make public the wholesale price charged to the third-party retailers. However, providers can easily determine the
retail price paid by consumers by, for example, visiting a Staples, reviewing a Staples circular, or monitoring the
product prices on http://www.staples.com.
171

Ex. 127 (Bennett Dep. 216:18-19).

172

See Ex. 145 (HRB-DOJ-00187146) Redacted

- 37 -

transactions. Thus, there are no powerful buyers of Digital DIY who can constrain the ability of
Intuit and HRB to raise prices, and the benefits of departing from a collusive agreement in any
single transaction are likely to be small relative to the potential costs. The risk of collusion is
therefore significant. See Cardinal Health, 12 F. Supp. 2d at 61 (“Given the large number of
customers and the interchangeability of contracts, it is unclear just how important each individual
customer, particularly each individual small to medium-sized customer, is to the Defendants.”);
Merger Guidelines at ¶ 7.2.
IV.

Defendants Cannot Rebut the United States’ Case Through Claims of Easy Entry or
Efficiencies Arising from the Transaction
By proving that the acquisition will increase concentration significantly in the Digital

DIY market, the United States establishes its prima facie justification for injunctive relief. See
Heinz, 246 F.3d at 716 (likelihood of success demonstrated by showing that market
concentration would increase substantially). Defendants therefore bear the burden of production
to rebut this presumption of anticompetitive effects. Id. at 715. As discussed above, the
evidence of increasing concentration in the relevant market is compelling, which increases the
quantum of evidence Defendants are required to demonstrate in order to rebut the presumption.
Id. at 725 (“The more compelling the prima facie case, the more evidence the defendant must
present to rebut it successfully.”). Defendants cannot make this showing.
A.

Obstacles in the Digital DIY Market Prevent Companies from Sufficiently
Entering or Expanding to Prevent Anticompetitive Harm

Entry by new firms or expansion by existing firms will not defeat an acquisition’s
anticompetitive effects unless that entry or expansion is likely to occur in a timely manner and is
sufficient to deter those anticompetitive effects. See Cardinal Health, 12 F. Supp. 2d at 55
(adopting “timely, likely, sufficient” test). In order for entry to be likely, it must be profitable
and at a sufficient scale to replace the competition lost by the acquisition. Merger Guidelines §
- 38 -

9.2. There are substantial barriers to entry by new firms and expansion by existing firms, and
therefore HRB and Intuit need not fear that timely entry or expansion would make a price
increase unprofitable. See Heinz, 246 F.3d at 717 n.13.
Barriers To Entry.

Redacted

”173 But even for companies with the necessary technology
and tax expertise, entry and expansion are difficult and take a long time, as success requires

Redacted

”174 And, as TaxACT
recognized, taxpayers will not use a Digital DIY product unless they have Redacted

”175 See, e.g., Rebel Oil v. Atl. Richfield, 51 F.3d 1421, 1439 (9th Cir. 1995)
(“[A] main source of entry barriers” is “entrenched buyer preferences for established brands.”).
Redacted

173

Ex. 38 (2SS-CORPe-0002404, at -19); Ex. 28 (Dunn Dep. 507:21-508:17); see also Ex. 134 (2SS-CORPe0001833, at -44); Ex. 28 (Dunn Dep. 503:4-13, 503:14-504:4; 504:5-12; 506:1-19). See CCC Holdings, 605 F.
Supp. 2d at 49 (recognizing need for specialized knowledge as significant barrier to entry).
174

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 27).

175

Ex. 125 (TA 4c-9, at 12).

176

Ex. 113 (RHO-DOJ-000121 (TaxSlayer Decl.) ¶ 13); see also Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 27).

177

Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 27); see also Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 13)

- 39 -

Redacted

”178 In other words, the very fact that a company is a new entrant or a fringe competitor,
with a small or non-existent customer base, makes it difficult for that company to grow quickly.
HRB itself concluded that new entry into the Digital DIY market is very difficult and
would take many years to gain a substantial amount of share.

Redacted

”182 And unlike TaxACT’s experience, new entrants
would be trying to expand in a market that has become significantly more mature since the time
period when TaxACT captured its market share.183 Marketing costs, in particular, have risen
dramatically,184 Redacted

185

Redacted

178

Ex. 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 13); see also Ex. 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 27)

Redacted

179

Ex. 146 (HRB-DOJ-00319797, at 20) Redacted

180

Ex. 130 (HRB-DOJ-00918192, at -270).

181

Ex. 148 (HRB-DOJ-00007735).

182

Ex. 28 (Dunn Dep. 507:11-20).

183

See, e.g., Ex. 149 (HRB-DOJ-00354158, at -59); Ex. 150 (HRB-DOJ-00347097, at -100).

