Our clients often ask us what happens after a recall has been completed and what to expect from a visit from a regional CPSC inspector. We advise to be prepared to demonstrate what actions were taken regarding the Corrective Action Plan (CAP). The main purpose of the inspection appears to be to provide confirmation that CAP tasks (such as distribution of retailer letters and posters) are underway and/or have been completed.

The Commission staff will check that notice of the recall is available on the company website and often go to retail establishments to look for posters.  The documents that an inspector may request at an on-site inspection include:

  1. Copies of all notifications to consumers and any other documents sent out regarding the recall;
  2. Copies or other demonstration that agreed social media was posted;
  3. If the company agreed to monitor wholesale/auction websites, records to show that such a process has been established;
  4. Records to demonstrate what the total number of units in the recall population, what inventory exists or what was done with any units under the company’s control at the start of the CAP;
  5. Incident records to confirm the total number of incidents, whether there have been new incidents discovered post-recall, and when the company first learned of incidents that gave rise to the CPSC filing.

Collecting and organizing these documents from the start can make the CPSC post-recall inspection much less time-consuming.  And the inspection can provide an opportunity to resolve any problems that may have arisen in recall execution. Much of the information requested is necessary for completion of CPSC monthly status reports and can make that process work smoothly as well.

A recent decision by a California appellate court may increase the frustration level for retailers trying to implement effective flexible work scheduling plans. In Ward v. Tilly’s Inc., No. B280151, 2019 WL 421743 (Cal. Ct. App. Feb. 4, 2019 ), a majority of the court reversed a trial court’s decision and reinstated a class action filed against an Orange County retailer. The complaint alleges that the company’s employee call-in procedures violated provisions of a California Wage Order requiring reporting pay, by not paying employees who were required to call-in two hours before a previously-scheduled ‘on call’ shift. The dissenting judge strongly criticized the outcome, observing that it was nonsensical for California employers to face “tens of millions of dollars in liability” as a result of an erroneous interpretation of the language of the Wage Order.

The Company’s Practices and the Lawsuit

Like many retailers, Tilly’s uses on-call shifts to optimize scheduling. Tilly’s required its employees to call their stores two hours before the start of an on-call shift, to determine whether they would actually be needed to work the shift. If the employee was told not to come in, Tilly’s did not consider the employee to have “reported for work” within the meaning of the relevant California Wage Order.

Tilly’s was sued in a class action complaint alleging that its practices violated the Industrial Welfare Commission (“IWC”) Wage Order 7. The complaint alleged that Tilly’s was required by Wage Order 7 to pay reporting time pay to employees who utilized the company’s call-in procedure.

Tilly’s filed a demurrer to the complaint, arguing that Wage Order 7 did not apply to its call in policy because the only way an employee could “report for work” within the meaning of the Wage Order was by physically appearing at the store at the start of a shift. The trial court agreed, and dismissed the lawsuit.

The Appellate Court’s Decision

On appeal, Plaintiff argued that Wage Order 7 is triggered by any manner of reporting, whether in person, telephonic, or otherwise. The court’s majority accepted this position and concluded that Tilly’s employees were entitled to reporting pay if they were told not to come into work when they called in two hours before the shift.

Wage Order 7 does not define the phrase “report for work.” The court analyzed the phrase’s meaning in context, beginning with several dictionary definitions of the word “report.” The majority concluded that those definitions do not conclusively establish whether the phrase “report for work” requires the employee’s presence at a particular time and place, or whether it is satisfied by an employee “presenting” himself or herself in whatever manner the employer has directed, such as the telephone call-in required under Tilly’s system.

