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

Filing 66

REPLY to opposition to motion re 35 MOTION for Preliminary Injunction Redacted Version for Public Filing filed by UNITED STATES OF AMERICA. (Attachments: # 1 Exhibit GX 248, # 2 Exhibit GX 622, # 3 Exhibit GX 623, # 4 Exhibit GX 624, # 5 Exhibit GX 625, # 6 Exhibit GX 627, # 7 Exhibit GX 633, # 8 Exhibit GX 634)(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 REPLY MEMORANDUM OF POINTS AND AUTHORITIES
IN FURTHER 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 ......................................................................................................... iii
INTRODUCTION ...........................................................................................................................1
ARGUMENT ...................................................................................................................................4
I.

Defendants Misconstrue the Applicable Legal Standard .........................................4

II.

The Relevant Product Market is Digital DIY Tax Preparation................................4
A.

B.
III.

Manual Filing is Not Part of the Relevant Product Market Because
Digital DIY Products are Not Reasonably Interchangeable with
Manual Filing ...............................................................................................7
Assisted Preparation is Not Part of the Relevant Market Because
It is Not a Constraint on Digital DIY Products ............................................9

The Proposed Transaction Violates Section 7 of the Clayton Act ........................11
A.

The Challenged Acquisition is Presumptively Unlawful ..........................11

B.

Removing TaxACT From the Market is Likely to Result in
Unilateral Anticompetitive Effects ............................................................12
1.

There is No Market-Share Threshold for Unilateral
Effects ............................................................................................12

2.

The Facts Reveal that a Unilateral Price Increase is Likely ..........13

C.
D.
IV.

The Acquisition of TaxACT Will Eliminate a Maverick ..........................15
The Digital DIY Market is Vulnerable to Tacit or Actual Coordination ...17

Defendants Fail to Rebut the United States’ Prima Facie Case Through
Claims of Easy Entry or Efficiencies Arising from the Transaction .....................18
A.

Expansion by Fringe Competitors Will Not Offset the
Anticompetitive Effects of the Proposed Transaction ...............................18

B.

Defendants’ Claimed Efficiencies Do Not Immunize This
Transaction .................................................................................................22

CONCLUSION ..............................................................................................................................25

ii

TABLE OF AUTHORITIES
CASES:
Beacon Mut. Ins. Co. v. OneBeacon Ins. Grp., 376 F. Supp. 2d 251 (D.R.I. 2006) ........................6
Brooke Grp. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) .................................18
Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410 (5th Cir. 2008) ...............................................19
Cmty. Publishers v. DR Partners, 892 F. Supp. 1146 (W.D. Ark. 1995) ........................................5
*FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998) ..................................4, 7, 18, 19
FTC v. CCC Holdings Inc., 605 F. Supp. 2d 26 (D.D.C. 2009) ..............................................13, 25
*FTC v. H.J. Heinz Corp., 246 F.3d 708 (D.C. Cir. 2001)..........................................11, 18, 23, 24
FTC v. PPG Indus., Inc., 798 F.2d 1500 (D.C. Cir. 1986) ............................................................11
*FTC v. Staples, 970 F. Supp. 1066 (D.D.C. 1997) ........................................................................7
*FTC v. Swedish Match, 131 F. Supp. 2d 151 (D.D.C. 2000).........................................................4
FTC v. Univ. Health, Inc., 938 F.2d 1206 (11th Cir. 1991)...........................................................24
FTC v. Weyerhaeuser, 665 F.2d 1072 (D.C. Cir. 1981) ..................................................................4
Hosp. Corp. of Am. v. FTC, 807 F.2d 1381 (7th Cir. 1986) ........................................................1, 5
Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939) .......................................................17
Korea Kumho Petrochem. v. Flexsys Am. L.P., No. C07-01057 MJJ,
2008 WL 686834 (N.D. Cal. Mar. 11, 2008) ...........................................................................11
Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007) ..............................................3
Leelenau Wine Cellars, Ltd. v. Black & Red, Inc., 452 F. Supp. 2d 772 (W.D. Mich. 2006) .........5
Marathon Oil Co. v. Mobil Corp., 669 F.2d 378 (6th Cir. 1981) ..................................................18
Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm. Co.,
290 F.3d 578 (3d Cir. 2002).......................................................................................................6
Procter & Gamble Pharms. v. Hoffman-LaRoche Inc., N. 06 Civ. 0034 (PAC),
2006 WL 2588002 (S.D.N.Y. Sept. 6, 2006).............................................................................6
United States v. Archer-Daniels-Midland Co., 866 F.2d 242 (8th Cir. 1988) .................................7
United States v. Ivaco, Inc., 704 F. Supp. 1409 (W.D. Mich. 1989) ...............................................4
United States v. Oracle Corp., 331 F. Supp. 2d 1098 (N.D. Cal. 2004)........................................12
United States v. United Tote, Inc., 768 F. Supp. 1064 (D. Del. 1991) ..........................................13
United States v. Visa, 163 F. Supp. 2d 322 (S.D.N.Y. 2001) ..........................................................7
iii

OTHER AUTHORITIES:
Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ........................................................12, 17
U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010)........... passim
Fed. Trade Comm’n & U.S. Dep’t of Justice, Commentary on the
Horizontal Merger Guidelines (2006) .....................................................................................13
Manual for Complex Litigation (4th ed. 2004) ................................................................................6
Christine Meyer, Designing and Using Surveys to Define Relevant Markets, in Economics of
Antitrust: Complex Issues in a Dynamic Economy (2007) ........................................................6
Jonathan B. Baker & Carl Shapiro, Detecting and Reversing the Decline in Horizontal Merger
Enforcement, Antitrust, Summer 2008.....................................................................................12
Roundtable Discussion: Unilateral Effects after Oracle, Antitrust, Spring 2005 .........................12
Shari Seidman Diamond, Reference Guide on Survey Research, in Reference Manual on Survey
Evidence (Federal Judicial Center 2d ed. 2000) ........................................................................6