184 Redacted

- 40 -

Barriers To Expansion. Current fringe players recognize the difficulty building share
through increased marketing.186

Redacted

Redacted

185

Ex. 21 (Newkirk Dep. 434:19-435:2).

186 Redacted

187 Redacted

188 Redacted

189 Redacted

190 Redacted
191 Redacted

- 41 -

Redacted

”192
B.

Defendants’ Claimed Efficiencies Do Not Immunize This Anticompetitive
Transaction

Defendants have claimed that efficiencies from the acquisition will outweigh any
anticompetitive effects.193 Courts, however, “have rarely, if ever, denied a preliminary
injunction solely based on the likely efficiencies.” CCC Holdings, 605 F. Supp. 2d at 72. In a
market like Digital DIY products, which is “highly concentrated” and “characterized by high
barriers to entry,” Defendants “must provide proof of extraordinary efficiencies [] to rebut”
Plaintiff’s prima facie case. Id. Defendants have the burden to prove efficiencies as an
affirmative defense.194
Redacted

Redacted

192 Redacted
193

Ex. 133 (Defs.’ Answer ¶ 58); see also Ex. 157 (Memorandum of Points and Authorities in Support of
Defendants’ Motion to Transfer Venue, at 4).
194

Ex. 133 (Defs.’ Answer, at ¶ 58).

195

Ex. 158 (HRB-DOJ-50264283); Ex. 159 (HRB 4c-01, at 2).

- 42 -

197

Defendants must show that the efficiencies are “merger specific to be cognizable as a
defense” and that they “cannot be achieved by either company alone, because if they can, the
merger’s asserted benefits can be achieved without the concomitant loss of a competitor.” Heinz,
246 F.3d at 722; see also Merger Guidelines § 10.

199

Redacted

See Heinz, 246 F.3d at 722 (D.C. Cir. 2001) (key

issue is whether “Heinz could obtain the benefit of better recipes by investing more money in
product development and promotion — say, by an amount less than the amount Heinz would
spend to acquire Beech-Nut”).

Redacted

”200
Further, to the extent an efficiencies defense is viable, there must be a showing that the
savings generated would be passed on to consumers. See, e.g., Univ. Health, 938 F.2d at 1223
(A defendant asserting efficiency defense “must demonstrate that the intended acquisition would
196

Ex. 131 (HRB 30(b)(6) Dep. 60:8-61:18) Redacted

197 Redacted

198 Redacted

199

Ex. 131 (HRB 30(b)(6) Dep. 144:6-145:9).

200

Ex. 161 (HRB-DOJ-00281972, at -73).

- 43 -

result in significant economies and that these economies ultimately would benefit competition
and, hence, consumers”); CCC Holdings, 605 F. Supp. 2d at 74 (Defendant required to show that
a “sufficient percentage of [] savings will accrue to the benefit of consumers to offset the
potential for increased prices). HRB’s incentive post-acquisition will be to increase, not
decrease its prices. Therefore, it can not show that any savings generated by the transaction will
benefit its customers, and its efficiency defense can not rebut the United States’ prima facie case.
That Defendants’ efficiencies arguments are weak is not surprising. A month before
Defendants announced the acquisition, a former head of HRB’s digital division explained

Redacted

”201
V.

The Balance of Harms and the Public Interest Favor a Preliminary Injunction
Although the harm to competition from consummation of the merger would be

irreparable, a preliminary injunction would not substantially injure HRB or TaxACT. This is not
a hostile takeover, and Defendants can continue to operate as independent firms until a full trial
on the merits can be held.202 At most, Defendants can claim only a private harm to their
respective businesses that may result from a delay in merging, in the unlikely event they
ultimately prevail on the merits. But such private interests yield to the public interest in
competition. Cf. Heinz, 246 F.3d at 727 n.25 (“‘Private equities do not outweigh effective
enforcement of the antitrust laws. When the Commission demonstrated a likelihood of ultimate
success, a countershowing of private equities alone would not suffice to justify denial of a
preliminary injunction barring the merger.’” (quoting Weyerhaeuser, 665 F.2d at 1083)).
201

Ex. 162 (HRB-DOJ-00277958).

Redacted

202

The Government’s experience in merger cases is that Defendants who lose a preliminary injunction almost
always abandon their deal, rather than litigate post-preliminary injunction.

