For many years after its implementation, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 seemed to sound the death knell of post-consummation merger trials. By establishing a file-and-wait system rather than the old catch-me-if-you-can non-system, the Act enabled the antitrust enforcement agencies to prevent the consummation of potentially anticompetitive mergers until they completed their investigation, and then to block the deal by seeking a preliminary injunction. Often, the threat of an injunction was enough to cause the parties to abandon the transaction. If the enforcement agency obtained an injunction, most deals simply disintegrated. Neither the companies nor their sources of financing were willing to tolerate litigating a case through a trial.
Today, the filing thresholds for the HSR Act have been increased by legislation, which also indexed those thresholds to inflation. (On January 17, 2014, the FTC announced that the value of transaction threshold has been raised to $75.9 million.) As the filing thresholds increased, so has the interest of the FTC and the DOJ in transactions that fall below those thresholds and do not require the parties to file and to comply with the HSR Act’s waiting period. Those transactions often close before the enforcement agencies take an interest in them and launch an investigation. At that point, abandonment is no longer an option—money has changed hands, the companies have been integrated, and the colors have been nailed to the mast. The companies’ only options—more precisely, the company’s only options—are to agree to a difficult unscramble-the-egg divestiture or to litigate the case through trial.
Such was the situation that led to the DOJ’s victory in challenging Bazaarvoice’s acquisition of PowerReviews, Bazaarvoice’s principal competitor in providing ratings and review (“R&R”) platforms to firms in online commerce. The Court described R&R platforms as “combin[ing] software and services to enable manufacturers and retailers, among other companies, to collect, organize, and display consumer-generated product reviews and ratings online. These reviews and ratings are displayed on the page of a commercial website on which a consumer can purchase the product discussed.” The acquisition closed in June 2012, but the DOJ’s lawsuit was not filed until January 2013.
On January 8, 2014, after a three-week trial, the U.S. District Court in San Francisco ruled that the transaction was unlawful under Section 7 of the Clayton Act. Notable in the Court’s 141-page opinion was the reappearance of Rip van Winkle issues that have largely slumbered since the passage of the HSR Act transformed merger litigation from a retrospective to a prospective process.
In particular, Bazaarvoice involved the significance of post-acquisition evidence. In an injunction case, the parties have to predict whether an acquisition will lead to increased prices or other anticompetitive effects. In a post-consummation trial, evidence of those effects is available, but its significance can be hotly disputed, as it was in the Bazaarvoice trial. The Court—like many of its predecessors in the antediluvian pre-HSR era—gave little weight to such evidence when it could even arguably be subject to manipulation, i.e., if Bazaarvoice could have held prices down, knowing that the transaction came under investigation by DOJ almost as soon as it had closed. (The Court also found, however, that prices in fact had often increased.)
Post-acquisition evidence potentially favorable to the company, but not subject to manipulation, did not materialize. For example, in injunction cases, companies often argue that new entry, or expansion by fringe firms already in the market, will prevent price increases. In Bazaarvoice, however, no significant entry or fringe expansion occurred after the acquisition closed.
Customer testimony also figured prominently in the case; the parties introduced more than 100 depositions into the trial record, many of them of R&R platform customers. In pre-HSR days, customer testimony also figured prominently in merger investigations and litigation, but those customers were asked to predict what effect the transaction would have on them. In Bazaarvoice, customers had experienced the effect of the consummated deal. Most customers responded to the transaction with a collective shrug; few either opposed or supported it. The Court pointed out that R&R platforms are relatively cheap in the context of most customers’ operating budgets, and customers spend little time evaluating them except when their contracts are due for renewal. The Court, for all intents and purposes, disregarded their testimony: “Their testimony on the impact and likely effect of the merger was speculative at best and is entitled to virtually no weight.” That conclusion, however, could be quite different in a case involving the merger of suppliers that provide major, continuing inputs to their customers.
Finally, the trial record abounded with internal documents that admitted or even celebrated the anticompetitive effect of the transaction, leaving a trail that not even a resourceful defense could overcome. The Court said: “[A]nticompetitive rationales infused virtually every pre-acquisition document describing the benefits of purchasing PowerReviews.” Those documents described PowerReviews as Bazaarvoice’s principal competitor, predicted that the acquisition would result in a “monopoly,” projected enhanced profits, and anticipated that the deal would end competitive “knife-fighting” between the companies. Bazaarvoice’s chief financial officer suggested that Bazaarvoice could compete against PowerReviews and “crush” them. His alternative was: “damnit lets (sic) just buy them now.”
The Supreme Court has not decided a case involving Section 7 merger standards for many years. The irony of Bazaarvoice is that it involved the cutting edge of e-commerce tools for online merchants, but the Court cited and relied on Supreme Court precedents from the 1960s and 1970s that were decided before the Internet existed. Bazaarvoice is far from the first post-consummation case to be tried in the HSR era, and it surely will not be the last. It should come as no surprise, given the dynamics of the current system of merger review, if the next Section 7 case that reaches the Supreme Court involves a transaction that, like Bazaarvoice, did not qualify for HSR review.