The United States Department of Justice (“DOJ”) successfully challenged the merger of two leading providers of internet Ratings & Reviews (“R&R”) platforms. On January 8, 2014, the U.S. District Court for the Northern District of California ruled that Bazaarvoice, Inc.’s (“Bazaarvoice”) $168 million acquisition of PowerReviews, Inc. (“PowerReviews”) violated Section 7 of the Clayton Act (“Section 7”) concluding that the merger is likely to substantially lessen competition in the U.S. market for R&R platforms. U.S. v. Bazaarvoice, Inc., Case No. 13-cv-00133-WHO (Jan. 8, 2014).
R&R platforms are fee-based internet services that allow eCommerce companies to collect, organize, and display consumer-generated product reviews and have become a critical service to many online retailers and brands. Bazaarvoice was the clear market leader in the commercial provision of R&R platforms when it acquired its significantly smaller rival PowerReviews. The transaction was not reportable pre-merger to the U.S. antitrust agencies pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”). However, two days after consummation of the transaction, the DOJ launched a seven-month investigation culminating in a January 10, 2013 federal court challenge alleging that the transaction would lead to higher prices and decreased innovation in R&R markets.
The DOJ’s challenge and the subsequent court ruling serve as valuable reminders that even consummated mergers are subject to scrutiny by U.S. antitrust enforcement agencies and that courts are willing to find liability in internet-based technology markets often characterized by rapid shifts in the competitive landscape.
District Court Opinion
U.S. District Judge William H. Orrick concluded that the DOJ had established its alleged relevant antitrust markets and sufficiently proven the likelihood of competitive harm presented by Bazaarvoice’s acquisition of its closest competitor. The court ordered a separate remedies proceeding to account for the complexity of unwinding an 18-month old corporate integration.
In a lengthy memorandum opinion, the court relied on extensive documentary and economic evidence to establish the relevant product and geographic markets at issue. The court concluded that the market for U.S. R&R platforms is a sustainable relevant market for antitrust analysis, rejecting the parties’ claims that a broader, worldwide social commerce market was most appropriate. The court focused on extensive pre-deal documentation evidencing unique competitive interaction between Bazaarvoice and PowerReviews and the parties’ consistent internal views that the United States constituted a separate competitive market.
Relying primarily on the parties’ own words, Judge Orrick also examined Bazaarvoice’s anticompetitive motivations for the acquisition. For example, despite the lack of legal intent requirements necessary to establish Section 7 violations, evidence suggesting Bazaarvoice’s goal was to “‘take out [its] only competitor, who . . . suppress[ed] Bazaarvoice price points . . . by as much as 15% . . .’” and the dearth of contemporaneous contrary evidence was particularly problematic for the parties at trial.
In defense of its acquisition, Bazaarvoice attempted to demonstrate the merger’s lack of competitive harm by relying on PowerReviews’ comparatively small market share and the absence of post-acquisition price increases to R&R customers. The court found the parties’ post-acquisition evidence unpersuasive because of Bazaarvoice’s obvious incentive not to raise prices while subject to DOJ antitrust review. The court also determined that market participant testimony describing the lack of harm to R&R customers had little probative value because “[t]he complexity of the economic and legal issues raised in antitrust actions warrants affording limited value to lay testimony regarding the effects of a merger.” Specifically, the court concluded that individual customers lacked sufficient information necessary to opine on the merger’s competitive impact. Furthermore, the court was not persuaded by the parties’ claims regarding ease of entry and the competitive threats posed by internet juggernauts such as Amazon and Google. The court concluded that substantial barriers to entry exist in the market for R&R platforms focusing particular attention on Bazaarvoice’s substantial network effect advantages. The court also concluded that Bazaarvoice’s acquisition of PowerReviews would exacerbate existing entry hurdles and that, despite Amazon’s formidable in-house R&R solutions, the internet retailer could not be considered a rapid entrant into the commercial supply of R&R platforms to third parties and Google was not a competitive constraint on Bazaarvoice.
Bazaarvoice emphasizes several key principles of U.S. merger review including: 1) the DOJ and U.S. Federal Trade Commission will aggressively pursue merger enforcement actions in non-reportable transactions; 2) parties to a consummated merger may not enjoy the benefits of HSR statutory timelines, risking lengthy agency investigations with little ability to influence timing; 3) firms competing in dynamic technology markets are not exempt from agency enforcement, particularly when barriers to entry such as network effects are present; 4) problematic contemporaneous business documents and company public statements – many of which can be avoided with appropriate legal counseling – create high hurdles for defending against agency merger challenges, particularly in the absence of comparable countervailing evidence; and 5) post-merger pricing evidence and customer testimony suggesting limited competitive impact will not necessarily prove dispositive before the U.S. antitrust agencies or federal courts.