iv

INTRODUCTION
In our opening brief, we cited voluminous pre-transaction admissions by Defendants’
senior executives showing that they have long viewed H&R Block, Inc. (“HRB”) and 2SS
Holdings, Inc. (“TaxACT”) as direct competitors in a distinct market for digital do-it-yourself
tax preparation (“Digital DIY”). We included extensive citations to internal analyses and public
pronouncements regarding this competition, and we included direct quotations by the CEOs of
HRB and TaxACT recognizing and touting TaxACT’s “maverick” role as a price discounter and
product innovator.
Defendants’ response contains virtually no citation to any pre-transaction evidence, and
not surprisingly, none of the cited evidence contradicts the prior admissions of vigorous, direct
competition in the distinct Digital DIY market. Instead, Defendants suggest that the Court
should ignore pre-transaction evidence as nothing more than “snippets,” in favor of “deal
documents,” created specifically to justify a transaction with obvious anticompetitive effects. Of
course, Defendants’ citation to its purported “post-merger strategy” provides no evidentiary basis
to challenge their own pre-transaction admissions.1 And, in any event, the purported strategy
itself is contradicted by the facts and actually highlights the anticompetitive nature of the
transaction.
For example, Defendants claim in the first sentence of their brief, that HRB is acquiring
TaxACT “to offer a competitive low-cost product . . . and to better ‘attract and retain clients
using the ‘free’ model.’”2

Redacted

1

See Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1384 (7th Cir. 1986) (Posner, J.) (“[p]ost-acquisition evidence
that is subject to manipulation by the party seeking to use it is entitled to little or no weight.”).
2

Defendants’ Memorandum of Points and Authorities in Support of its Opposition to Plaintiff’s Motion for a
Preliminary Injunction (“Opp. Memo.”), at 1.

Redacted

.3 Defendants also claim that HRB will use

TaxACT as a price leader and product innovator,4 yet that is exactly what TaxACT is already
doing, forcing competitive responses from HRB and Intuit. The transaction is not necessary to
create such competition — it must be blocked to ensure that competition is not lessened.
Nor is there any basis in the “deal documents” or any other evidence to contradict the
market realities described in pre-transaction documents and recent testimony. There simply is no
doubt that pre-transaction, Defendants viewed each other as direct competitors and did not
recognize distinct “value” and “premium” markets. As Defendants admit in a footnote, prior to
the transaction “HRB [did] not consistently use[] the words ‘value’ and ‘premium’ . . . .”5
Similarly, Defendants’ 11th hour argument that assisted and digital tax preparation methods
compete with one another is completely belied by the explicit testimony just two weeks ago from
HRB’s president of its digital business:

Redacted

These admissions
are indicative of the larger truth that Defendants’ arguments in this case are nothing more than
“artificial constructs” — a term introduced by HRB’s CEO during his deposition while
3 Redacted

Redacted

4

Opp. Memo., at 11.

5

Opp. Memo., at 13 n.48.

6

GX 296 (Houseworth Aug 4. Dep. 88:4-11). Additionally, Defendants ignore that HRB actually sued Intuit
for false advertising merely for insinuating that Digital DIY and assisted tax preparation are competitive
alternatives. See GX 248 (Complaint, H&R Block Eastern Enters., Inc. v. Intuit, Inc., No. 06-0039-CV-W-SOW ¶¶
29-30 (W.D. Mo. Jan. 13, 2006).

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referencing Defendants’ proposed value and premium segments7 — that completely contradict
their business realities.
The business reality is that for the past several years, TaxACT has aggressively competed
with HRB, causing HRB to lower its prices and increase the quality of its offerings, while at the
same time preventing HRB from turning the Digital DIY market into a duopoly. Through this
transaction, HRB aims to end that competition. As Defendants’ expert Dr. Meyer tellingly
admits, HRB Redacted

and the acquisition of TaxACT will

allow it to achieve that goal.8 However, competition on price is precisely one of the goals our
antitrust laws aim to achieve. Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 895
(2007). And contrary to Defendants’ position, decreases in price competition cannot be
overcome under our antitrust laws simply through a CEO’s promise not to raise prices.
Defendants conclude their brief by threatening to abandon this deal if the Court grants the
United States’ Motion for a Preliminary Injunction.9 But that is no threat at all. HRB internally
has noted that if this transaction does not go through, it will Redacted

”10 In other words, HRB, in the absence of acquiring
market share by purchasing TaxACT, plans to compete aggressively to acquire that same share
by becoming a better Digital DIY provider. That is exactly what our antitrust laws aim to
promote, and why this transaction should be enjoined.
7 Redacted

8

Expert Report of Dr. Christine Siegwarth Meyer (“Meyer Report”) ¶ 76.

9

Opp. Memo., at 42.

10

GX 620 (HRB-DOJ-00007730, at -31).

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ARGUMENT
I.

Defendants Misconstrue the Applicable Legal Standard
Defendants fundamentally fail to understand the interplay of the four-factor preliminary

injunction test in merger cases where the plaintiff is the Government.11 To determine whether
the United States has a likelihood of success on the merits, a court must find there is a
“reasonable probability” that the proposed acquisition substantially lessens competition. FTC v.
Cardinal Health, Inc., 12 F. Supp. 2d 34, 45 (D.D.C. 1998). From this finding, it logically
follows that absent an injunction, there will be irreparable harm. First, “the threatened violation
of the law here is itself sufficient public injury to justify [injunctive] relief. The Congressional
pronouncement in § 7 embodies the irreparable injury of violation of its provisions.” United
States v. Ivaco, Inc., 704 F. Supp. 1409, 1429 (W.D. Mich. 1989).12 Second, it is nearly
impossible to unwind consummated mergers. Thus, if the court denies a preliminary injunction
where there has been a showing of a reasonable probability of lessening competition, and the
transaction is later found to violate the Act, it will be impossible to remedy the harm to
competition. FTC v. Swedish Match, 131 F. Supp. 2d 151, 172 (D.D.C. 2000) (failure to enjoin a
merger means that “the eggs will be irreparably scrambled”).
II.