The court’s opinion gets more interesting when it gets to the legislative intent of Wage Order 7. Tilly’s argued for an originalist interpretation of the phrase, to reflect the understanding of the phrase at the time of the language’s adoption in the 1940s.  The majority acknowledged that, back in the day, the phrase would have been understood to require the employee’s physical presence at the work site. The majority cited statistics suggesting that telephones were not widely available to the public in the 1940s, in support of the conclusion that physical presence would have been the common understanding of the phrase. The court then observed that the advent of the cell phone and other technologies has altered the way in which employees communicate with their employer. The court concluded that, given the employee protection objectives of the California Wage Orders, it was appropriate to ask how the IWC would have addressed this question had it anticipated the realities of modern technology. In what some might call a presumptuous form of mind-reading, the court concluded that, had the IWC addressed the issue, it would have concluded Tilly’s alleged on-call system triggers the payment of reporting time pay.

The majority gave the following explanation for the policy supporting its interpretation of the phrase: “[O]n-call shifts burden employees, who cannot take other jobs, go to school, or make social plans during on-call shifts—but who nonetheless receive no compensation from [the employer] unless they ultimately are called in to work. This is precisely the kind of abuse that reporting time pay was designed to discourage.”

The Dissent

Justice Egerton dissented in a robust and colorful opinion. Her review of the legislative history of the Wage Order clearly reflected “the drafters’ intent that―to qualify for reporting time pay―a retail salesperson must physically appear at the workplace: the store.”Tilly’s at *15. Justice Egerton rejected the majority’s focus on cell phone technology. “But there has been no technological change pertinent to proper statutory interpretation in this case. Nothing turns on whether a cord or a cell tower connects the phone. The notion that phones were unfamiliar in the 1940s is ahistorical: spend some enjoyable time listening to Glenn Miller’s 1940 hit Pennsylvania 6-5000. (The Andrews Sisters’ rendition is delightful.)” Id. at *18.

Justice Egerton relied on a district court decision (Casas v. Victoria’s Secret Stores, LLC (No. CV 14-6412-GW) 2014 WL 12644922, at * 5 (C.D. Cal., Dec. 1, 2014), which held on-call shifts do not trigger reporting time pay under Wage Order 7 unless employees actually reported to work in the traditional sense of the term, rejecting contrary “interpretations that promote the Court’s view of good policy.’” Id.  While Justice Egerton acknowledged the hardships an on-call system may impose on employees, she reasoned employers do not have on-call systems just to “torture employees”  Id. at *18.

What this Means for California Employers

The majority’s decision in Ward endorses the view of advocates who oppose employer predictive scheduling initiatives and other flexible staffing strategies. While the decision may be reviewed by the California Supreme Court, California retailers should be aware that Ward may well represent the current view of California courts as to on-call scheduling practices. And, because other Wage Orders implemented by the IWC contain the same language regarding reporting pay, California employers in other industries should assume that advocates will seek to extend the rationale of Ward to their businesses.


Over the past couple of years there have been several important conversations regarding intellectual property issues in the beauty industry. This industry faces a persistent issue of copycat beauty looks that are not credited to the original inspiration. For example, earlier this year Instagram account Diet Prada called out two editorial beauty looks worn by Rihanna in a magazine, arguing that the two makeup artists and creative teams had ripped off looks from their peers. Diet Prada commented that in its opinion, Rihanna’s silver glitter coated lids, lips and tongue were directly copied from a 2014 design by another artist for a 2018 Allure magazine story. Two years prior, Snapchat made headlines when it released a new batch of face-altering filters that seemed to be inspired directly by the creations of independent make-up artists. These filters weren’t just replicas of simple beauty looks. In fact, they were exact replicas of intricate works of art, arguably plucked directly from the make-up artists’ feeds.

The issue that many beauty artists face is that the industry does not have adequate avenues to protect their creations and take legal action for copyright infringement. Peter Philips, a well-known makeup artist and Creative Image Director of Christian Dior Beauty, saw his Swarovski crystal-rimmed eyes at the Dries van Noten Spring 2018 show replicated by many other makeup artists. Commenting on the copycats, he stated to website Fashionista: “what drives me is the creative process and trying to do different things than other people do.” He also said “I do respect the skills of people [re]doing my makeup, but on the other hand, I feel you miss out on something because doing our job is not only about repeating and what’s been done. That could be a starting point to push it further — that’s just the fun of it”. But what happens when no such “pushing further” occurs, and there are mere copies on the runway?

