By Siddharth Cavale

NEW YORK (Reuters) – A U.S. judge blocked the pending $8.5 billion merger of U.S. handbag and accessories maker Tapestry (NYSE:TPR) and Capri on Thursday, a victory for the Federal Trade Commission that is a likely death blow for the deal.

The decision is a win for the Biden administration ahead of the Nov. 5 presidential election, where rising consumer prices have become a top concern for voters.

The FTC argued at an eight-day trial in New York that the merger would eliminate fierce head-to-head competition between the top two U.S. handbag makers and create a massive company with the power to unfairly raise prices.

The ruling sent Capri shares tumbling by 47%, and Tapestry shares up by around 13% in after-market trading.

U.S. District Judge Jennifer Rochon rejected the companies' defense of the deal, including their argument that handbags are nonessential items whose price consumers can control by not buying them if they become too expensive.

Judge Rochon stated, "That argument ignores that handbags are important to many women, not only to express themselves through fashion but to aid in their daily lives."

Tapestry claimed the ruling is incorrect and plans to appeal, stating, "We face competitive pressures from both lower- and higher-priced products and continue to believe this transaction is pro-competitive and pro-consumer."

Henry Liu, director of the FTC’s Bureau of Competition, called the decision "a victory not only for the FTC, but also for consumers across the country seeking access to quality handbags at affordable prices."

A spokesperson for Capri did not immediately respond to a request for comment.

The deal would have brought six brands under one roof: Tapestry's Coach, Kate Spade, and Stuart Weitzman; and Capri's Versace, Jimmy Choo, and Michael Kors.

Tapestry argued at trial that the deal was spurred by an intensely competitive U.S. handbag industry and was necessary to compete against European players like Gucci, which are increasing market share.

The ruling effectively permanently blocks the proposed deal, Tapestry's lawyers said, as it would require another lengthy review by the FTC, stretching past the termination date of Feb. 10.

Rochon stated that the companies can defend the deal before the FTC and are not obligated to abandon it if it does not close.

There is scant precedent for merger challenges in the fashion industry, which is typically too fragmented and competitive to foster traditional monopolies.

Tapestry and Capri argued that reviving the Michael Kors brand and investing in all Capri brands using Tapestry's resources would actually increase competition in the industry. However, Rochon rejected that argument, stating the companies had not proven that Capri couldn't reinvigorate the brand independently.

The judge concluded that harm to competition in accessible luxury handbags outweighs the potential benefits of the merger.

Tapestry and Capri argued that accessible or affordable luxury was not a well-defined category in the industry, but Rochon pointed out their own documents showed these terms were frequently used.

Various factors, including price, materials, and manufacturing locations, differentiate affordable luxury handbags from their luxury and mass-market cousins, the judge wrote.

This ruling follows the approval of the merger by regulators in Japan and the European Union earlier this year.