- 44 -

Finally, there is a significant “public interest in effective enforcement of the antitrust
laws.” Heinz, 246 F.3d at 726. Because the acquisition violates the antitrust laws, issuance of a
preliminary injunction clearly serves the public interest. See generally PPG, 798 F.2d at 1508;
Weyerhaeuser, 665 F.2d at 1083, 1085.
CONCLUSION
For the foregoing reasons, the United States respectfully requests that this Court grant the
United States’ Motion for a Preliminary Injunction and prevent H&R Block from consummating
its acquisition of TaxACT pending a full trial on the merits.

Dated this 1st day of August 2011.
Respectfully Submitted,
FOR PLAINTIFF UNITED STATES:

__/s/ James J. Tierney__________________
James J. Tierney (D.C. Bar #434610)
Chief
Networks and Technology Section

__/s/ Lawrence E. Buterman_____________
Lawrence E. Buterman (D.C. Bar #998738)
Sanford Adler
Kent Brown
Jessica Butler-Arkow
Mary N. Strimel
Aaron Comenetz
Adam T. Severt
Danielle G. Hauck
Anthony D. Scicchitano
David Gringer
H. Joseph Pinto
Trial Attorneys

__/s/ Scott A. Scheele__________________
Scott A. Scheele (D.C. Bar #429061)
Assistant Chief
Networks and Technology Section

U.S. Department of Justice
Antitrust Division
Networks and Technology Section
450 Fifth Street, NW
Washington, DC 20530
Telephone: [phone]
Facsimile: [phone]
[e-mail]

__/s/ Joseph F. Wayland_______________
Joseph F. Wayland
Deputy Assistant Attorney General
Antitrust Division

- 45 -

INDEX OF EXHIBITS BY CATEGORY
UNPUBLISHED DECISIONS
Hynix Semiconductor Inc. v. Rambus Inc., No. CV-00-20905, 2008 WL 73689
(N.D. Cal. Jan. 5, 2008) .................................................................................................1
Sherley v. Sebelius, __ F.3d __, 2011 WL 1599685 (D.C. Cir. Apr. 29, 2011) ..................2

PRESS RELEASES
Press Release, TaxACT 2009 Raises the Bar Higher on Free and Affordable Tax
Preparation Solutions, dated Jan. 7, 2010, available at
http://www.taxact.com/press/2010/press-release-01-07-2010-affordable.asp (last
visited July 30, 2011) ...................................................................................................56
Press Release, TaxACT Users Can Now Prepare, Print and E-File Returns Without
Charge, dated Dec. 12, 2005, available at http://www.taxact.com/press/press-release12-12-2005.asp (last visited July 30, 2011) .................................................................43
WEBSITES AND ARTICLES
Carroll, Sean, Online Tax Prep Services, PC Magazine, dated Apr. 14, 2011,
available at http://www.pcmag.com/article2/0,2817,2359077,00.asp
(last visited July 30, 2011) .........................................................................................116
Free File Fillable Forms, available at
https://www.freefilefillableforms.com/FFA/Gateway/FED.htm
(last accessed July 30, 2011)......................................................................................123
Free File Fillable Forms: Frequently Asked Questions, available at
http://www.irs.gov/efile/article/0,,id=226829,00.html
(last accessed July 30, 2011)......................................................................................124
Gray, Tim, Tasting Three Flavors of Tax Software, The New York Times,
dated Feb. 13, 2011, BU11, available at
http://www.nytimes.com/2011/02/13/business/yourtaxes/13review.html
(last visited July 30, 2011) .........................................................................................114
Kirkham, Chris, Online Tax Filing No Longer Free For All, WashingtonPost.com,
dated Jan. 26, 2006, available at http://www.washingtonpost.com/wpdyn/content/article/2006/01/25/AR2006012501786.html
(last visited July 30, 2011) ...........................................................................................40
Rosenberg, Eva, Five Top Online Tax-Prep Services, MarketWatch,
dated Jan. 28, 2011, available at
http://www.marketwatch.com/Story/story/print?guid=370EE742-2A61-11E0-A21500212804637C (last visited July 30, 2011) ...............................................................115
10-K FILINGS
H&R Block 10-K for Fiscal Year Ending April 30, 2009 ...............................................139
H&R Block 10-K for Fiscal Year Ending April 30, 2010 .................................................13
H&R Block 10-K for Fiscal Year Ending April 30, 2011 .................................................12
H&R Block Amended 10-K for Fiscal Year Ending April 30, 2005.................................37
Intuit Inc. 10-K for Fiscal Year Ending July 31, 2010 ....................................................112
- 47 -

COURT FILINGS
Memorandum of Points and Authorities in Support of Defendants’
Motion to Transfer Venue..........................................................................................157
FREE FILE ALLIANCE DOCUMENTS
FFA000091 ........................................................................................................................42
FFA000097 ........................................................................................................................30

- 48 -