Present State of US Copyright Law

Copyright is a right given to its owner to prevent the unauthorized use of his/her work. Copyright may only subsist in certain categories of “works” including those that are literary, artistic, and musical.

Copyright is automatic. As soon as a work is produced, it is protected by copyright. One does not need to register the work or apply a copyright notice to it in order to be protected by copyright. As a general rule, a person who reproduces a substantial portion of the original work without the permission of the copyright owner is a prima facie infringer, and therefore must prove some affirmative defense such as fair use in order to escape liability.

A turning point for this issue came in 2000 when the Southern District of New York clarified that certain intricate tattoos and stage makeup qualify for copyright protection. In Carell v. Shubert, the Court held that the stage makeup featured in the Broadway musical Cats was protectable under copyright law, as even though actors in the show could change, the makeup was sufficiently fixed in the same way. They also considered choreography (with its ever-changing dancers) to be fixed. The Cats makeup required up to eight layers of products and several hours of work each night. This was found to be an original work of authorship that is fixed in a tangible medium, thereby satisfying the elements necessary for copyright protection under 17 U.S.C. §102.

Existing Issues for the Beauty Industry

One of the main issues with granting copyright protection to makeup looks is that makeup disappears and washes off instantly whereas clothing, artwork or even photography is long lasting. Makeup artists do not fit squarely into the protections afforded by US copyright law because these looks are not permanent. However, semi-permanence is part of the beauty of makeup—it allows the wearer to become whoever he/she wants to be.

Additionally, everyday hair and makeup, generic tattoos, and nail art would likely not be sufficiently original to qualify for copyright protection. The artwork done by a makeup artist would have to meet the definition of “sufficient originality” to be considered copyrightable. Under a portion of the Copyright Act known as the Visual Artists Rights Act (VARA), certain “works of visual art” may qualify for protection against distortion and other wrongs. In relevant part, section 101 of the Copyright Act defines a “work of visual art” to include: a painting, drawing, print, or sculpture, existing in a single copy or in a limited edition of 200 copies or fewer, which are signed and consecutively numbered by the author.

An artist may attempt to apply the same makeup design on different people, or even the same person. The definition of “work of visual art” appears to distinguish a work existing in a single copy from a work existing in multiple copies on the basis of copies of the latter work being derived from a common mechanical process (such as the multiple casting of a sculptural work or the manufacture of several photographs from the same negative). See id. § 101 (defining a work of visual art). Because the second and further applications of a makeup design are not mechanical, each application may count as a separate work of art.


Even though Carell held that makeup is protectable under copyright law, the landscape of makeup art and copyright law is still relatively undeveloped and requires some clarity on how to allocate copyright when no long-term record can be obtained.

This article originally appeared in FashionUnited.


Crowell & Moring has issued its fifth annual report on regulatory trends for in-house counsel. “Regulatory Forecast 2019: What Corporate Counsel Need to Know for the Coming Year” explores a diverse range of regulatory developments coming out of Washington and other leading regulatory centers of power, and it takes a deep dive into international trade—examining the challenges and opportunities that will arise in the year ahead as global businesses compete in the digital revolution and operate their businesses across borders.

The cover story, “Trade Winds: How Global Businesses are Navigating Trade, Tariffs, and the Uncharted Waters Ahead,” examines how changing international trade policies are causing businesses to rethink strategies for everything from supply chains to data transfers, while uncovering new opportunities along the way. The article forecasts changes on the horizon that include how new tariffs and trade barriers may drive up costs and cause companies to rearrange their supply chains; how some countries are restricting the flow of data across borders; and the impact of the growing number of stronger enforcement of financial crimes regulations, among others. The article also identifies hot spots for 2019 in an international trade infographic.

