Antitrust Alert: DOJ Wins Bazaarvoice Merger Trial – Lessons for Future Deals
The Department of Justice ("DOJ") has prevailed in its lawsuit against Bazaarvoice's consummated acquisition of PowerReviews. This is a summary of what happened and the key takeaways for clients doing deals.
What happened?
In June 2012, Bazaarvoice acquired rival PowerReviews in a transaction that fell below the reporting requirements of the Hart-Scott-Rodino Act. This allowed the parties to close the transaction without government review. However, just two days after the transaction was closed, the DOJ indicated that it was reviewing the transaction for a potential violation of the merger statute, Clayton Act § 7.
After an in-depth investigation, in January 2013, the DOJ filed a lawsuit challenging the merger. The DOJ alleged that the acquisition was likely to substantially lessen competition for product Rating and Review ("R&R") platforms used by U.S. retailers and manufacturers. R&R platforms combine software and services to enable manufacturers and retailers to collect, organize, and display consumer-generated product reviews and ratings online. The DOJ charged that Bazaarvoice was the leading commercial supplier of R&R platforms, with PowerReviews being its closest competitor by a wide margin.
At the three-week trial beginning in September 2013, Bazaarvoice relied heavily on testimony from its customers, submitting over 100 customer declarations. The DOJ countered by citing to other customer testimony and introducing an extensive collection of "hot" documents and economic analysis.
On January 9, 2014, Judge Orrick issued a 141-page opinion, ruling in favor of the DOJ. He emphasized that the DOJ need only show a "reasonable probability of anticompetitive effect" to establish a violation of Section 7. Clear "proof" was not needed. The Court made the following findings:
- The relevant market was R&R platforms, notwithstanding the existence of a broader dynamic and evolving social e-commerce space.
- Bazaarvoice's high market share, estimated at 56-68%, established a prima facie violation of Section 7.
- Significant entry barriers – arising from network effects, high switching costs and reputation barriers – would limit entry that might counteract Bazaarvoice's increased market power.
- Suitable competitive alternatives did not exist and would not defeat a price increase, notwithstanding the presence of some other competitors and use of in-house solutions.
- The probative value of postmerger evidence was limited whenever it could have been subject to manipulation by the merged company.
Did the fact that the merger had already closed affect the outcome?
The fact that the companies had closed their transaction and integrated their operations did not seem to diminish the DOJ's interest in bringing a case. This is not surprising, because in recent years the agencies have not been shy about opposing consummated transactions they believe are anticompetitive. Although some public accounts have speculated the fact the transaction had closed actually increased the DOJ's interest, so as to "send a message," we do not believe this was the DOJ's primary motivation, given the nature of the documents in the DOJ's possession.
Judge Orrick stressed that there was no difference in the methodology applicable to postmerger and premerger challenges, at least in cases where the government challenge followed relatively soon after consummation. Both premerger and postmerger challenges are subject to the traditional presumptions based on the Philadelphia National Bank case, which relies on a firm's combined market share as the primary measure of the merger's competitive significance.
But here the fact the companies already had combined set the stage for the battle itself. With 18 months between the merger signing and trial, the parties had the opportunity to argue that events in the market, following their merger, proved wrong the statements in their documents, which suggested the combination would be anticompetitive. So postmerger evidence was very important here, and this case highlights the contrast between relying on the DOJ and FTC Merger Guidelines' predictive tools on price (such as diversion ratios) and empirical post-closing pricing analysis, which can be available in consummated deals. Although in this case the Court seemed to dismiss the postmerger price evidence, because the merged companies arguably could manipulate those prices (by refraining from taking advantage of lessened competition), empirical price studies will continue to be important in cases where manipulation is not a concern.
What evidence did the Court find persuasive?
