By George L. Paul, a partner in the Washington, D.C. office of the law firm White & Case LLP.

On January 8, 2014, the U.S. District Court for the Northern District of California found that Bazaarvoice’s acquisition of rival PowerReviews violated the Clayton Act.  United States v. Bazaarvoice, Inc., Mem. Op., No. 13-cv-00133 (N.D. Cal. Jan. 8, 2014).  The Department of Justice (DOJ) challenged the $168 million transaction, which had already been consummated, in January 2013 on the ground that it eliminated meaningful competition in the market for “rating and review” (R&R) platform services sold to internet retailers.

The court discounted unanimous testimony from more than 100 customers that the transaction would not be detrimental, relying instead upon internal company documents that suggested the reason for the deal was to eliminate a competitor.  Further, the court applied a traditional merger analysis to this high-tech market and rejected arguments that the dynamic nature of competition should lessen concerns about the transaction.

An Unusual Merger Challenge.  This is a curious transaction for the DOJ to challenge and for the court to reject.  This transaction was so small it fell below the mandatory reporting thresholds for mergers.  The vast majority of such transactions are never reviewed and when they are it is almost always because there was either vocal customer opposition or significant post-transaction price increases.  Neither were present here.  Prices had stayed level and none of the 104 customers deposed in the case complained that the merger had hurt them.

The Court Discounted the Views of Customers.  The court discounted the static price levels and the customer testimony for at least three reasons. First, it felt that Bazaarvoice may have intentionally mitigated any anti-competitive post-merger conduct because it was investigated almost immediately by the DOJ.  Second, the court discounted the customers’ lack of complaints because each customer was negotiating prices individually and therefore the court felt customers were unable to assess what was actually happening in the broad market. Lastly, the court indicated that most of the customers, who were not privy to the economic evidence presented during the proceeding, “paid little or no attention to the merger” and had “different levels of knowledge, sophistication, and experience.”  Mem. Op. at 8.

This aspect of the decision is troubling.  Customers are the proverbial “canary in a coal mine” and the fact that the DOJ was unable to introduce any customer testimony against the transaction could, and probably should, have doomed its case.  Customer testimony is often the deciding factor in merger cases.  For instance, the U.S. Court of Appeals for the Ninth Circuit has noted that testimony from customer witnesses, the “supposed victims” is “[p]erhaps the most telling evidence” in a merger.  United States v. Syufy Enterprises, 903 F.2d 659, 669 (9th Cir. 1990) (emphasis supplied).

The Court Found the Parties’ Bad Documents to be the Critical Evidence that the Deal Was Harmful.  Instead, the court focused on dozens of documents from the merging parties indicating Bazaarvoice considered PowerReviews  the plethora of documents showing that, prior to the merger, Bazaarvoice considered PowerReviews “its strongest and only credible competitor,” and that the transaction would “eliminate [Bazaarvoice’s] only real competitor” and reduce “pricing pressure.” Mem. Op. at 9, 32.  These documents were the most important reason the court rejected the transaction.

While the court acknowledged that “intent is not an element of a Clayton Act violation,” it found that the unusually larger number of documents referencing an anti-competitive intent coupled with the lack of documents referencing potential pro-competitive aspects of the transaction was more probative of what would happen in the future than the views of customers.  Mem. Op. at 21.

While looking at internal documents is pertinent (and certainly a factor), the court gave it the most prominent role in reaching its decision.   Brown Shoe Co. v. United States, 370 U.S. 294, 329 n.48 (1962) (“[E]vidence indicating the purpose of the merging parties, where available is an aid in predicting the probably future conduct of the parties and thus the probable effects of the merger.)  It is reasonable to say that the parties’ customer testimony and economic analysis were simply unable to overcome the image created by their internal documents.

High-Tech Industry, Traditional Antitrust Analysis.  Finally, another curious aspect of the court’s opinion is its use of traditional antitrust analysis in a high-tech industry.  The court accepted the economic arguments of the DOJ that the relevant product market was R&R platforms in the U.S., which in essence narrowed the number of potential competitors to the two merging parties.  Mem. Op. at 8-9, 53-62.  Bazaarvoice’s economist, Dr. Ramsey Shehadeh, had presented evidence that customers viewed the market as much broader in that online retailers used not only R&R platforms but also other social commerce tools, like Q&As, blogs, forums, and social networks internationally, and retailers often developed in-house solutions.  He further presented evidence that firms not currently offering an R&R platform could rapidly begin selling to customers in the event that prices were to rise, a factor making anticompetitive harm unlikely.

The evidence presented by Bazaarvoice is typical of what you would expect to see in a high-tech industry, where alternate formats and easy entry are often characteristic of competition and are often credited by courts.  See United States v. SunGard Data Sys., Inc., 172 F. Supp. 2d 172 (D.D.C. 2001) (noting the dynamic nature of the market, use of in-house solutions and diversity of customers to reject DOJ merger challenge).  The fact that the judge accepted the DOJ’s position suggests at least some courts continue to apply traditional modes of analysis used for years to assess smokestack industry mergers to high-tech industries.

Lessons.  For merging parties, this opinion is instructive.  No acquisition or merger is “too small” for the government to review.  Second, a company’s internal documents will be used by the government as the best indicator of the parties’ views about competition and harmful statements in these documents will be very difficult to overcome.  Third, customer support is essential to successfully defend a merger challenge, but that support—at least in this instance—may not be enough.  Finally, parties in high-tech industries face an uphill battle in convincing courts (and the government) that competition is different than in many traditional industries.  The case is now proceeding to a hearing on potential remedies and could result in the transaction being unwound some 18 months after closing.

George L. Paul is a partner in the Washington, D.C. office of the law firm White & Case LLP.