DOJ's Successful Challenge Of Bazaarvoice’s Acquisition: A Reminder That Consummated Deals Are Not Immune From Section 7 Scrutiny

By successfully challenging Bazaarvoice’s acquisition of PowerReviews in district court, the Department of Justice (DOJ) has provided yet another reminder that consummated transactions can be subject to antitrust review and enforcement action.[1] In a decision filed on January 8, 2014, the District Court for the Northern District of California held that Bazaarvoice violated Section 7 of the Clayton Act when it acquired PowerReviews, its “only meaningful commercial competitor.” The DOJ complaint sought the divestiture of sufficient assets to create another business that would replace the competition lost as a result of the PowerReviews acquisition. The scope of such divestitures or other remedies, such as licensing technology, will be set by the court in separate proceedings.

Background

Bazaarvoice and PowerReviews were the two largest “ratings and reviews” (R&R) platform providers. R&R platforms are the technological structures on websites that allow consumers to offer reviews and comments on particular products. Each company that uses such review technology negotiates directly with the R&R provider, such as Bazaarvoice, to determine the fees for providing these R&R platforms on the company’s website. Although large Internet retailers such as Amazon.com can develop R&R platforms in-house, smaller retailers and manufacturers often look to independent R&R companies to provide this type of social media content for their websites.

After a year-long courtship and negotiation process, in June 2012, Bazaarvoice acquired PowerReviews in a transaction valued at $168.2 million. The companies did not report the acquisition to the government because the transaction did not reach the Hart-Scott-Rodino Act reporting thresholds – PowerReviews did not meet the “size-of-person test” that triggers the mandatory notification and pre-clearance process.[2] Nevertheless, DOJ opened an investigation of the acquisition shortly after it was consummated.[3] After a six-month investigation, in January 2013, the DOJ concluded that, “Bazaarvoice bought PowerReviews knowing that it was acquiring its most significant rival and hoping to benefit from diminished price competition,”[4] and filed a civil antitrust lawsuit against Bazaarvoice challenging the acquisition as anticompetitive under Section 7 of the Clayton Act, which prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”[5] In January 2014, after a full trial, the district court ruled that Bazaarvoice’s acquisition of PowerReviews violated Section 7 of the Clayton Act.

The Court’s Opinion

In a 141-page opinion, the court summarized its findings and explained the basis for its ruling that Bazaarvoice’s acquisition of PowerReviews violated the antitrust laws.

The court found that the relevant product market was narrowly defined as R&R platforms, contrary to Bazaarvoice’s assertion that it competes in a larger cluster market that includes other e-commerce tools and “big data.”[6] In defining the relevant product market, the court looked to customer and industry perceptions as well as the companies’ ordinary course documents, which mentioned only R&R platform providers as competitors.[7] In fact, in many internal documents, the companies viewed each other as the only competitors – even using the term “duopoly” to describe the competitive situation.[8] The court also considered whether various other e-commerce tools and social media platforms could be substitutes, but concluded that R&R platforms constitute a distinct relevant product market.[9] The court found it important that the two companies directly competed with one another on price. Bazaarvoice focused its sales efforts on large enterprise customers. PowerReviews positioned itself as the low-price alternative to Bazaarvoice, and although many of its customers were small- to medium-sized businesses, it also attracted large enterprise customers. Significantly, each company would adjust its pricing in negotiations with customers depending on the nature of the competitive threat posed by the other company for the specific customer.[10] Retailers and manufacturers ‒ the regular consumers of R&R technology ‒ also viewed Bazaarvoice and PowerReviews as the two most significant providers of the platforms.[11]

The court also explored the possibility of entry or expansion by smaller competitors in the fast-moving technology sector, but concluded that such activity was unlikely sufficient to challenge the incumbents. Although Bazaarvoice argued that entry into the R&R market is easy and noted some examples of entry, the court found that “these and other companies’ relative lack of success selling R&R undercuts [Bazaarvoice’s] argument, as do the lack of historical entry and entry barriers like syndication and switching costs.”[12]

The court acknowledged that intent is not an element of a Section 7 violation; however, the court found that the companies’ ordinary course documents and statements made by Bazaarvoice and PowerReviews executives prior to the merger undergirded the government’s case and contradicted much of Bazaarvoice’s assertions at trial about the likely competitive effects of the merger.[13] Bazaarvoice documents pointed to PowerReviews’ aggressive approach to pricing, which frequently forced Bazaarvoice to defend its higher prices, or offer lower prices.[14] In addition, documents reflected Bazaarvoice’s recognition that increasing competition from PowerReviews threatened the long-term value of Bazaarvoice’s business.[15] Further, throughout the year-long negotiations, both Bazaarvoice’s and PowerReviews’ internal documents included anticompetitive rationales for the acquisition. For example, the court highlighted that, when outlining the benefits of the acquisition, Bazaarvoice executives repeatedly noted that acquiring PowerReviews would eliminate Bazaarvoice’s primary competitor, provide relief from pricing pressure, and raise barriers to entry.[16] Some of the companies’ documents also referred to the acquisition as a means to increase the combined firm’s network of customers and audience reach, which ultimately would make the company more attractive to advertisers and marketers. However, based on the documents and testimony, the court concluded that the companies’ central rationale for the transaction was anticompetitive, and the companies’ emphasis on other rationales in the companies’ public statements and during trial was unconvincing in determining competitive effects under Section 7.[17]