The Relevant Product Market is Digital DIY Tax Preparation
To construct their proposed market definition, Defendants are forced to dismiss over five

years of business documents analyzing competition between the companies. But, the facts that
matter for product market definition are pre-litigation documents of defendants, the testimony of
defendants’ officials and other industry participants, and the economic analyses conducted by

11

Opp. Memo., at 24 n.107.

12

See also FTC v. Weyerhaeuser, 665 F.2d 1072, 1082 & n.23 (D.C. Cir. 1981) (R.B. Ginsburg, J.).

-4-

expert witnesses.13 What these all show here is that HRB monitored the number of references to
TaxACT on the internet, tracked TaxACT’s share of the Digital DIY market, analyzed and
compared TaxACT’s customer base with its own and studied why customers were switching
from HRB’s digital products to TaxACT.14 HRB specifically considered TaxACT’s customers
to be within HRB’s “Addressable Market,” lamented that TaxACT was surpassing HRB in the
digital marketplace, and frequently changed its business strategies, products and prices in
response to TaxACT.15 Thus HRB and TaxACT were unquestionably significant competitors in
the Digital DIY market.16
Thus, it is hardly surprising that Defendants never argue that HRB and TaxACT are in
different product markets. Instead, Defendants contend the Digital DIY market is too narrow
because it does not include “manual filing” and “paid assisted” tax preparation. This assertion is
curious in light of the fact that it is wholly inconsistent with how HRB segments its business,17
and instead is merely based on two fundamentally unreliable documents: a 2011 TaxACT
survey that was conducted for purposes of this litigation, and a 2009 HRB “pricing simulator.”18
2011 Litigation Survey. Defendants’ reliance on TaxACT’s survey conducted for this
litigation19 is misplaced. As Defendants’ expert has written, a survey “must be carefully

13

See, e.g., Cmty. Publishers v. DR Partners, 892 F. Supp. 1146, 1155-56 (W.D. Ark. 1995) (defining narrow
product market after weighing testimony from industry participants, pre-litigation records and expert opinion); cf.
Hosp. Corp. v. FTC, 807 F.2d at 1384 (Posner, J.) (“[p]ost-acquisition evidence that is subject to manipulation by
the party seeking to use it is entitled to little or no weight.”).
14

Pl. Mem., at 11.

15

Id. at 11-13.

16

Indeed, recent deposition testimony from two of Defendants’ executives responsible for digital products
confirms as clearly as possible that HRB and TaxACT compete in a digital market. Redacted

17

GX 532 (Cobb Dep. 142:3-19).

18

Opp. Memo., at 29.

19

One factor set forth by the Federal Judicial Center to determine whether a survey is sufficiently trustworthy is

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designed if it is to yield reliable and accurate data that are admissible as evidence,” and “must
surpass high standards if they are to yield data that are admissible in the courtroom.”20 But, as
the Government’s survey expert, Dr. Ravi Dhar, explains in his expert report, the survey on
which Defendants rely falls far short of those standards.21
As a threshold matter, the survey is flawed because it both fails to ask a question relevant
to any issue in this proceeding, and never gives survey recipients the opportunity to respond
“don’t know/no opinion.”22 Further, the survey’s response rate is astonishingly low (never more
than 2.5%), causing bias and further calling into question its reliability.23 Moreover, because it
asks only closed-ended, leading questions, the survey is “not credible.” Novartis Consumer
Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm. Co., 290 F.3d 578, 591 (3d Cir.
2002). Accordingly, this Court should afford the survey no weight.
2009 Pricing Simulator. Defendants also place substantial reliance on a study performed
by HRB in 2009 that Defendants claim “show[s] that [they] are not close competitors.”24 While

whether “the survey was conducted in anticipation of litigation and by persons connected with the parties or counsel
or by persons aware of its purpose in litigation.” Manual for Complex Litigation § 11.493 (4th ed. 2004); see also
Leelenau Wine Cellars, Ltd. v. Black & Red, Inc., 452 F. Supp. 2d 772, 778 (W.D. Mich. 2006) (citing Manual for
Complex Litigation factors).
20

GX 622 (Christine Meyer, Designing and Using Surveys to Define Relevant Markets, in Economics of
Antitrust: Complex Issues in a Dynamic Economy, at 101, 108 (2007)).
21

See GX 623 (Expert Report of Dr. Ravi Dhar).

22

Id. By not giving respondents a “don’t know/no opinion” option, a survey artificially inflates the proportion
of respondents willing to guess or speculate. See GX 624 (Shari Seidman Diamond, Reference Guide on Survey
Research, in Reference Manual on Survey Evidence, at 229, 249-51 (Federal Judicial Center 2d ed. 2000), available
at
http://www fjc.gov/public/home nsf/autoframe?openform&url l=/public/home.nsf/inavgeneral?openpage&url r=/pu
blic/home nsf/pages/610). Courts have held that “the reliability of the answers” to a survey is “undermined” when
respondents are not informed they have the option of responding don’t know/no opinion. See, e.g., GX 625 (Procter
& Gamble Pharms. v. Hoffman-LaRoche Inc., N. 06 Civ. 0034 (PAC), 2006 WL 2588002, at *23-24 (S.D.N.Y.
Sept. 6, 2006)) (citing cases).
23

See, e.g., Beacon Mut. Ins. Co. v. OneBeacon Ins. Grp., 376 F. Supp. 2d 251, 261 n.4 (D.R.I. 2006) (noting
that the Guidelines for Statistical Surveys issued by the former U.S. Office of Statistical Standards provide that “in
the case of probability samples, potential bias should receive greater scrutiny when [the] response rate drops below
75%, and if the response rate drops below 50%, the survey should be regarded with significant caution.”).
24

Opp. Memo., at 15.

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Defendants exclusively focus on the favorable results from a single scenario within a single
version of this study, they ignore the study’s methodology and ignore other results showing just
how unreliable the study truly is. For example, when the price of TaxCut online Basic is raised
in the model from Redacted to Redacted (holding all other prices constant) its own market share
increases dramatically. A

Redacted

increase in the price of HRB’s Basic product should not cause

growth in its share of the market. There simply is no economic explanation for this result.25
Accordingly, this simulator also deserves no weight.
A.

