DOJ’s Thumbs Down Scuttles Completed Merger Of Online Ratings And Review Companies
Last week’s victory of the U.S. Department of Justice (the “DOJ”) in its challenge to a consummated merger in U.S. v. Bazaarvoice Inc. shows that dominant companies that assume they are free to gobble up their main competitors if such consolidations do not meet the thresholds for reporting under the Hart-Scott-Rodino Act (“HSR”) may be in for some rude awakenings.
While the DOJ has not been shy about suing to block proposed mergers that it deems anticompetitive, traditionally it has not sued to dismantle consummated mergers that did not meet the threshold for pre-merger reporting under HSR. Last year, however, the lack of pre-merger review did not stop the DOJ from suing Bazaarvoice for acquiring its only significant rival in the dynamic online product ratings and reviews (R&R) market. The DOJ had not reviewed the merger before consummation because Bazaarvoice’s $168.2 million acquisition of PowerReviews in June 2012 was below the reporting threshold for HSR.
Judge William H. Orrick of the U.S. District Court for the Northern District of California held on Wednesday that Bazaarvoice violated Section 7 of the Clayton Act by purchasing its “closest and only serious competitor,” creating the likelihood of an anticompetitive effect in the U.S. market for R&R.
Bazaarvoice provides a platform for consumer-generated ratings and reviews for major companies such as Best Buy, Costco and Crate & Barrel. These reviews are displayed on the retailers’ and manufacturers’ websites, allowing consumers to make informed purchasing decisions. Pre-merger, PowerReviews was Bazaarvoice’s only significant rival in this emerging market. And they frequently competed head-to-head for contracts.
The court found that post-merger there was a “competitive void” that other, smaller competitors were unable to fill. UK-based R&R provider Reevoo is one such company. Reevoo entered the U.S. market just after Bazaarvoice scooped up PowerReviews. Although Reevoo has been successful in Europe – and has competed with Bazaarvoice for a number of accounts – it has struggled in the U.S. Other small companies, such as Pluck and Gigya, have not fared much better.
Moreover, with the consolidation of the market’s two biggest players, the court found that Bazaarvoice had the incentive and ability to raise prices above a competitive level. Judge Orrick found that “Bazaarvoice and PowerReviews each asserted that the merged firm could increase prices post-merger,” and that “[s]omeone with 100 percent of the market could do so even more profitably.”
The court noted that the case raises questions as to the proper place for antitrust law in rapidly changing, high-tech markets. Judge Orrick dismissed those concerns, however, noting that even though Bazaarvoice “indisputably operates in a dynamic and evolving field,” it was unable to show that “the evolving nature of the market itself precludes the merger’s likely anticompetitive effects.”
Judge Orrick found that the government would be entitled to an injunction that requires Bazaarvoice to divest PowerReviews. He noted, however, that it is not a “simple proposition” to unscramble a merger that was consummated 18 months ago. Judge Orrick intends to involve the parties in tackling the remedy issue. He requested that they appear in court on January 22, 2014, to discuss a remedy.
In the meantime, Bazaarvoice has expressed its disappointment in the ruling and has said that it will not make a decision regarding an appeal “until after the Court concludes the remedy phase of the litigation.” The DOJ released a statement expressing its satisfaction with the ruling, while also cautioning that “anticompetitive transactions that are not reported to federal agencies will not receive a free pass from antitrust scrutiny.”
The DOJ’s statement could be viewed as the moral of the story – being outside the reach of the HSR does not provide merging parties with any type of antitrust immunity. Even when the case involves a high-tech, dynamic and evolving market, antitrust authorities are not likely to look kindly upon consummated mergers when they conclude that one company has acquired its only significant rival, leaving no room for other competitors to fight, and no alternatives to consumers who may be subject to disciplinary price increases.
— Edited by Gary J. Malone
Tagged in: Antitrust Litigation,