A federal district court judge in the Western District of Washington recently dismissed an antitrust class action suit alleging that two private equity funds had unlawfully conspired in their bid to acquire WatchGuard Technologies (“WatchGuard”), a publicly traded company. Pennsylvania Avenue Funds v. Borey, No. C06-1737RAJ (W.D. Wash. Feb. 21, 2008). The opinion is particularly noteworthy as it holds that allegations of coordination among bidders in the acquisition of a public company cannot be treated as per se unlawful under the antitrust laws. Under Pennsylvania Ave., such joint bidding arrangements must be evaluated under the rule of reason. The court further held that the plaintiff’s allegations did not withstand a rule of reason analysis because there was no allegation from which the court could reasonably infer that defendants had market power even in a narrowly defined market for corporate control over WatchGuard Technologies. Although there have been other suits alleging antitrust violations in connection with joint bidding activities by private equity firms, this is the first decision addressing the substantive antitrust issues concerning such arrangements. The Pennsylvania Ave. decision is a significant development for private equity firms involved in joint bidding activities. However, they should continue to exercise caution (and consult with counsel) in connection with their bidding activities, including with respect to joint bidding opportunities and in their communications with other bidders.

The Pennsylvania Ave. case arose out of the acquisition of WatchGuard by Francisco Partners L.P. (“FP”) and Vector Capital Corporation (“Vector”). As part of the auction process for WatchGuard, as many 50 firms, including 18 other private equity firms, expressed an interest in acquiring the company. Defendants FP and Vector submitted bids and were the only remaining bidders at the conclusion of the bidding process. Ultimately, however, Vector dropped out of the auction and reached an agreement with FP to finance half of the acquisition of WatchGuard in exchange for a 50 percent interest in the company. The final accepted offer was lower than the initial bids of both FP and Vector. Plaintiff alleged that the lower bid was the result of an illegal agreement between FP and Vector to refrain from bidding against each other and to fix the price for the acquisition.

The Decision

First, in its opinion, the court rejected the plaintiff’s claim that the alleged conspiracy should be treated as per se unlawful. Per se unlawful treatment under the antitrust laws is reserved for a narrow class of agreements (e.g., bid rigging, horizontal price fixing, customer or market allocation) that are inherently anticompetitive and may be condemned without any inquiry into their actual anticompetitive effect. Except for these limited categories, all other alleged unlawful agreements are evaluated under the rule of reason, which requires the plaintiff to prove anticompetitive effects. Courts have been extremely reluctant to expand the categories receiving per se treatment. The court in Pennsylvania Ave. recognized that per se treatment is appropriate only after courts have had considerable experience with the type of restraint at issue. According to the court, “no court has applied the [per se] rule to a price-fixing agreement in a contest for corporate control.” Further, unlike other agreements that have been treated as per se unlawful, the agreements involved here were not “uncommon”.

In its finding that per se treatment of such joint bidding arrangements was inappropriate, the court acknowledged that “price fixing among rival bidders in a contest for corporate control is not, in general, anticompetitive” and, indeed, “bidders who join forces can promote rather than suppress competition.” The court noted that joint bidding can be procompetitive because, among other benefits, it (i) allows firms – “poorer contestants” – that otherwise might not bid to participate in the auction, thus increasing competition, and (ii) allows bidders to spread the risk, thus promoting competition.

Second, after determining that per se treatment of the joint bidding arrangement was inappropriate, the court undertook a rule of reason analysis which, among other things, requires the plaintiff to prove anticompetitive effects. Applying the rule of reason analysis, the court concluded that the plaintiff had not sufficiently alleged defendants’ market power (e.g., the ability to dictate an anticompetitive price) within a relevant market, an essential element under the rule of reason. Even within a narrowly defined market for corporate control of WatchGuard – a questionable finding from the court’s perspective – defendants had no ability to exercise market power. Two factors were critical to the court’s reasoning. Notwithstanding that FP and Vector may have been the final two bidders, no inference could be made that the dozens of other bidders would not have made a topping bid if they believed that the company was worth more than the purchase price. In addition, to the extent shareholders believed that Vector’s bid was too low, they could have rejected it. As the court reasoned, “[t]he illusion of market power arose not from the Defendants’ anticompetitive conduct, but from the lack of market interest in Watchguard.”

Finally, the court declined to adopt defendants’ argument that plaintiff’s antitrust claims should be dismissed on the grounds that their alleged conduct is impliedly immune from the antitrust laws because such conduct is subject to the securities laws. The Second Circuit, in Finnegan v. Campeau Corp., previously held that the disclosure requirements for joint bidders under the securities laws precluded any application of the antitrust laws in circumstances involving alleged coordination among bidders for a public company in a similar context. However, the court decided that it could dismiss the claims on the antitrust grounds above without resolving the implied immunity issue.


Pennsylvania Ave. is the first decision weighing in on an area that has received much public attention. The case is instructive in that it recognizes that joint bidding arrangements may be procompetitive and, therefore, should be evaluated based on their actual competitive effects. Nevertheless, while the decision is helpful to other courts, it is not controlling in other districts and may be appealed. There are legitimate and strong procompetitive justifications for joint bidding arrangements; however, such conduct may still raise antitrust sensitivities. Firms should continue to exercise caution (and consult with counsel) in connection with such activities.