Manual Filing is Not Part of the Relevant Product Market Because Digital
DIY Products are Not Reasonably Interchangeable with Manual Filing

Products are said to be interchangeable where they are “similar in character or use.” FTC
v. Staples, 970 F. Supp. 1066, 1074 (D.D.C. 1997). The three “most relevant factors to
determine reasonable interchangeability are use, quality and price.” United States v. ArcherDaniels-Midland Co., 866 F.2d 242, 246 (8th Cir. 1988). So-called “manual filing” is not
similar in use, quality or price to Digital DIY preparation. Indeed, manual filing is no more of a
“constraint” on Defendants than a legal pad is a “constraint” on Microsoft Word, or a ledger
book is a “constraint” on Microsoft Excel.26 See United States v. Visa, 163 F. Supp. 2d 322, 33638 (S.D.N.Y. 2001) (holding that “although it is literally true that, in a general sense, cash and
checks compete with general purpose cards as an option for payment by consumers and that
growth in payments via cards takes share from cash and checks in some instances,” the products
are still in different markets because “cash and checks do not drive many of the means of
25

See Rebuttal Report of Dr. Fredrick Warren-Boulton; see also GX 660 (Second Expert Report of Ravi Dhar).

26

Defendants incorrectly contend that “as a matter of law,” manual preparation must be in the same market as
Digital DIY preparation. See Opp. Memo., at 28. The sole basis for Defendants’ claim is an incomplete and
irrelevant quote about “captive output.” Defendants fail to note, however, that “captive output” can “only be
considered [in the relevant product market] to the extent that ‘such inclusion reflects [its] competitive significance in
the relevant market prior to the merger.’” Cardinal Health, 12 F. Supp. 2d at 48 (quoting U.S. Dep’t of Justice &
Fed. Trade Comm’n, Horizontal Merger Guidelines (2010), available at
http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf (“Merger Guidelines”)).

-7-

competition in the general purpose card market.” (emphasis added)).
Several industry participants have testified that “manual filing” simply does not drive
competition with Digital DIY tax preparation. Bert DuMars, formerly of the IRS, testified that
the number of customers who switched from e-filing to pen-and-paper was “insignificant.”27 Mr.
DuMars noted that error rates with pen-and-paper filing were 20 times higher than those
associated with Digital DIY, and that taxpayers do not receive refunds from paper returns as
quickly as from e-filed returns.28 Consistent with the above, industry participants have testified
that they do not consider the prices of manual filing when setting their own digital prices.29
Indeed, when questioned as to whether pen-and-paper was a constraint on HRB’s digital
business, HRB’s president of its digital business Redacted
30

As for free fillable forms, Mark Ernst, HRB’s former CEO (who later worked at the IRS)
testified that they are Redacted

”31 In

27 Redacted

28

GX 569 (DuMars Dep. 18:24-19:1; 18:21-23).

29 Redacted

30

GX 296 (Houseworth Aug. 4 Dep. 89:2-90:1).

31

GX 572 (Ernst Dep. 31:23-32:7).

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other words, free fillable forms are simply electronic versions of pen-and-paper that have
remained a Redacted

”32

It is beyond dispute that the overwhelming flow of filers has “most definitely” been from
manual filing to Digital DIY — and HRB never was concerned about a reversal of that trend.33
B.

Assisted Preparation is Not Part of the Relevant Market Because It is Not a
Constraint on Digital DIY Products

In a written submission to the Department of Justice at the conclusion of the TaxACT
investigation, Defendants stated that HRB Redacted

”34 This admission is based on the simple fact that over the past decade,
while Digital DIY tax preparation has undergone explosive growth, the number of taxpayers
utilizing paid assisted tax preparation has remained largely unchanged.35 It is difficult to fathom
how this could be true if the products were in the same product market.
To the extent there is switching between Digital DIY and assisted preparation, industry
participants and HRB’s own documents confirm that the main reason for that switching is due to
changes in complexity in an individual’s tax returns, and not because of competition between
Digital DIY and assisted. As T. Rufe Vanderpool, COO of Liberty Tax, testified, Redacted

32 Redacted

33 Redacted
34

GX 629 (Joint Submission on Behalf of H&R Block, Inc. and 2nd Story Software, Inc. in Support of the
Proposed Acquisition of 2SS Holdings, Inc. by H&R Block, Inc. (“White Paper”), at 92).
35 Redacted

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Redacted

.36 HRB’s own studies confirm that

Redacted

to assisted tax preparation.37
Industry practice further proves that paid assisted preparation is not a constraint on the

Digital DIY market. For example, HRB’s former CEO Mark Ernst testified that he does not
believe HRB’s retail stores are a constraint on its Digital products, or vice versa.38 Similarly,
TurboTax does not consider the price of paid assisted preparation when setting its digital prices
Redacted

”39
In addition, Defendants’ position in this case flies in the face of its business practices as

well as the beliefs of HRB’s own executives.

Redacted

40

And, in 2006, HRB sued

Intuit for false advertising merely for insinuating that Digital DIY and assisted tax preparation
are competitive alternatives.41 Consistent with the above, HRB’s president of its digital business
testified:

Redacted

”42 And, in announcing this deal to his company,

36

GX 607 (Vanderpool Dep. 79:5-80:8). Liberty Tax is the nation’s third-largest assisted tax preparation
business, which also sells a separate digital product.
37

GX 128 (HRB-DOJ-00359542, at 29).

38

GX 572 (Ernst Dep. 57:8-25).

39 Redacted

40

GX 616 (HRB-DOJ-50168750). If HRB truly believed that Digital and assisted competed with one another,
then its investment in the Digital DIY market would make no sense, since they would simply be attempting to
cannibalize customers from their more profitable retail business.
41

See GX 248 (Complaint, H&R Block Eastern Enterprises, Inc. v. Intuit, Inc., No. 06-0039-CV-W-SOW ¶¶
29-30 (W.D. Mo. Jan. 13, 2006)).
42 Redacted

GX 532 (Cobb 57:2-59:6).