The Forecast examines how the pace of technological change has revolutionized commerce and industry, and those charged with developing and enforcing regulations are working to keep up. The government affairs article, “Congressional Influence on Rulemaking Is on the Rise,” explores how congressional input on rulemaking is increasing as the Trump administration pursues deregulation, while the energy article, “Electricity—Prepare for Continuous Disruption,” explores how the digital transformation is bringing extraordinary risks and opportunities to incumbent utilities, competitive suppliers, and consumers.

Be sure to follow the conversation on social media with #RegulatoryForecast.


The American Manufacturing Competitiveness Act of 2016 (AMCA) directed the U.S. International Trade Commission (ITC) to establish a process for the submission and consideration of Miscellaneous Tariff Bill (MTB) petitions for duty suspensions and reductions. The Miscellaneous Tariff Bill (MTB) Act of 2018 (MTB Act) temporarily reduced or eliminated import duties on specified raw materials and intermediate products used in manufacturing that are not produced or available domestically. This is because it was intended to insure that companies were not at a disadvantage to their foreign competitors when sourcing components.

The ITC is currently issuing a mandatory questionnaire to companies that previously benefitted from the 2018 MTB Act. The purpose of the questionnaire is to collect information that will allow the ITC to prepare a report to examine the effect of duty suspensions and reductions contained in the MTB Act on the U.S. economy. The MTB Act requires the ITC to solicit and append this report the agency’s recommendations with respect to domestic industry sectors or specific domestic industries that might benefit from permanent duty suspensions and reductions. Once the ITC report is completed, it will be posted at https://www.usitc.gov/mtbeffects for public comment.

Originally announced in the Federal Register on October 9, 2018, the ITC has also instituted a new fact-finding investigation (Inv. No. 332-565; American Manufacturing Competitiveness Act: Effects of Temporary Duty Suspensions and Reductions on the U.S. Economy) to examine the effects of the newly enacted miscellaneous tariff bill (MTB). However, as a consequence of the Government Shutdown, a yet to be published Federal Register Notice will formally announce new deadlines for filings. These deadlines are:

  • Filing requests to appear at the public hearing – March 18 2019;
  • Filing prehearing briefs and statements – March 21, 2019;
  • The public hearing is now scheduled for April 8, 2019;
  • Filing post-hearing briefs – April 15, 2019;
  • Filing all other written submissions – April 23, 2019; and
  • The USITC will transmit its report to the House Committee on Ways and Means and the Senate Committee on Finance (Committees) by October 18, 2019.Keep following the blog for updates regarding the MTB petition process.
  • All other dates pertaining to this investigation remain the same as in the notice published in the Federal Register on October 9, 2018.

On March 5, Lauren Aronson will moderate the panel, “Guidance on Reliable Testing to Support your Advertising Claims,” at the National Advertising Division’s West Coast Conference. Joining Lauren will be Benjamin Sarbo – Product Development Lead at Kimberly-Clark, Ray Iveson – Director and Senior Research Fellow, The Duracell Company, and Martin Zwerling – Deputy Director, NAD.

The panel will cover issues related to testing products to support advertising claims. Using real-life product examples, they will discuss key questions that advertising should address, including Is there an industry standard or, in the absence of an industry standard, what type of test method is reasonable and reliable? Is the test method consumer relevant? Do the test results correlate to the claim? This panel will explore these challenges from the perspective of in-house R&D, an in-house lawyer, and outside counsel.

Click here to register for the event.

Today, our blog takes a detour from advising on the CPSC and FTC to update you on a lesser-known law that can have major compliance consequences for appliance manufacturers and importers: the Energy Policy and Conservation Act, or “EPCA.”


EPCA was born out of legislation in the late 1970s, which authorized the setting of non-binding “energy efficiency improvement targets” for 13 categories of appliances. Congress beefed up the statute in the 1980s to impose mandatory energy efficiency standards for a suite of covered products, and empowered the Secretary of Energy to promulgate new standards for additional products in his or her discretion. Pursuant to that authority, the Secretary of Energy has promulgated efficiency standards for a multitude of additional products over the course of the last three decades.

