NEW YORK (The Deal) -- As argument opens Monday in the trial over the federal government's attempt to break up the June 2012 acquisition of online rating service PowerReviews by rival Bazaarvoice (BV - Get Report), the key for Department of Justice lawyers will be demonstrating that retailers who rely on the services to collect customer reviews of their products have been hurt by the consummated deal.
On Jan. 10, the DOJ sued to break up the $168 million transaction, arguing that it "substantially lessened competition in the market for product ratings and reviews platforms in the United States, resulting in higher prices and diminished innovation." The DOJ alleges that Bazaarvoice is the dominant commercial supplier of product ratings and review platforms in the U.S., and PowerReviews was its closest rival. Before the transaction, PowerReviews was an aggressive price competitor. The government said this prompted the companies to offer many retailers and manufacturers substantial price discounts.
The DOJ has said the transaction stripped retailers that are not capable of setting up their own review system in-house of negotiating leverage with the ratings providers, leaving them vulnerable to anticompetitive price increases.
The trial before Judge William H. Orrick of the U.S. District Court in San Francisco will pit DOJ lawyers Claude Scott, Peter Huston and Michael Bonanno against a Wilson Sonsini Goodrich & Rosati PC team featuring Scot Sher, Jonathan Jacobson, Chul Pak and Boris Feldman.
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Joshua Soven, partner in the Washington office of Gibson, Dunn & Crutcher LLP and a former DOJ litigator, said a key factor in the case will be how Judge Orrick weighs internal company documents the DOJ obtained showing Bazaarvoice officials complaining prior to the merger that competition from PowerRatings was keeping prices down, versus evidence the companies may submit showing that since consummation prices for ratings services have not increased substantially and that in the fast-moving technology market whatever harmful competitive effects DOJ alleges will be erased by new entrants and new products.
"The companies' documents clearly had a significant impact on the DOJ's decision to bring an enforcement action," he said. "But the merged parties will emphasize a lot of other facts - post-merger price trends, whether customers can convincingly show that the merger has hurt competition, that the tech market moves quickly and whether it's reasonable to assume what might seem like concentrated market today will remain that way over the medium or long term."
The case also raises an interesting doctrinal question, he said, because the DOJ's suit gave very little attention to defining a relevant market that has been harmed by the deal. Typically, antitrust enforcers are obligated to define a market in order to win their case. "The government's complaint devotes only two paragraphs to market definition and did not provide formal market shares or market concentration calculations," Soven said. "Instead they emphasized what they call direct evidence of anticompetitive effects," such as the parties' documents, and might rely on bid data showing the parties were the only two companies bidding on certain customers' business and economic modeling predicting the merger's effect on price.
Soven also said it will be interesting to see if Judge Orrick chooses to hold to the high bar for crediting customer testimony set by U.S. District Court Judge Vaughn Walker of the Northern District of California in 2004 when he allowed Oracle Corp.'s (ORCL) acquisition of PeopleSoft to proceed. If the DOJ relies heavily on customers, Soven said they will have to show with persuasive market facts how they will be harmed by the merger if the judge uses the Oracle approach.
The case is also affected by the fact that the merger has been consummated, Soven said. On one hand, the parties are likely to argue that pre-merger company documents indicating executives believed a merger would help them shore up prices are irrelevant given that the actual effect of the merger in the year-plus since it closed can be measured. On the other hand, the government can argue that Bazaarvoice has been on good behavior while under investigation by the DOJ and can impose price increases if the court allows the merged firms to remain together.
Written by Bill McConnell.