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HRB’s CEO proclaimed that Redacted

”43 As such, Defendants’ current market definition is yet another artificial
construct engineered by counsel in the hope of getting this deal approved.
III.

The Proposed Transaction Violates Section 7 of the Clayton Act
A.

The Challenged Acquisition is Presumptively Unlawful

The Digital DIY market was highly concentrated prior to the proposed acquisition with
an HHI of 4,291, and will increase by approximately 400 if this acquisition is approved. This
change alone establishes that the acquisition should be presumed illegal. FTC v. H.J. Heinz
Corp., 246 F.3d 708, 716 (D.C. Cir. 2001).
Defendants’ contention that Plaintiff has not demonstrated undue concentration because
there is no “mention of any state return numbers”44 in the market shares Plaintiff alleges is
nothing more than a red herring. Not breaking out the numbers by state is insignificant. HRB’s
own study showed that Redacted
”45 Thus,
there is no reason to expect that the market share numbers would be any different if state return
numbers were included. Indeed, the law in this Circuit and elsewhere makes clear that market
share estimates are sufficient. See, e.g., FTC v. PPG Indus., Inc., 798 F.2d 1500, 1505 (D.C. Cir.
1986) (reversing district court decision that denied preliminary injunction based on inability to

43

GX 621 (HRB-DOJ-60214885).

44

Opp. Memo., at 32.

45

GX 600 (HRB-DOJ-00626841, at 8).

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calculate exact market shares).46
Defendants’ argument is particularly disingenuous because Plaintiff’s market share
numbers are based on precisely the same methodology Defendants use to look at the market —
i.e., IRS e-filing data.47 As HRB’s head of Corporate Analytics testified, IRS e-filing numbers
were Redacted

for the Digital DIY providers.48

In fact, the digital sales figures cited in the Complaint that form the basis for the HHI
calculations come from Defendants’ own White Paper, submitted to the Department of Justice at
the conclusion of the investigation into the TaxACT transaction.49
B.

Removing TaxACT From the Market is Likely to Result in Unilateral
Anticompetitive Effects
1.

There is No Market-Share Threshold for Unilateral Effects

Defendants’ contention that, as a matter of law, the United States must show that, postmerger, Defendants will have dominant power in the relevant market, is not the law in this
Circuit. Defendants’ entire argument is based on a passage from United States v. Oracle Corp.,
331 F. Supp. 2d 1098, 1123 (N.D. Cal. 2004), that has been subject to intense criticism.50 In this

46

See also GX 633 (Korea Kumho Petrochem. v. Flexsys Am. L.P., No. C07-01057 MJJ, 2008 WL 686834, at
*9 (N.D. Cal. Mar. 11, 2008)) (antitrust plaintiff “need not necessarily quantify [defendant’s] market share with
precision”).
47

See, e.g., GX 182 (HRB000439); GX 617 (HRB-DOJ-00944528); GX 27 (HRB-DOJ-00012327).

48

GX 21 (Newkirk Dep. 126:7-19).

49

See GX 629 (White Paper, at 11 n.24); Compl. ¶¶ 9-10.

50

See, e.g., Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 914a1 (court in Oracle “erred in
concluding” that dominant market shares were required for a finding of likely unilateral effects because “the concern
of merger law is impermissible price increases, something which can be achieved on far lower market shares”); GX
634 (Jonathan B. Baker & Carl Shapiro, Detecting and Reversing the Decline in Horizontal Merger Enforcement,
Antitrust, Summer 2008, at 29, 34 (“[c]ontrary to what the court required in Oracle, we would not insist that the
merged firm have a dominant or near-dominant market share [to prove likely unilateral effects]”); GX 627
(Roundtable Discussion: Unilateral Effects after Oracle, Antitrust, Spring 2005, at 8, 15) (statement of George
Cary: “Where, in my view, the Oracle opinion goes wrong is to assume that there just cannot possibly be an
anticompetitive effect if the firm is not dominant. The law is, or should be, quite different from what the Oracle
opinion found it to be.”). The Merger Guidelines state that “[a]dverse unilateral price effects can arise when the
acquisition gives the merged entity an incentive to raise the price of a product previously sold by one merging firm
and thereby divert sales to products previously sold by the other merging firm, boosting the profits on the latter

- 12 -

Circuit, courts do not apply a market-share threshold before considering the likelihood of
unilateral effects. See, e.g., FTC v. CCC Holdings Inc., 605 F. Supp. 2d 26, 68 (D.D.C. 2009)
(listing prerequisites for likely unilateral effects without including dominant market-share
threshold).
2.

The Facts Reveal that a Unilateral Price Increase is Likely

Defendants’ argument that the clear factual record of competition between HRB and
TaxACT can be ignored because of some artificially constructed value and premium
segmentation simply is incorrect. See United States v. United Tote, Inc., 768 F. Supp. 1064,
1070-71 (D. Del. 1991) (rejecting argument that parties competed in different segments where
there was “aggressive[]” competition between the parties and the acquiring company referred to
the acquired firm as a “primary competitor”). The evidence in this case, as set forth in Plaintiff’s
opening brief, strongly supports both that HRB and TaxACT have been close and direct
competitors for the better part of a decade, and that, if this transaction goes through, a unilateral
price increase is likely.51
Evidence newly developed through discovery as well as analyses in the parties’ expert
reports further supports these points. For example, Redacted

52

Similarly, Jonathan Baron of Thomson Reuters testified that

Redacted

products.” Merger Guidelines § 6.1.
51

See Pl. Mem., at 10-15, 23-29, 33-35.

52

GX 607 (Vanderpool Dep. 90:6-9; 88:5-89:17). Even if Intuit is the closest substitute for either HRB or
TaxACT, the merger may still produce significant unilateral effects. See Fed. Trade Comm’n & U.S. Dep’t of
Justice, Commentary on the Horizontal Merger Guidelines, at 28 (2006), available at
http://www ftc.gov/os/2006/03/CommentaryontheHorizontalMergerGuidelinesMarch2006.pdf.

