• A federal court judge has blocked the proposed merger between Tapestry-owned Coach and Capri parent Michael Kors.
• The reasoning behind the judge's order wasn't immediately clear but the FTC had previously argued the merger would harm consumers, raise prices and reduce employee benefits.
• Tapestry and Capri announced their $8.5 billion merger last year but the deal has been stalled after the FTC sued to block it.

A federal judge blocked Tapestry's acquisition of Capri on Thursday following a brief trial last month in New York.

In her order, Judge Jennifer Rochon granted the Federal Trade Commission's motion for a preliminary injunction to block the proposed merger, which would marry America's two largest luxury houses and put six fashion brands under one company: Tapestry's Coach, Kate Spade and Stuart Weitzman with Capri's Versace, Jimmy Choo and Michael Kors. 

Tapestry's stock surged 10% after the order was filed while Capri's plunged about 50%.

In a statement, Tapestry said it plans to appeal the order, "consistent with our obligations under the merger agreement."

"Today's decision granting the FTC's request for a preliminary injunction is disappointing and, we believe, incorrect on the law and the facts. Tapestry and Capri operate in an industry that is intensely competitive and dynamic, constantly expanding, and highly fragmented among both established players and new entrants," the company said. "We face competitive pressures from both lower- and higher-priced products and continue to believe this transaction is pro-competitive and pro-consumer."

Under the terms of the merger agreement, Tapestry agreed to reimburse Capri for expenses incurred in connection with the transaction if it fails to be approved, according to a securities filing. If either Tapestry or Capri walks away from the deal because it didn't receive regulatory approval or, a government issued a permanent, non-appealable injunction against it, Tapestry agreed to pay Capri between $30 million and $50 million, the filing said.

Capri, on the other hand, has agreed to pay a breakup fee of $240 million if it decides to terminate the proposed merger.

Rochon's reasoning behind the order wasn't immediately clear. A detailed opinion was filed under seal and isn't currently accessible to the public.

The former rivals and longtime competitors announced the $8.5 billion deal more than a year ago but the Federal Trade Commission sued to block it in April and sought a preliminary injunction to stop the agreement. 

The FTC argued if the companies merged, it would harm consumers by making the affordable handbag market less accessible and would leave employees with worse salaries and benefits. Tapestry argued consumers would be better off if it merged with Capri because it would allow them to keep up with trends faster, offer better products and reach more customers.

"Today's decision is a victory not only for the FTC, but also for consumers across the country seeking access to quality handbags at affordable prices," Henry Liu, director of the FTC's Bureau of Competition, said in a statement. "These bags are a product which millions of people rely on throughout their daily lives. The decision will ensure that Tapestry and Capri continue to engage in head-to-head competition to the benefit of the American public."

The decision comes at a time when consumers are more price-sensitive than ever after years of elevated inflation. The Biden administration, and Democratic presidential candidate Vice President Kamala Harris, have pushed for the federal government to use its power to maintain competition and help keep prices low. Republican candidate Donald Trump has also criticized inflation and has pushed for tariffs to address the issue.

The FTC under Chair Lina Khan has moved to block mergers and acquisitions in the grocery, technology and apparel spaces.

During the trial last month, key witnesses called by the FTC cited research that showed the merger could raise prices for handbags, accessories and apparel, and may give the combined company little incentive to invest in product quality.

Lawyers for Tapestry and Capri argued the companies are not each other's main competitors. They said shoppers now have more options than ever in the handbag market, and trends can change in a blink in the era of TikTok.

— CNBC's Melissa Repko contributed to this report