Today, the Department of Energy (“DOE”) has set mandatory energy and water efficiency standards for over 60 “covered products,” including everything from battery chargers to refrigerators, and microwave ovens to air conditioners.

Each efficiency standard has two components: a conservation standard and an associated testing procedure, which the manufacturer must apply to demonstrate compliance with that conservation standard. DOE is required to reassess each standard and each test procedure at least every six years, but critically, DOE only has the authority to strengthen, not weaken, energy efficiency standards – even in response to technological advancement that may nevertheless result in overall greater energy savings – meaning that manufacturers subject to onerous standards may only get relief from Congress (except in very limited circumstances). Participating in the DOE proceedings in which the agency reassesses a given product’s conservation standards and testing procedures is a critical means for companies and other stakeholders to ensure that standards are revised in an equitable and sensible manner.


Understanding whether your products are covered by EPCA and if you’ve complied with its substantive and procedural requirements is essential for any manufacturer or importer because the penalty for a failure to comply with EPCA can be substantial. Companies should also be aware that EPCA defines “manufacturers” more expansively than many other regulatory regimes, to include importers of EPCA products that are manufactured internationally. Importers may be responsible for EPCA compliance obligations and subject to enforcement actions for noncompliance as if they were the literal manufacturer.

Each non-compliant unit is subject to a maximum civil penalty of (currently) $449, with a five year “look-back” period. For manufacturers or importers with large inventories, the penalties can quickly add up to millions of dollars. It is important, therefore, for companies to not only maintain adequate EPCA compliance programs, but to also respond swiftly in the event they find themselves in DOE’s crosshairs. If DOE determines your products are non-compliant, it will typically demand that you:

  • Immediately halt sales of noncompliant products,
  • Ensure that replacement products are compliant,
  • Notify customers who may have purchased noncompliant products, and
  • Pay some (but not usually all) civil penalties.

In negotiating with DOE, it is important to abide by the following principles, which have served our clients well. First, do not immediately go to war with DOE. DOE understands its leverage (large civil penalties, reputational damage, and collateral litigation) and is not afraid to use it. Second, engage early and often with the Department. For example, request any testing performed by DOE and all other pertinent materials in the Department’s possession. Similarly, it is important for you to quickly compile all EPCA-related testing and other materials in your own possession. Understanding the scope of possible liability is necessary to understand your negotiating position. Third, consult with your SEC attorneys if you are a public company. If the possible civil penalty is sufficiently large, you may be required to publicly disclose the proposed or final penalty. Finally, read, understand, and apply DOE’s Civil Penalties Guidelines to your situation. The Guidelines are current, plain English, and valuable in understanding the mitigating factors that could help adjust the maximum penalty downwards. DOE has often been willing to settle civil cases at a significant discount to the maximum penalty permitted under law, but only if the settling party has checked the appropriate boxes described by the Guidelines and worked collaboratively with DOE to address its concerns.

The Future of EPCA

As EPCA ages and products evolve, stakeholders are reconsidering EPCA’s basic structure. In the past year and a half, DOE has issued three requests for information – typically a precursor to initiating a rulemaking or even proposed legislation – asking industry, non-profits and other interested parties to weigh in on EPCA’s future. It has sought comment on (i) whether EPCA should adopt market-oriented mechanisms for achieving reductions in energy consumption; (ii) how the Department should reform its process for developing appliance standards; and (iii) how to address the growing market for appliances enabled with smart technology, a topic not yet addressed in either EPCA or its existing regulations.

The agency’s pace is only quickening. In January it announced its intention to roll back proposed standards for certain lightbulbs which were expected to take effect in 2020. And only days ago, DOE published a proposal in the Federal Register that would re-write the agency’s Process Rule, which is the standard by which the agency seeks input regarding potential revisions to its energy efficiency standards. Comments on DOE’s wide-ranging proposal are due by April 15, 2019.

