On January 8, 2014, Judge Orrick of the Northern District of California ruled that Bazaarvoice’s acquisition of competitor PowerReviews violated Section 7 of the Clayton Act.  The ruling was in favor of the U.S. Department of Justice (DOJ).  The public version of the opinion was made available on January 10.  In its self-described “necessarily lengthy opinion,” which spans 141 pages, the court ultimately found that the facts overwhelmingly showed the acquisition will have anticompetitive effects and that Bazaarvoice did not overcome the government’s prima facie case.  The case included 40 witnesses at trial, more than 100 depositions and 980 exhibits.  Dr. Carl Shapiro testified as DOJ’s economist and Dr. Ramsey Shehadeh testified on behalf of Bazaarvoice/PowerReviews.  The court noted that the case presented some difficult issues, including that there were no generally accepted “market share statistics covering the sales of R&R solutions or social commerce solutions and no perfect way to measure market shares.”  And while neither side presented flawless analyses, the court found Dr. Shapiro’s approaches more persuasive than those of Dr. Shehadeh.

Bazaarvoice and PowerReviews each offered sophisticated “R&R platforms.”  R&R platforms provide a user interface and review form for the collection and display of user-generated content (i.e., user reviews) on the product page of a commercial website where the product can be purchased.  Often these are in the form of star ratings and open-ended reviews in a text box.  R&R platforms increase sales for the retailer and have a variety of different features.  The court noted that many on-ine retailers view an R&R platform as “necessary.”  Before the merger, Bazaarvoice and PowerReviews offered similar products and features and targeted similar customers.

The court found that the relevant product market was the narrow “R&R platforms,” rather than the broader “social commerce tools” or “eCommerce platforms.”  The court went through many popular social media platforms such as Facebook, Google+, Twitter, Instagram, and Pinterest, explaining why each was not a substitute for these R&R platforms.  In this relevant market, the court found that PowerReviews was Bazaarvoice’s only real competitor, and thus the merger “would eliminate Bazaarvoice’s only meaningful commercial competitor.”

At the end of the opinion, the court commented on the role of antitrust “in rapidly changing high-tech markets.”  It noted that there is a debate as to whether antitrust is properly suited to assess competitive effects in these markets.  The court declined to take sides and stated that its “mission is to assess the alleged antitrust violations presented, irrespective of the dynamism of the market at issue.”

The case now moves to the remedy phase.  In its complaint, the DOJ requested that the court order Bazaarvoice to divest assets originally possessed by either Bazaarvoice and/or PowerReviews to create a viable, competing business.   However, as Judge Orrick noted, 18 months after the merger, it may not be so simple to divest assets.  The judge scheduled a conference for January 22 with the parties to discuss a possible remedy.

There are several lessons to be gathered from this case.  First, the Bazaarvoice litigation is further evidence that the antitrust agencies are not shy about litigating mergers they feel are anticompetitive.  The DOJ invested significant resources and time – including three full weeks at trial in California – into litigating the case, beginning with its investigation that it launched two days after the firms closed their transaction on June 12, 2012.  It has established a significant record of bringing, and winning, merger cases.

Second, this is a significant event, having a federal district court evaluate a consummated merger transaction.  While the agencies have challenged many non-reportable transactions, almost all have been resolved by consent order, or litigated through the Federal Trade Commission’s (FTC’s) in-house administrative hearing process (where, not surprisingly, the FTC essentially always wins).  Accordingly, parties to a non-reportable transaction that raises significant antitrust risks should expect the agencies to investigate and, if warranted, litigate.

Third, the Court heavily discounted Bazaarvoice’s arguments regarding lack of any actual anticompetitive effect, because the companies knew the DOJ was reviewing the deal and could moderate their behavior.  The court discounted Bazaarvoice’s arguments that none of the 104 customers who were deposed complained that the merger has hurt them.  The court stated “it would be a mistake to rely on customer testimony about effects of the merger for several reasons.”  Among the reasons the court included was “Bazaarvoice’s business conduct after the merger was likely tempered by the government’s immediate investigation; the customers were not privy to most of the evidence presented to the Court, including that of the economic experts; many of the customers had paid little or no attention to the merger; and each had an idiosyncratic understanding of R&R based on the priorities of their company and their different levels of knowledge, sophistication, and experience.”  Thus, while raising prices after a transaction provides strong evidence to support the government’s case, the lack of a price increase does not necessarily support the merging parties’ defense.

Finally, and perhaps most importantly, the case shows the need to be circumspect in preparing ordinary course documents.  Aside from the fact that in reportable transactions, the DOJ and FTC are entitled to “4(c)” and “4(d)” documents about the transaction, once a second request is issued or discovery begins, documents created in the ordinary course of business are discoverable.  This includes Strengths, Weaknesses, Opportunities and Threats (SWOT) analyses, board meeting minutes, business and strategic plans, market and market share analyses, and competitive assessments.  In this case, the court found the ordinary course documents, and particularly those made by the companies’ executives, some of the most persuasive evidence.  The court quoted extensively from the documents and cited numerous documents from Bazaarvoice and PowerReviews that showed that the parties viewed each other as their primary competitor, that there were no other strong competitors in this market, that the two companies operated in essentially a duopoly, and that the intent of the merger was to eliminate a primary competitor.  Despite the parties’ efforts to explain away these documents, the court was not persuaded.  Thus, it is important that companies carefully consider what to include in documents and e-mails, and assume that any non-privileged material may be discovered.

The agencies’ aggressive pursuit of perceived anticompetitive, non-reportable transactions places a premium on parties’ evaluating the antitrust risk.

The public version of the court’s opinion can be found here:http://www.justice.gov/atr/cases/f302900/302948.pdf