- 13 -

Redacted

53

And the Vice President of Corporate

Development for Wolters Kluwer, provider of CompleteTax, Redacted
54 Redacted

.55

The closeness of competition between HRB and TaxACT is confirmed by the similarities
in the Defendants’ advertising messages. As one HRB employee testified, HRB and TaxACT
both focus their messaging heavily on Redacted

”56

Accordingly, it is unsurprising that Dr. Warren-Boulton found that when TaxACT increased its
advertising expenditures in certain marketing areas, TaxACT’s increase in sales from that area
came, in part, at the expense of HRB sales.57
Undoubtedly, the similarity in Defendants’ advertising is because HRB and TaxACT
compete for so many of the same customers. As an HRB document confirms, as of 2008, the
average HRB online user was under the age of

Redacte

, with an average income under Redacted

with a

basic tax situation.58 This is hardly the profile of a “premium” customer.59 Instead, HRB’s
customer demographics closely match the demographics of TaxACT’s customers.60
When not constructing surveys for this case, Defendants’ ordinary course of business
documents reveal that the HRB and TaxACT brands are viewed comparably by consumers.
HRB’s 2010 “Brand Health Study” revealed that Redacted
53

GX 606 (Baron Dep. 70:9-11; 78:9-11).

54

GX 26 (WK-DOJ-000001 (CCH Decl.) ¶ 4).

55

GX 573 (Tennola Dep. 108:10-13).

56

GX 294 (Simone Dep. 207:7-22).

57

GX 121 (Expert Report of Dr. Frederick Warren-Boulton, at 42-43).

58

GX 602 (HRB-DOJ-50010961, at -63); see also GX 294 (Simone Dep. 88:12-91:15).

59

See Meyer Report, at 30.

60

GX 635 (HRB000123, at -79-82).

- 14 -

Redacted

”61

Redacted

.62 In the mind of consumers, HRB’s brand is no more “premium” than TaxACT’s.
Thus, Defendants incorrectly assert that TaxACT products serve a “value” market and
HRB’s products serve a “premium” market. Both companies are competing for the same
customers, including free and low-cost customers. HRB needs to aggressively market its free
offering and offer significant discounts off the list price. Without doing so, few customers would
buy its products. Indeed, it is hard to understand how HRB can classify itself as a premium
product when nearly

Redacted

of all returns it processed in the most recent year were totally free.63

As HRB admits, it expects that the transaction will alleviate price pressure on HRB
products.

Redacted

”64 Implicit in this argument, of course, is that currently HRB is forced to compete by
offering low-cost products — a fact that explains Redacted
65 Redacted

66

61

GX 601 (HRB-DOJ-60152201, at 10).

62 Redacted
63

See GX 296-7 (HRB-DOJ-60099526).

64

Meyer Report, at 78.

65

Id.

See supra n.3.

66 Redacted

- 15 -

C.

The Acquisition of TaxACT Will Eliminate a Maverick

Defendants acknowledge “TaxACT’s rise in popularity, aggressive marketing, sustained
low prices, and its introduction of an entirely free product,”67 but claim TaxACT is not a
maverick because that is all “old news.”68 In making this argument, Defendants ignore that the
number of free filers continues to grow each year and that the cumulative industry price change
since 2004 is Redacted

69

— trends resulting from TaxACT’s maverick conduct.70

Contrary to Defendants’ position, TaxACT is no less of a maverick today. TaxACT’s
recent aggressive entry into the boxed software segment mirrors how it shook up the online
segment of the market. In 2010, TaxACT began selling its software at Staples, Redacted

71 Redacted

72 Redacted

.73

Redacted

74 Redacted

,75 Redacted
6

67

Opp. Memo., at 40.

68

Id.; see also Pl. Memo., at 5-10, 34-35 for a detailed account of TaxACT’s history as a maverick.

69

GX 121 (Expert Report of Dr. Frederick Warren-Boulton, at 57).

70 Redacted

71

GX 294 (Simone Dep. 85:17-20; 240:6-11).

72

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

73

GX 608 (2SS-MRKTe-0664736).

74

GX 603 (AQ 112).

75

GX 294 (Simone Dep. 23:13-15).

76

GX 294 (Simone Dep. 134:11-136:12).

- 16 -

— yet

another benefit to consumers generated by TaxACT.77
TaxACT also has been a maverick innovator in terms of its online marketing. As Daniel
Maurer of Intuit testified, TaxACT’s Redacted

”78 Maurer acknowledged that TaxACT’s innovation resulted
in TurboTax becoming Redacted
D.

.79

The Digital DIY Market is Vulnerable to Tacit or Actual Coordination

Contrary to Defendants’ contention,80 the Digital DIY market is already vulnerable to
coordinated effects, and HRB’s acquisition of TaxACT will only make it more so.81
The core of Defendants’ argument in opposition is that the Digital DIY product market is
differentiated. This misses the point. That a product market is differentiated “does not
eliminate” the potential for coordinated effects. Phillip E. Areeda & Herbert Hovenkamp,
Antitrust Law ¶ 942b. This is particularly true when the main elements of differentiation — here,
brand and quality extras — are not “disruptive to oligopolistic coordination or collusion.”82
Indeed, courts have long recognized — and expressly found — a likelihood of anticompetitive
coordinated effects in differentiated product markets.83

77 Redacted

78

GX 293 (Maurer Dep. 162:18-23).

79

Id. at 163:10-18.

80

Opp. Memo., at 38-39.

81

See Pl. Memo., at 36-38.

82

Id. Indeed, HRB and Intuit each sell four basic Digital DIY products that have similar features, and thus it
would not be difficult for them to coordinate or collude with respect to these products. See GX 294 (Simone Dep.
72:18-73:12) (describing how HRB and TurboTax SKUs line up with one another).
83

See, e.g., Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939) (describing express collusion in
differentiated product market); Heinz, 246 F.3d at 716 (finding a likelihood of coordinated effects in differentiated

- 17 -

The Digital DIY market is ripe for coordination if TaxACT is acquired. A market is
vulnerable to coordination where producers recognize their “shared economic interests and their
interdependence with respect to price and output decisions.” Brooke Group v. Brown &
Williamson Tobacco Corp., 509 U.S. 209, 227 (1993). Here, the ability to collect and verify
pricing information,84 the fact that transactions in the market are small and numerous,85 regular
communications between HRB and Intuit,86 past coordination on rationalizing industry pricing,87
and HRB’s recognition that acquiring TaxACT will discourage the Redacted

”88 all suggest

that coordinated effects are likely post-acquisition.
IV.

