On February 21, 2008, the Honorable Richard A. Jones of the U.S. District Court for the Western District of Washington ruled that price fixing among rival private equity funds in a contest for corporate control was not anticompetitive and did not violate the Sherman Act.
In 2005, the board of directors of WatchGuard Technologies Incorporated (“WatchGuard”) began to solicit offers to purchase the company. As many as fifty suitors expressed an interest in the company during the acquisition process. Vector Capital Corporation (“Vector”) and Francisco Partners LP (“Francisco Partners”) were among the interested suitors that offered acquisition bids. By June 2006, Francisco Partners had offered $4.60 per share and Vector had offered $4.65 per share. According to court records, on June 26, 2006, Vector and Francisco Partners were alleged to have entered into an agreement in which Vector agreed to stop pursuing the acquisition of WatchGuard so that Francisco Partners could lower its bid for the company. Francisco Partners later lowered its bid to $4.25 per share. WatchGuard’s board accepted this lower bid in July 2006. In August, Vector announced that it would fund half of the acquisition in exchange for a 50% interest in WatchGuard after the merger. WatchGuard’s directors disclosed this agreement when soliciting shareholder votes in favor of the merger. The WatchGuard shareholders voted to approve the merger, and the merger closed in October 2006.
Pennsylvania Avenue Funds owned shares in WatchGuard and brought suit against Vector and Francisco Partners on behalf of the WatchGuard stockholders. The plaintiffs’ complaint alleged that Vector and Francisco Partners violated Section 1 of the Sherman Act because they “entered into a contract, combination or conspiracy to artificially fix the price, refrain from bidding, or rig the tender offer bids for WatchGuard shares.” The plaintiffs claimed that the agreement between Vector and Francisco Partners artificially depressed the company’s purchase price.
Upon hearing the defendants’ motion to dismiss, the district court held that price fixing by two rival bidders was not per se unlawful because bidders who join forces actually can promote rather than suppress competition. Judge Jones reasoned that by allowing less wealthy bidders and bidders who alone could not bear the risks of acquisition to enter the process, competition could be increased. The court also held that the anticompetitive conduct of Vector and Francisco Partners did not violate the rule of reason. Under the rule of reason, a plaintiff must allege: (1) that a relevant market exists and (2) that the defendants have power within that market. The court explained, “[T]he plaintiff must show that the defendants control enough of the market that their anticompetitive conduct actually injures competitors or consumers.”
The court found that even if the relevant market were considered only to include the market for corporate control of WatchGuard, the defendants did not have market power within that market. The court reasoned that Vector and Francisco Partners did not have market power among the potential suitors for WatchGuard. In other words, there was no support for the inference that the other potential suitors declined to make bids because of the anticompetitive agreement between Vector and Francisco Partners. The court found that any suitor that thought that WatchGuard was worth more than Francisco Partners’ decreased bid could have made a higher bid. It decided that it was the “lack of market interest in WatchGuard” that determined the buyout price, not the agreement between Vector and Francisco Partners. The court dismissed the plaintiffs’ antitrust claim.