Understanding the existing regulatory regime and how proposed changes will impact your products is an essential but often overlooked component of a smart compliance program. For those of you who were previously less familiar with EPCA, hopefully this blog post is a first step toward ensuring that your products follow EPCA’s compliance requirements, and in warding off unwanted attention from DOE.

On Tuesday, February 26th, the Cardozo FAME Center and the Cardozo Fashion Law Society will host a Symposium focused on “Innovation in Fashion.”

This event will explore the most rapidly changing areas in fashion, and the related legal perspectives. Students, attorneys, businesspeople, and members of the fashion community will come together to discuss the influencing shift from magazines to social media; wearable technology and the use of AI to improve consumers’ experience with fashion; sustainability initiatives; and retail changes from brick-and-mortar/department stores to e-commerce.

Crowell & Moring’s Preetha Chakrabarti will be speaking on the panel, “The New Frontier: Technology in Fashion.” The panel discussion will address how the law is adapting to cutting edge issues, from 3D printers being used to make clothing to the ramifications of wearing AI-enabled smartwatches all day. Questions related to privacy in fashion and design and utility patents will be covered, as well.

Click here for more information about the event or to register.

On January 31, 2019, e.l.f. Cosmetics, Inc. (“ELF”) agreed to pay $996,080 to settle its potential civil liability for 156 apparent violations of the North Korea Sanctions Regulations (NKSR). Elf is a cosmetics company headquartered in Oakland, California.


ELF appeared to have violated § 510.201(c)1 of the NKSR by importing 156 shipments of false eyelash kits from two suppliers located in the People’s Republic of China (PRC) that contained materials sourced by these suppliers from the Democratic People’s Republic of Korea (DPRK). The total value of the imported shipments equaled $4,427,019.26. The statutory maximum civil monetary penalty amount for the apparent violations was $40,833,633, and the base civil monetary penalty amount for the apparent violations was $2,213,510.

OFAC determined that throughout the time period in which the apparent violations occurred, ELF’s OFAC compliance program was either non-existent or inadequate. The company’s production review efforts focused on quality assurance issues pertaining to the production process, raw materials, and end products of the goods it purchased and/or imported. Until January 2017, ELF’s compliance program and its supplier audits failed to discover that approximately 80 percent of the false eyelash kits supplied by two of ELF’s China-based suppliers contained materials from the DPRK.

OFAC considered the following facts and circumstances pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. Part 501, Appendix A, in reaching the settlement amount. It found the following to be aggravating factors:

  • The apparent violations may have resulted in U.S.-origin funds coming under the control of the DPRK government, in direct conflict with the program objectives of the NKSR;
  • ELF is a large and commercially sophisticated company that engages in a substantial volume of international trade; and
  • ELF’s OFAC compliance program was either non-existent or inadequate throughout the time period in question.

OFAC found the following to be mitigating factors in this case:

  • ELF’s personnel do not appear to have had actual knowledge of the conduct that led to the apparent violations in this investigation;
  • ELF has not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the apparent violations;
  • The apparent violations do not appear to constitute a significant part of ELF’s business activities; and
  • ELF cooperated with OFAC by immediately disclosing the apparent violations, signing a tolling agreement, and submitting a complete and satisfactory response to OFAC’s request for additional information.

ELF then terminated the conduct which led to the apparent violations and has undertaken the following steps to minimize the risk of recurrence of similar conduct in the future:

  • Implemented supply chain audits that verify the country of origin of goods and services used in ELF’s products;
  • Adopted new procedures to require suppliers to sign certificates of compliance stating that they will comply with all U.S. export controls and trade sanctions;
  • Conducted an enhanced supplier audit that included verification of payment information related to production materials and the review of supplier bank statements;
  • Engaged outside counsel to provide additional training for key employees in the United States and in China regarding U.S. sanctions regulations and other relevant U.S. laws and regulations; and
  • Held mandatory training on U.S. sanctions regulations for employees and suppliers in China and implemented additional mandatory trainings for new employees, as well as, regular refresher training for current employees and suppliers based in China.