Defendants Fail to Rebut the United States’ Prima Facie Case Through Claims of
Easy Entry or Efficiencies Arising from the Transaction
A.

Expansion by Fringe Competitors Will Not Offset the Anticompetitive
Effects of the Proposed Transaction

Entry or expansion is sufficient to rebut the Government’s prima facie case only if
Defendants can show that entry or expansion is likely to occur in a timely fashion, and such entry
would be sufficient to deter or counteract the transaction’s anticompetitive effects.89 Entry or
expansion is likely only if Defendants can show that it “reaches a threshold ranging from [a]

product market).
84 Redacted

85

Consequently, the incentive to cheat on a collusive scheme would be small, as the gains through cheating
would be minimal. See Merger Guidelines § 7.2.
86 Redacted

See Marathon Oil Co. v. Mobil Corp., 669 F.2d 378, 383
(6th Cir. 1981) (joint operations between members of industry “may provide the opportunity for collusion”).
87

GX 121 (Expert Report of Dr. Warren-Boulton at 73-75).

88

GX 18 (HRB-DOJ-00355217).

89

Cardinal Health, 12 F. Supp. 2d at 55-58.

- 18 -

‘reasonable probability’ to ‘certainty.’” Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 430
n.10 (5th Cir. 2008).
In their Opposition, Defendants argue that fringe competitors TaxSlayer, TaxHawk,
Thomson Reuters (maker of TaxSimple), Petz Enterprises (maker of TaxBrain), On-Line Taxes
(maker of OLT.com), as well as other FFA participants, could easily reposition their respective
products to undermine any price increase imposed by the merged firm. But, the evidence clearly
shows that marketing expense and brand awareness issues are substantial impediments to Digital
DIY firms quickly gaining additional customers and share.90 Indeed, the evidence demonstrates
that the acquisition will create higher marketing barriers to entry. An HRB document analyzing
the proposed transaction concludes that it will result in Redacted

”91
The history of the Digital DIY market illustrates just how substantial barriers to
expansion truly are. Over the past decade, no firm other than TaxACT has been able to garner
any significant market share. TurboTax (62.2%), HRB (15.6%), and TaxACT (12.8%) are by far
the three largest firms, and even if all of the smaller firms in the market added up their shares,
the combined company still would not exceed or even match TaxACT’s share.92 While
Defendants point to TaxACT as the perfect example of a company that can quickly rise to the
top, Defendants ignore that TaxACT’s repositioning to become a significant competitor in the
Digital DIY market was time-consuming and expensive.93 In fact, HRB executives rejected

90

See, e.g., Cardinal Health, 12 F. Supp. 2d at 57 (“[T]he fact [that fringe firms] are so small suggests that they
would incur sharply rising costs in trying to [significantly increase] their output.”).
91

GX 630 (HRB-DOJ-00321954, at 4).

92

GX 27 (HRB-DOJ-00012327).

93 Redacted

- 19 -

offering their own new Digital DIY brand because they concluded that it would take Redacted
94

None of the fringe competitors identified by Defendants are likely to expand in a timely,
likely and sufficient manner to impose a competitive constraint on HRB and TurboTax.
TaxSlayer. TaxSlayer began selling its Digital DIY product in 2003. In 2011, TaxSlayer
products were used to prepare approximately Redacted

.95 TaxSlayer

recognizes that it has not been able to significantly increase its market share due to its Redacted
”96
TaxSlayer’s marketing and advertising budget last year was Redacted
million for TaxACT,

Redacted

million for HRB and

Redacted

97

compared to

Redacted

million for TurboTax.98 Data from this

past tax year indicates that TaxSlayer Redacted
99

TaxHawk. TaxHawk began selling its Digital DIY product in 2002, and in 2010 had

Redacted

in revenues.100 TaxHawk acknowledges that, Redacted

Redacted
94

GX 146 (HRB-DOJ-00319797, at 21).

95

GX 113 (RHO-DOJ-000121 (TaxSlayer Decl.) ¶ 5).

96 Redacted

97

Id. at ¶ 12.

98

GX 151 (Defendants 2SS Holdings, Inc. and TA IX L.P. Responses to Plaintiff’s First Set of Interrogatories,
at 6); GX 152 (Defendant H&R Block, Inc.’s Response to Plaintiff’s Third Set of Interrogatories to Defendant H&R
Block, Inc., Ex. 4); GX 29 (DOJ-INT-000001 (Intuit Decl.) ¶ 38).
99 Redacted

100

Id. ¶ 10. TaxHawk also does not offer functionality for all 43 states with income taxes, nor does it offer
support for all forms in the other states. Id. ¶ 9.

- 20 -

Redacted 101 Redacted

”

”102
Thomson Reuters. Last year, Thomson Reuters’ Digital DIY products were used to
prepare only approximately Redacted

Redacted 103

and its marketing budget was

Mr. Baron testified that to compete in the Digital DIY market, Thomson Reuters would have to
invest Redacted

”104

Redacted

.105
Petz Enterprises. After eleven years in the industry, TaxBrain, Petz’s product, is only
used to process approximately Redacted individual tax returns each year, translating into a

Redacted

market share. Over the past two years, despite what Petz’s CFO described as improved
marketing, Petz has Redacted

106

Nonetheless, if

HRB acquires TaxACT, Petz’s CFO believes that he could Redacted

107

His projections are, at best, speculative,108 and are based in

101 Redacted

102

GX 25 (THK-DOJ-000001 (TaxHawk Decl.) ¶ 14) (emphasis added).

