The Federal Trade Commission is on the brink of approving an extraordinary merger, one that would link up Staples, the leading office retailer, with one of the nation’s leading office wholesalers, threatening to lock up the market. Central to the approval process has been a top Staples lawyer who spent five years overseeing the very division that is now contemplating approval of the merger.
A leading anti-corruption group is crying foul, pointing to a revolving-door practice in which agency officials often show up on the opposite side of the negotiating table, where they press their former colleagues to get mergers approved.
Two recent cases involve mergers in the office supply and dialysis industries, and on Monday, Jeff Hauser of the Revolving Door Project at the Center for Economic and Policy Research filed a public comment exposing that dynamic.
Hauser’s comment pertains to the proposed merger between Staples and Essendant, the nation’s largest office equipment wholesaler and one of only two major companies in that space. If the merger is approved, Staples, the main retail giant in the industry, would be in a position to potentially control price points for its retail competitors.
On a party-line vote, the FTC agreed to this unholy alliance, reaching a settlement that puts alleged “firewalls” in place to separate information about Essendant’s retail clients from those making Staples pricing decisions. Staples presumably wouldn’t need access to that information to simply make Essendant’s prices higher (or its own prices lower) to drive market share away from rivals, among numerous other options. The settlement agreement provisionally agreed to by the FTC is subject to public comment and then a final approval.
In his letter, Hauser floats a hypothesis for why the FTC gave the go-ahead: The legal counsel for Staples’s parent company was, until 2012, the leader of the FTC division that negotiated the settlement, where he worked with some of the agency lawyers now dealing with the Staples case.
The lead counsel for Sycamore Partners, the private equity firm that owns Staples, is Matthew J. Reilly of the white-shoe D.C. law firm Kirkland & Ellis. As his bio indicates, Reilly “served for five years as the head of the FTC’s Mergers IV division.” The Mergers IV Division of the FTC’s Bureau of Competition happens to be the section that handled the Staples-Essendant case.
“The potential for Reilly’s prior relationships with members of the Mergers IV division to have helped secure the deal’s approval irreparably undermines public confidence in this merger’s merits.”
Two of the career FTC attorneys involved in the Staples case — Maria DiMoscato and Kevin Hahm — previously worked on cases in which Reilly was a lead attorney. Hauser speculated that, as head of the division, Reilly had promotion or bonus authority over these more junior attorneys. “The potential for Reilly’s prior relationships with members of the Mergers IV division to have helped secure the deal’s approval irreparably undermines public confidence in this merger’s merits,” Hauser wrote in his comment letter to the FTC.
Due to this conflict of interest, the Revolving Door Project wants the FTC to withdraw its approval for the Staples-Essendant merger. The Washington-based watchdog group also wants new rules prohibiting a former attorney from representing clients in a merger inquiry before a division in which the attorney once held a leadership role.
This would renew public trust in the agency as “serving the public interest, rather than the interests of the regulated,” Hauser writes. But it would really screw up Kirkland & Ellis’s marketing of Reilly as a bulldozer prying open the doors of the FTC.
“Matt is frequently relied upon to obtain regulatory clearance for many of the toughest, high profile deals,” according to his law firm bio. The National Law Journal gave Reilly the honor of one of America’s top outside counsels, specifically “for his success in obtaining US merger clearances,” Kirkland & Ellis notes. He has experience in this field, too, having represented Office Depot when it was approved to purchase OfficeMax in 2013.
In other words, Reilly’s past service at the FTC is precisely how he makes his money working for corporate clients. He needs to shuttle between the government and the private sector to build the relationships necessary to serve his clients’ goals of concentrating corporate power.
Through a spokesperson, Sycamore Partners declined to comment. Reilly did not respond to a request for comment, and neither did the FTC.
The FTC is taking public comment on the proposed settlement for the Staples-Essendant merger until Wednesday, February 27. The commission will then make a final decision on the merger within a couple months.
Hundreds of comments have been filed opposing the merger, which is unusually large for an FTC comment period. Grassroots groups like Demand Progress have been organizing opposition to the merger, with an emphasis on preventing another private equity retail disaster, in which Staples builds unsustainable debt as it grows through acquisition.
A similar revolving-door situation can be seen in another approved vertical merger, between dialysis giant Fresenius and NxStage Medical, makers of an in-home dialysis machine. Fresenius is one of two leading dialysis companies, and critics charge that the deal could prohibit competitors from making more patient-friendly devices and potentially limit uptake of in-home use.
In this case, NxStage Medical went beyond merely hiring the head of the specific division of the FTC’s Bureau of Competition analyzing the merger: It hired Deborah Feinstein, the former head of the entire bureau.
Feinstein’s case exemplifies just how fluid the door between the private and public spheres is. She has shuttled between the Bureau of Competition and top antitrust law firm Arnold & Porter Kaye Scholer three times in the past 30 years. At the FTC, she was notorious for waving through mergers in pharmaceuticals and other industries; in a 2013 speech, Feinstein openly argued in favor of settlements that allow companies to merge as “a remedy that is as good as or better than what could be achieved from litigation.”
Now back at Arnold & Porter, Feinstein represents companies in the same settlement negotiations that she championed while at the FTC.
Feinstein did not respond to a request for comment.
This corrosive back-and-forth between positions of power at the antitrust agencies and firms that represent clients before those agencies is widespread. Joseph Simons, the current chair of the FTC, worked on corporate mergers at the law office of Paul, Weiss, Rifkind, Wharton & Garrison. Christine Wilson, a Republican commissioner, worked at Kirkland & Ellis, Matthew Reilly’s firm, representing clients like Northwest Airlines in its merger with Delta, and later as Delta’s in-house counsel.
“This is not Nigerian corruption where suitcases of cash are handed over or money is transferred to Swiss Banks,” writes Jonathan Tepper, co-author of “The Myth of Capitalism.” “The revolving door creates a culture of ideological capture and what Nassim Nicholas Taleb calls the ‘retrospective bribe.’ It encourages poachers turned gamekeepers turned poachers to look after their clients’ interests in the long term.”
The antitrust group of Arnold & Porter, Feinstein’s firm, has a particular pipeline into government service. Lawyers from the group have moved on to positions like FTC chair, general counsel, and director of the Bureau of Competition, as well as head of the Justice Department’s Antitrust Division. Former Antitrust Division chief William Baer had two stints at the FTC in between his tenure at Arnold & Porter. Former chair of the FTC Robert Pitofsky also went back-and-forth between the agency and Arnold & Porter.
The true irony is that one of the co-founders of Arnold & Porter was Thurman Arnold, the head of the Antitrust Division under President Franklin D. Roosevelt and perhaps the most aggressive antitrust enforcer in history. He might not be thrilled about what’s being done in his name.