The notice from OFAC regarding this enforcement action highlights the risks for companies that do not conduct full-spectrum supply chain due diligence when sourcing products from overseas, particularly in a region in which the DPRK, as well as other comprehensively sanctioned countries or regions, is known to export goods.

OFAC indicated that it encourages companies to develop, implement, and maintain a risk-based approach to sanctions compliance and to implement processes and procedures to identify and mitigate areas of risks. It also explained that such steps could include, but are not limited to, implementing supply chain audits with country-of-origin verification; conducting mandatory OFAC sanctions training for suppliers; and routinely and frequently performing audits of suppliers.

For more information and in response to any questions regarding OFAC regulations and supply chain compliance please feel free to contact us.

There was a time when a quick estimate of market shares might have been enough to provide a reasonable assessment of antitrust risk for a potential combination between two brick and mortar retail chain stores.

Not anymore.

The playbook for evaluating competitive concerns from a potential combination of two brick and mortar retailers has evolved considerably. In recent years, the Federal Trade Commission (FTC) has reviewed proposed transactions between well-known retailers, including Office Depot/OfficeMax (2013), Dollar Tree/Family Dollar (2015), Albertsons/Safeway (2015), Walgreens/Rite Aid (2017), Bass Pro Shops/Cabela’s (2017), and 7-Eleven/Sunoco (2018). Public statements from recent transactions investigated by the FTC confirm that the agency is using more sophisticated data-driven tools during investigations with important implications for future deal activity.

As the tools used by the U.S. antitrust enforcement agencies have evolved, so too must the tools used to gauge antitrust risk at the pre-deal stage. These risks include the potential for a long and costly antitrust investigation, including compliance with a Second Request (a giant subpoena for documents, data, and other information from the merging parties), the potential that divestitures may be required to resolve competitive concerns raised by the agency, as well as the possibility that the agency may seek to block the transaction entirely.

That’s why brick and mortar retailers contemplating a merger need to adjust their thinking about pre-deal risk assessment. A modern approach to retail M&A involves five key areas, including:


Consumer substitution patterns—not market shares—are central to assessing the antitrust risk of a potential retail merger. In an investigation, the FTC is trying to figure out whether the consolidation will “substantially lessen competition.” Naturally, a key aspect of answering that question is to determine how closely the two retailers compete with one another. Closeness of competition is evaluated along a variety of dimensions, including geographic proximity as well as similarities in pricing, promotion, and product assortment. The closer two retailers are along these dimensions, the more likely it is that the FTC will conclude that consumers view them as close substitutes.

A before/after analysis is a standard practice at the antitrust agencies for assessing customer substitution patterns and whether the proposed transaction is likely to give rise to competitive concerns. One of the most common types of before/after analysis used by the FTC is to compare the parties’ store-level sales before and after a competitor store opens nearby. In undertaking this type of analysis, the agency is attempting to develop evidence to answer questions related to consumer substitution patterns, such as: How big of a hit to sales does the store suffer when a competitor store opens nearby? Is the hit to sales from entry bigger for some categories of products than others? Is the hit to sales bigger when one specific competitor (e.g., one of the parties to the proposed transaction) enters compared to other competitors?

In general, if the hit to sales from entry by a variety of competitors are all similar, then it is more likely the agency will conclude that consumers do not view the parties to the proposed transaction as particularly unique or especially close substitutes in the marketplace. The same is true if the hit to sales from the entry is small.

In a FTC merger review, the impact on sales from a competitor’s entry are translated into consumer substitution patterns, which are referred to, in antitrust jargon, as “diversions” or “diversion ratios.” The amount—and value—of that diversion provides a numerical measure used by the FTC to assess how closely the parties to the proposed transaction compete. The agency views “high” diversion ratios as indicating that those two retail chains are close competitive alternatives for consumers. Consequently, antitrust risk typically increases if the FTC, using its own analytical framework, would likely find high diversion ratios between the parties to the proposed transaction.