103

GX 156 (TR-DOJ-000001 (Thomson Reuters Decl.) ¶¶ 5, 9).

104

GX 606 (Baron Dep. 72:21-73:4).

105 Redacted

106

GX 571 (Petz Dep. 87:25-88:17).

107

Id. at 22:4-10.

108 Redacted

- 21 -

part on conjecture about HRB’s post-acquisition plans — which he has no knowledge of.109
On-Line Taxes.

Redacted

”110

Redacted

111

FFA. Defendants also point to the the FFA as providing opportunities for robust
competition. But the FFA has been limited in its recent ability to attract taxpayers. As Bert
DuMars, a former IRS executive, noted, the FFA is only able to attract “a small number” of
taxpayers because individuals are generally unaware of the program and do not feel comfortable
dealing directly with the IRS.112 HRB’s former CEO Mr. Ernst testified that by the time he left
HRB in 2007, Redacted
B.

”113

Defendants’ Claimed Efficiencies Do Not Immunize This Transaction

Defendants’ efficiencies claims are unsupported, not merger-specific, and do not save
this otherwise anticompetitive transaction. In fact, Defendants’ claimed efficiencies only prove
the iron law at the crux of this case, i.e., that more competition, not less, is what drives true
efficiency and consumer welfare.
First, as the United States will show, Defendants’
Redacted

109

GX 571 (Petz Dep. 98:8-10).

110

GX 154 (OLT-DOJ-000001 (On-Line Taxes Decl.) ¶ 4).

111

GX 570 (John Dep. 48:18-49:2).

112

GX 569 (DuMars Dep. 119:13-120:17).

113

GX 572 (Ernst Dep. 90:10-13).

- 22 -

Redacted

million in annual claimed

efficiencies are unverified. Though there is doubtless some overlap between the two
Defendants’ operations — indeed, one would expect as much from two close competitors who
offer the same product to the same customers in exactly the same way — courts require more
than merging parties’ “plans” and “commitments” in order to consider, much less to accept, their
claims of merger-specific efficiencies.
As this Circuit held in Heinz, any claimed efficiencies in a concentrated market must not
only be “extraordinary,” but they must also be “verifiable” after “rigorous analysis,” rather than
“represent[ing] mere speculation and promises about post-merger behavior.” 246 F.3d at 721.
The reason for this standard is simple: corporate history is littered with examples of mergers
gone bad, where promised synergies did not live up to the hype offered by company managers.114
Yet, Dr. Meyer, Defendants’ expert, does not describe in her report any independent analysis that
she conducted to verify her clients’ efficiency claims. In contrast, the testimony and analysis of
Plaintiff’s accounting expert, Dr. Mark Zmijewski, will demonstrate that Defendants’ efficiency
claims do not come close to being objectively verifiable by a third-party. Rather, those claims
are based on estimates of post-merger expenses from TaxACT that are concededly “back of the
envelope”115 and rely on the personal judgments of interested managers rather than objective
calculations that can be verified through traditional accounting methods.116
Second, the big-ticket “efficiencies” claimed here are not specific to the TaxACT merger,
but simply represent competitive adjustments that HRB could make, and indeed was making on

114 Redacted

115 Redacted

116

The shortcomings of the Defendants’ projections are too numerous to catalog in this brief but are described
in Dr. Zmijewski’s expert report.

- 23 -

its own, before the opportunity for this “defensive”117 transaction arose. Take, for example, the
savings HRB hopes to achieve from its proposal to Redacted

118 Redacted

119

Other efficiency claims are subject to a similar critique, in that

Defendants have failed to show they cannot be achieved absent the merger and “without the
concomitant loss of a competitor.” Heinz, 246 F.3d at 722.120 There is no reason to doubt Mr.
Bennett’s assessment that Redacted
”121 and that his successor would do the same, because that is how competition works.
Additionally, Defendants have made no showing that any claimed efficiency’s mergerspecific effects will actually benefit competition and thus consumers. See FTC v. Univ. Health,
Inc., 938 F.2d 1206, 1223 (11th Cir. 1991). HRB makes a vague claim that it will offer a Redacted
and Redacted

expenditures after the merger,122 but again,

HRB elsewhere acknowledges that it not only can, but should and likely will, take these same

117

GX 129 (HRB-DOJ-00576608, at -13).

118

GX 605 (Agar Dep. 36:6–15; 40:2-16; 44:1-7; 48:19–49:4).

119 Redacted

120 Redacted

121

GX 620 (HRB-DOJ-00007730, at -31).

122

GX 15 (Defendants’ Response to Plaintiff’s First Set of Interrogatories to All Defendants, at 16).

- 24 -

steps without the merger.123 Moreover, innovation-related efficiency claims are “often a
speculative proposition,” and are “looked upon with skepticism” because when two firms are
already among the largest in a market, there is no empirical basis to believe that an even larger
firm would produce more innovation. See CCC Holdings, 605 F. Supp. 2d at 74. In that respect,
this market is no different from any other: in competition, HRB and TaxACT are likely to
continue innovating their products, marketing aggressively, and providing services that
consumers have come to appreciate and depend on at low prices. Defendants’ “commit[ent]” to
continue doing so124 is worth far less than the competition that will effectively force them to.
CONCLUSION
For the foregoing reasons, as well as those set forth in Plaintiff’s opening brief, the
United States respectfully requests that this Court grant the United States’ Motion for a
Preliminary Injunction.

123 Redacted

124

See Opp. Memo., at 1

- 25 -

Dated this 18th day of August 2011.
Respectfully Submitted,
FOR PLAINTIFF UNITED STATES:

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

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

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

/s/ Lawrence E. Buterman
Lawrence E. Buterman (D.C. Bar #998738)
Kent Brown
Jessica Butler-Arkow
Mary N. Strimel
Aaron Comenetz
Adam T. Severt
Danielle G. Hauck
Anthony D. Scicchitano
David Gringer
Trial Attorneys
U.S. Department of Justice
Antitrust Division
450 Fifth Street, NW
Washington, DC 20530
Telephone: [phone]
Facsimile: [phone]
[e-mail]