On January 8 2014 – one year since the filing of the lawsuit and 18 months since the merger closed – a US federal judge declared that Bazaarvoice violated Section 7 of the Clayton Act by acquiring its main rival, PowerReviews. The US Department of Justice challenged the $168 million deal even though PowerReviews was too small to require a Hart-Scott-Rodino pre-merger notification filing with the federal antitrust enforcers. The ruling by Judge William H Orrick underscores that even non-Hart-Scott-Rodino reportable consummated mergers are subject to scrutiny and may be found to violate the antitrust laws. The case will now move to the remedy phase, where the Department of Justice can seek an order to unwind the merger.
The government argued that the merger would lead to higher prices and less innovation in the market for product ratings and review platforms used by e-commerce websites. Unlike most merger challenges, the Department of Justice did not rely on a heavily concentrated market or high market shares. Instead, it focused on the closeness of competition between the merging parties, claiming that other actual and potential competitors provided an insufficient check on the combined firm.
The opinion in US v Bazaarvoice demonstrates the important role that pre-merger documents (especially those explaining the rationale behind an acquisition) play in the analysis of potential anticompetitive harm. Orrick, while careful to note that "intent is not an element of a Section 7 violation", cited at length documentary evidence describing PowerReviews as Bazaarvoice's fiercest competitor and containing employee opinions that the transaction would "enable the combined company to 'avoid margin erosion' caused by 'tactical knife-fighting over competitive deals'"(1) Although Bazaarvoice offered alternate explanations for the transaction at trial, the court gave great weight to these pre-merger statements and found that "Bazaarvoice wanted to buy PowerReviews to use its enhanced market power" to avoid competition in pricing and innovation.(2)
The court's focus on pre-merger opinion and intent is in stark contrast to its treatment of the testimony that Bazaarvoice offered from existing, former and potential customers who believed that the acquisition had not and would not harm them. While the court observed that the customers were credible sources of information on their need for, use of and substitutability of the relevant product and their past responses to price increases in those products, Orrick also found that their "testimony on the impact and likely effect of the merger was speculative at best".(3) The court held that as "customers were not privy to most of the evidence presented to the court [and] many customers had paid little or no attention to the merger", their opinions on the actual effects of the merger were "entitled to virtually no weight".(4) In other words, customer testimony does not outweigh documents and economic evidence showing a likely anti-competitive effect.
The key takeaways for corporate counsel are as follows:
- The federal antitrust enforcers will not ignore consummated, non-reportable transactions that substantially lessen competition.
- Negative documents describing intense competition or market power can be difficult to overcome.
- Closeness of competition can be at least as harmful as high market shares and concentration.
- Parties to transactions in technology markets cannot expect to avoid enforcement simply by claiming that they operate in a 'dynamic' market.