In sum, the court concluded that

[g]iven the overwhelming market share Bazaarvoice acquired when it purchased PowerReviews, the stark pre-merger evidence of anticompetitive intent and the merger’s likely effect, coupled with the actual lack of impact competitors have made since the merger, the government established the Section 7 violation. The Court finds that it is probable that Bazaarvoice’s acquisition of PowerReviews will have an anticompetitive effect over the next two years absent intervention by the Court.[18]

The Remedy Phase

Courts are “clothed with large discretion” to fashion remedies “effective to redress [antitrust] violations and to restore competition.”[19] This discretion extends to crafting remedies when an already-completed transaction has been found to violate the antitrust laws. Of course, if too much time has elapsed after a transaction, disentangling the merged companies can be difficult or impossible.[20] However, government challenges to consummated transactions can result in the combined firm being compelled to reconstitute the separate entities to replicate pre-merger competitive dynamics. Recently, there have been a number of instances where the government successfully compelled joined firms to “unscramble the eggs.” For example, in 2013 alone, the FTC saw success in challenges to two separate completed transactions that resulted in divestitures to restore competition.[21] Already in 2014, the DOJ and FTC have successfully challenged consummated mergers. An Idaho federal judge ruled for the FTC and required a hospital to fully divest a physician’s practice it had acquired in early 2013.[22] Further, in early January 2014, the DOJ announced it would require Heraeus Electro-Nite Co., LLC to divest the assets it had acquired from Midwest Instrument Company Inc. (Minco) to resolve the government’s competitive concerns in the steel manufacturing industry acquisition.[23] In sum, the antitrust agencies are not shy in seeking, and courts appear willing to grant, divestiture of significant assets or whole divisions when it is determined that an already-completed transaction violates the antitrust laws.

As for Bazaarvoice, the remedy phase of the litigation is ongoing, and the court will order what it determines is an appropriate remedy. The court noted that although the government is “entitled to injunction that requires Bazaarvoice to divest PowerReviews . . . [t]hat is not a simple proposition 18 months after the merger.”[24] Following the court’s ruling, at least one potential competitor appears to be encouraged to attempt entering the US R&R market.[25]

On February 12, the DOJ filed its proposed remedy.[26] To restore the pre-transaction competitive environment, the DOJ asked the court to order Bazaarvoice to divest all of the assets acquired through its purchase of PowerReviews. The government also requests that the company undertake various additional steps to ensure the lost competition would be fully replaced, including: providing cross-network syndication services for the buyer; waiving trade-secret restrictions on employees hired by the buyer; licensing R&R technology to the buyer; providing transitional services to the buyer; and permitting customers to terminate their existing agreements. Further, the DOJ requests that the court appoint a special master to oversee implementation of the remedy. Bazaarvoice’s response to the government’s proposed remedy is due by March 5.

Observers will be watching closely for the court’s decision on remedy, which is expected in the spring of 2014.

Key Takeaways

The following are a few key takeaways from the Bazaarvoice case:

• The court’s decision demonstrates the continued importance of “hot documents” in a merger or acquisition review. Throughout the opinion, the court highlighted the companies’ ordinary course of business documents as key evidence regarding market definition, market structure, and competitive effects. The court also looked to the companies’ documents to illuminate what the court concluded was an anticompetitive rationale for the acquisition as well as to help determine likely competitive effects.
• This ruling also is notable for the court’s application of traditional antitrust principles to a technology sector acquisition. The court concurred with the conclusions of the government’s economic expert regarding application of the DOJ/FTC Merger Guidelines to assess the probable outcomes of the merger. The court also found traditional antitrust analysis adequate to assess post-acquisition market concentration, entry barriers, and anticompetitive effects of the acquisition. Simply because a merger occurs in the fast-paced technology industry does not mean that the government or a court will shy away from traditional antitrust inquiry. In a recent speech, a DOJ official noted that: “The [Bazaarvoice] decision confirms that merger analysis in high-tech markets, as in other markets, is highly fact-specific. High-tech mergers do not get a free pass, and their impact on competition must be evaluated on a case-by-case basis.” [27]
• Finally, parties to a transaction that is exempt from or falls below the Hart-Scott-Rodino reporting thresholds should be reminded that the government can scrutinize or even challenge the transaction after it has been consummated. There are numerous ways the government can find out about a proposed acquisition, and if there are competition issues in the transaction, the parties should treat them as seriously as if the transaction was reportable. In some cases, this means engaging the government affirmatively or restructuring the transaction to deal with competitive effects.