The U.S. Federal Trade Commission on Monday sued to block Coach parent Tapestry‘s $8.5 billion deal to buy Michael Kors owner Capri, saying it would eliminate “direct head-to-head competition” between the flagship brands of the two luxury handbag makers.

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In a statement, the FTC said the tie-up, which would create a company with about 33,000 employees worldwide, could reduce wages and employee benefits.

“The proposed merger threatens to deprive millions of American consumers of the benefits of Tapestry and Capri’s head-to-head competition, which includes competition on price, discounts and promotions, innovation, design, marketing and advertising,” the FTC said.

The FTC’s rare antitrust challenge against a high-end fashion merger could set a precedent for luxury deal regulation, several antitrust lawyers said.

In an interview with Reuters, Tapestry CEO Joanne Crevoiserat said the company was “proud of the wages and benefits” it offers to employees and that the competition for talent goes beyond just the fashion industry.

“We see the FTC as fundamentally misunderstanding the marketplace and the way consumers shop today as well as the impact of this deal on employees and workers in our industry,” Crevoiserat said.

“We source talent and lose talent to a vast array of competitors,” she added.

The U.S. luxury market is highly fragmented with several differentiated brands catering to a wide range of consumers, antitrust experts said, arguing that legacy fashion brands typically face healthy competition from labels launched every year.

“The FTC’s decision to sue is surprising because there’s no shortage of competition for fashion, apparel and accessories. The commission has latched onto a marketing term – ‘accessible luxury’ – and treats it like a unique market that exists in a vacuum,” said Howard Hogan, chair of the fashion, retail and consumer practice at law firm Gibson Dunn.

New guidelines

U.S. antitrust enforcers issued new merger guidelines in December to encourage fair, open and competitive markets.

Antitrust lawyers noted that the FTC is using a new tactic under the guidelines by arguing that the merger would directly affect hourly workers who may lose out on higher wages due to reduced competition for employees.

“The revised federal merger guidelines outlined that potential effects on labor like lowering wages or work conditions is a basis to challenge a merger, so that is a newer trend. It’s not surprising since the agencies announced they’d do that but it is something new to test in court,” said Jennifer Lada, litigation attorney at Holland & Knight.

Tapestry had offered to buy Capri in August, hoping to create a U.S. fashion behemoth that could effectively battle bigger European rivals such as Louis Vuitton parent LVMH and potentially win more share in the global luxury market.

But the FTC requested more information from the firms on their deal in November.

“Capri Holdings strongly disagrees with the FTC’s decision,” the company said in a statement. “The market realities, which the government’s challenge ignores, overwhelmingly demonstrate that this transaction will not limit, reduce, or constrain competition.”

Earlier in April, the companies received regulatory clearance from the European Union and Japan for their deal, which would bring top luxury labels such as Kate Spade and Jimmy Choo under one roof.

While investors are skeptical of the deal winning approval, most analysts expect the deal to close before Aug. 10, the deadline for the two companies to complete the transaction. Capri’s stock closed at $37.96 on Monday, well below the $57-per-share price Tapestry has offered to pay.

“In our view, we do not believe consumers would be harmed with a combination given the competitive nature of the category and varying degrees of cultural relevance,” analysts at TD Cowen wrote in a note earlier in April.