No surprise, their own documents first and foremost created an uphill battle for the parties. The documents included internal emails, strategy papers, presentations to boards of directors, SEC filings, and investment banker presentations. Some of the more colorful, premerger statements indicated that the acquisition would:
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"[e]liminate [Bazaarvoice's] primary competitor" and provide "relief from…price erosion"
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"block[] entry by competitors" and "ensure [Bazaarvoice's] retail business [was] protected from direct competition and premature price erosion"
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"tak[e] out [Bazaarvoice's] only competitor, who…suppress[ed] [Bazaarvoice] price points []by as much as 15%"
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provide a "[d]ramatic increase in reach and overall market share making future competition extremely difficult and will increase switching costs"
The opinion concluded that the documents "overwhelmingly" revealed that "Bazaarvoice and PowerReviews viewed themselves as operating in a "duopoly" and that removing PowerReviews…would eliminate Bazaarvoice's only meaningful commercial competitor."
Although the documents made a major difference in this case, the Court also painstakingly detailed how it thought the market facts postmerger and economic analysis supported its finding a Section 7 violation.
The Court placed little value on customer testimony in support of the transaction. The opinion cautioned that "it would be a mistake to rely on customer testimony about effects of the merger," noting that many of the customers were not privy to the expert economic evidence, most had paid at best little attention to the merger, and they had a limited understanding of the broader R&R market.
Interestingly, this is the second merger case in the Northern District of California that cautioned against deferring too heavily to customer opinion. In U.S. v. Oracle, the court rejected the DOJ challenge to the merger of Oracle and PeopleSoft in part because it discounted the testimony of customers complaining about the transaction. In blocking the Bazaarvoice/PowerReviews merger, the Court similarly discounted customer views (at least those 100 customers relied upon by the merging parties). Other cases, such as FTC v. Lundbeck, have found in favor of defendants, relying, in part, upon customer testimony.
Does the decision have ramifications for future mergers?
Some, and perhaps most likely in technology deals. Although commentators tend to overstate the significance of any one case, the agencies will argue that Bazaarvoice supports the government's efforts to define narrow technology markets, even in larger, dynamic, and fast moving technology environments. However, the Court was very clear that these are case-by-case factual determinations, and the mere fact that an arguably narrow market was found here does not mean it will always be.
We would not expect Bazaarvoice to change the agencies' use of customer reactions. Customer views regarding purchasing patterns, options, and the ultimate impact of a transaction will continue to be important at the agencies' investigation stage. However, the agencies will continue to challenge deals they believe are anticompetitive despite customer support, especially when they have strong evidence they believe trumps customer opinion. How much customer opinions matter at trial is a more open question, which as we have seen will vary from judge to judge.
The agency and court attention to internal business documents should remind companies of the need for caution and restraint in what they say about a target or potential transaction. "Hot" documents can be crucial to the outcome of any antitrust matter, and company executives should avoid exaggerations or overstatements, particularly when describing competitive alternatives and the impact of a transaction.
This case also should reinforce the DOJ trial strategy of positioning deals using Philadelphia National Bank presumptions. Under the Philadelphia National Bank approach, if the government establishes that the merger would produce a firm controlling an undue percentage share of the relevant market, typically 30% or higher, then the burden shifts to the defendant to rebut that presumption by showing why the merger is unlikely to substantially lessen competition or by discrediting the data underlying the market share calculations. The Bazaarvoice opinion seems to suggest that these presumptions are decisive unless parties can overwhelm it with other facts. And while the parties here offered some compelling facts, they were not enough to outweigh the presumption and other evidence in the record. While this conclusion is not unique to this case, it is a strong reminder that, once you get to trial, some of the more sophisticated arguments that could be effective in convincing the agencies not to sue might have a lot less impact in counteracting a simple approach that illustrates high shares, a lack of short-term effective entry, and bad documents.
What happens next?
The Court has scheduled a hearing on January 22, 2014, to discuss procedures for the remedy phase of the litigation. Prior to this hearing, the litigants are required to file a joint statement on remedies. In its complaint, the DOJ sought a court order to divest assets and create a "separate, distinct, and viable competing business that can replace PowerReviews." This could be as or more interesting than the liability stage of the process. As the Court recognized, "[divesture] is not a simple proposition 18 months after the merger."
Documents from the proceedings, including the Court's opinion, can be found here.
