On January 10, 2013, the Department of Justice's Antitrust Division (“DOJ”) filed a lawsuit challenging Bazaarvoice Inc.'s acquisition of PowerReviews Inc. The transaction was consummated on June 2012.
Transaction Was Not Reported Under HSR Act
The DOJ's investigation of this transaction began shortly after the deal was consummated. The transaction was not reported to the U.S. antitrust agencies under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”). Apparently, the transaction was not reportable because the transaction did not satisfy the applicable size of person test.
Complaint Supported By “Hot Docs”
Interestingly, no market shares or HHIs are alleged in the DOJ's complaint. Rather, the evidence that the DOJ cites in its complaint relates to damaging internal business records known as “hot docs.” The Antitrust Division's complaint relies on numerous internal company documents including faxes, emails, and memos between employees and executives that indicate that the purpose of Bazaarvoice's acquisition of PowerReviews was to essentially monopolize a very narrow relevant product market defined as “product rating and review platforms used to collect and display consumer-generated product ratings and reviews online”.
The key allegation in the complaint is that PowerReviews, the target company, “was routinely the only significant competitive threat that Bazaarvoice faced in U.S.-based sales opportunities.” The complaint goes on to say that “[a]s a result of the transaction, Bazaarvoice will be able to profitably impose price increases on retailers and manufacturers based in the United States.” The complaint quotes internal company documents from the co-founder of Bazaarvoice as well as the current and previous CEOs that claim that post-merger, there will be virtually no significant competition in the market for Bazaarvoice.
Moreover, the DOJ cites numerous comments from executives that suggest the intention of the transaction was to eliminate a competitor:
(1) the transaction would “[e]liminate[e] [Bazaarvoice's] primary competitor”;
(2) the acquisition is “an opportunity to 'take out Bazaarvoices's only competitor, who . . . suppressed Bazaarvoice price points by as much as 15%'”;
3) the transaction ” would enable the combined company to 'avoid margin erosion' caused by 'tactical knife fighting' over competitive deals.”; and,
4) the acquisition “would (1) 'eliminate feature driven one-upmanship and tactical competition,' (2) 'create significant competitive barriers to entry” (3) 'eliminate the cost in time and money to take PowerReviews' accounts,' and (4) reduce Bazaarvoice's risk of account losses as PowerReviews competed for survival.'”
Facts Versus Documents
While the DOJ's complaint cites a number of internal company documents, it is still largely in the air whether there is any substance to the complaint. There are no market shares or HHIs alleged in the complaint, but the DOJ staff may believe that it was unnecessary to include any shares when there are “literally, no other competitors” in the market. That being said, the companies believe that the DOJ's complaint fails to take into account the reality of the market place.
Bazaarvoice states that there are a number of problems with the DOJ's complaint including the Antitrust Division's overly narrow definition of the product market. There is no single market for “product ratings and review platforms.” Bazaarvoice claims that ratings and reviews are but one of many tools that brands and retailers can use to engage with their customers as part of an overall social commerce strategy to increase awareness of their products. Other prominent tools include Facebook, Twitter, question and answer, and community forums, and many others. Even assuming the validity of the DOJ's product market definition, Bazaarvoice believes there is still robust competition for ratings and reviews all over the social commerce landscape. Therefore, the relevant product market is much larger and more nuanced than the DOJ appreciates.
As we have learned from other merger challenges, courts may overlook hot docs that support the antitrust agencies' theories and instead focus on merging parties' economic experts. At its very core, Bazaarvoice's product is a program that relays product reviews and ratings to their producers and sellers in a manner that is conducive to statistical analysis and scrutiny. Given that software code allows for numerous distinct ways to accomplish a single task, it is not difficult, and in fact can be relatively easy, for any firm with a coding professional to devise and implement a system that is similar to that of Bazaarvoice. In this way, there are few, if any technological barriers to entry for this kind of software. Fears of Bazaarvoice having control of pricing in this particular market could possibly be mitigated by the relative ease of entry. If Bazaarvoice were to set its prices exceptionally high, a startup firm with a new equivalent product could just as easily set its prices lower and thereby restore any lost competition.
Nevertheless, the documents will haunt the merging parties. The memos, business plans and other corporate records cited in the complaint will be used to bolster the DOJ's theory. It puts the merging firms in an enormous disadvantage because they are now in the position of having to argue to a court that it must believe what they are saying now, rather than what they were saying internally, only a year or two ago. The key for Bazaarvoice will be to focus the judge away from what it will describe as a series of dated documents. Bazaarvoice will argue that the Antitrust Division ignored its recent ordinary course documents and the substantial economic evidence that contradicts many of the hot docs. Bazaarvoice is now in the position of arguing that the Antitrust Division's use of its internal company documents in the complaint paint an inaccurate picture of the marketplace.
The Antitrust Division's challenge is noteworthy for several reasons. First, the challenge reiterates that the internal company documents are an essential part of every merger investigation. Hot docs can influence the DOJ's investigation and its decision to challenge a transaction. Corporate executives should be aware that careless and inappropriate language in company documents can have an extremely negative effect. Ambiguity or exaggeration in memoranda, marketing presentations, or board presentations may convey the erroneous impression that the acquisition will injure competition. All internal company documents should be written clearly and carefully in order to avoid misinterpretation. Documents that contain careless language may make a perfectly legal merger appear anticompetitive. Second, the challenge indicates that the DOJ is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. Third, the fact that a deal is not HSR reportable does not mean that no antitrust concerns exist with the combination.