Evidence about the extent of customers’ cross-shopping across multiple retailers is also useful, but must be interpreted with care. While cross-shopping often reflects consumers’ ability and willingness to substitute purchases of the same goods across different retailers, such cross-shopping could well reflect that consumers satisfy different needs at different retailers or through different channels of sale.


Online sales as a percentage of overall retail sales continues to grow significantly. Few brick and mortar retailers have escaped at least some competitive pressure from e-commerce retailers. The constraint from online retailers, however, is not the same in every retail setting. Nearly everyone buys online these days, but not everyone considers buying everything online all the time—or even most of the time for certain types of retail purchases.

That has implications for the antitrust analysis of retail mergers. In some retail settings, like the retail sale of office supplies (Office Depot/OfficeMax) and children’s toys (Toys ‘R Us), the FTC has credited online competition as a constraint on brick and mortar retailers. But in other retail settings, like the sale of tailored men’s suits (Jos. A Bank/Men’s Wearhouse) and supermarkets (e.g., Albertsons/Safeway, Ahold/Delhaize), the FTC has not viewed online retailers as a significant constraint on brick and mortar retailers despite the growth of online sales. Therefore, determining how much credit the antitrust agency is likely to give online retail competition is critical.


Understanding the business rationale for the choice of pricing strategy is a central issue in the antitrust agency’s competitive assessment of a proposed transaction. While zone-level or store-level pricing may be driven by differences in costs to serve, the FTC typically considers prices, pricing policies, and price zones that vary locally based on the presence or absence of key competitors to be a major factor in their antitrust analysis. A price zone allowing for higher prices when a competitor (or type of competitor) is absent, or lower prices when the competitor is present, is likely to affect how the agency defines the relevant set of competitors and is almost always a critical factor in the agency’s ultimate assessment of the competitive effects of the merger itself.

National and omnichannel pricing—in which prices and promotions do not vary across stores, e-commerce, and hardcopy mailings such as catalogs—may mean there are different competitive constraints compared to localized pricing strategies. Indeed, it is not uncommon for parties to a proposed transaction to point to their national-pricing policies to explain why the transaction will not change pricing in any local area where the parties both have stores. But even here, the reason for the choice matters.

National pricing may be driven by a desire to provide a singular experience because many consumers purchase across multiple stores and through multiple channels—both in-store and online. A decision to use national pricing may also be driven by vigorous competition from omnipresent e-commerce alternatives. National pricing may also stem from vigorous competition from thousands of diverse mom-and-pop retailers across the country. Those are benign to affirmatively helpful facts for parties that propose to merge.

National pricing, however, is not a silver bullet. If the reason for national pricing is that the other party to the transaction has a nationwide, or nearly nationwide, footprint of stores, making nationwide pricing an efficient way to price against that key competitor, national pricing may raise antitrust scrutiny.


The ability to lower costs often motivates a potential combination. That’s almost always a good thing because it is important to be able to articulate a strong pro-competitive rationale for the proposed transaction. The focus of the antitrust agency’s investigation is not on how the consolidation will benefit the merging parties, but rather: “How will the transaction benefit consumers?” A merger premised on lowering costs and passing those savings on to consumers through lower prices is viewed favorably by the FTC.

But not all synergies are inevitably pro-competitive. While cost synergies are often viewed as pro-competitive, synergies that stem from transaction-related store closures can create a red flag.


One thing that has not changed over time is the use of the traditional investigation tools and types of evidence. In retail merger investigations, these include: documents discussing competition and efficiencies that are submitted with the merging parties’ premerger notification Hart-Scott-Rodino filings; interviews of competitors of the merging parties and other industry participants; and the merging parties’ ordinary-course documents focusing on how the merging parties assess competition, their competitors, and, yes, their market shares.

The five areas described here represent a modern, pre-transaction risk assessment approach that is aligned with the analytical tools the antitrust agencies rely on when reviewing a merger. The tools described here play a key role in assessing internally the competitive issues that may arise during the antitrust merger-review process and that affect the ultimate outcome of that review.

This original version of this article appeared in Retail Leader.