U.S. District Judge William Orrick III, Northern District of California ()
SAN FRANCISCO — In an antitrust case that sounded an alarm in Silicon Valley, a federal judge has thrown a wrench in the merger of two little-known social commerce companies.
In a 141-page order issued Thursday evening, U.S. District Judge William Orrick III sided with the government that Bazaarvoice’s purchase in 2012 of its main rival PowerReviews would likely stifle competition in the field of online ratings and reviews.
Bazaarvoice’s lawyers at Wilson Sonsini Goodrich & Rosati had insisted the company still faced plenty of competition and pointed to its deteriorating revenue to bolster its case.
But Orrick disagreed: “The evidence that Bazaarvoice and PowerReviews expected the transaction to have anticompetitive effects is overwhelming,” he wrote.
The U.S. Department of Justice enforcement action raised questions about the role of antitrust law in quickly evolving high-tech markets. Peter Huston, assistant chief of the department’s Antitrust Division in San Francisco, and Wilson Sonsini partner Boris Feldman, Bazaarvoice’s lead lawyer, faced off in a three-week bench trial last fall, sparring fiercely over how to define the relevant market.
Although ratings and reviews are Bazaarvoice’s bedrock, Feldman argued that the company should be considered as part of a broader social commerce market with the likes of Google and Amazon. But Orrick adopted the government’s view that there is a distinct U.S. market for product ratings and reviews.
“The marketplace may be filled with many strong and able companies in adjacent spaces,” he wrote. “But that does not mean that entry barriers become irrelevant or are somehow more easily overcome.
“To conclude otherwise,” he added, “would give e-commerce companies carte blanche to violate antitrust laws with impunity with the excuse that Google, Amazon, Facebook or any other successful technology company stands ready to restore competition to any highly concentrated market.”
Orrick did not indicate how he would address Bazaarvoice’s violation of antitrust laws and scheduled a Jan. 22 conference to discuss the remedy phase of the case. The government has asked Orrick to compel Bazaarvoice to divest enough assets to create a company that can replace PowerReviews.
“As today’s decision reaffirms, anticompetitive transactions that are not reported to federal agencies will not receive a free pass from antitrust scrutiny,” Assistant Attorney General Bill Baer, who leads the Antitrust Division, said in a statement.
Bazaarvoice said in a statement that it will decide whether or not to appeal Orrick’s decision after the remedy has been determined.
“We are disappointed in the outcome of the litigation,” the statement reads. “With the court’s decision, we’ll now do everything we can to help ensure that the final order achieves the best outcome for our clients, shareholders and employees.”
The government’s bid to unravel the consummated merger of low-profile firms caused a stir in the Valley, where lawyers say small companies traditionally assumed their deals were unlikely to draw government scrutiny. Deal lawyers say they have sensed heightened review of small deals under the Obama administration, which promised to scrutinize technology transactions of all sizes. Bazaarvoice’s purchase of PowerReviews for $168 million was too small to require reporting under the Hart-Scott-Rodino Act.
Cooley M&A partner Jamie Leigh said she has received more inquiries about the antitrust implications of small deals since the government announced its case against Bazaarvoice. She expects Orrick’s decision to amplify the message.
“There’s a realness to it when an order like that comes down,” she said.
Having already integrated PowerReviews, Bazaarvoice could face severe implications from the court’s order, said Chris Compton, a longtime antitrust lawyer in the Valley who is not involved in the case.
“They could have to give up things financially, intellectual property–wise and customer-wise, that would put them in a far worse position than they were in before the merger,” he said.
Bazaarvoice executives unwittingly handed government lawyers some of their best pieces of evidence. Huston’s team trotted out various exhibits at trial indicating that the company’s own leaders believed that the deal would eliminate competition. One of Bazaarvoice’s cofounders said the acquisition of PowerReviews would give Bazaarvoice “relief from price erosion.” Bazaarvoice’s current CEO wrote that the company had, “literally, no other competitors.” Orrick wrote that the statements from Bazaarvoice executives supported the conclusion that the merger would likely have anticompetitive effects in violation of the Clayton Act, even though company executives struck a different tone during trial.
“Bazaarvoice’s efforts at trial to walk away from its central rationale leading up to the merger—that acquiring PowerReviews would significantly diminish price competition for R&R platforms—was, at best, unconvincing,” Orrick wrote.
The decision underscores the importance of involving antitrust counsel at the deal table, Compton said. “This decision is a dramatic example of how much damage and loss can be incurred by failing to put a little bit of preventative counseling in place early,” he said.
Bazaarvoice was also represented by Wilson Sonsini on the underlying transaction.
Orrick found that the merger had upped concentration in a market that was already highly concentrated. He wrote that he arrived at his conclusion with the help of testimony from the government’s economics expert, UC Berkeley professor Carl Shapiro, whom he found more persuasive than Bazaarvoice’s expert.
Orrick wrote that retailers see product ratings and reviews as an important feature that they are unlikely to give up, despite increases in price. He wrote that he did not give much weight to 104 declarations from Bazaarvoice customers that they had not been harmed by the merger. He noted that the customers had not been privy to the evidence presented at trial and that Bazaarvoice had surely been on its best behavior while under government investigation.
Some antitrust lawyers were surprised by that aspect of the ruling.
“If customers don’t think there’s a problem, by definition you would expect that the government would have a hard time proving there’s a problem,” said Compton, adding that it would likely be an issue raised by Bazaarvoice on appeal.
Jones Day partner Craig Waldman recalled that retired U.S. District Judge Vaughn Walker also disregarded the views of customers when he decided not to block the 2004 merger of Oracle and PeopleSoft.
“In the Northern District of California, it doesn’t appear that the customer has the final word,” he said.
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