Category: Litigation

Half-Billion Dollar Arbitration Award in Trade Secrets Case Affirmed by Minnesota Supreme Court in Trade Secrets Dispute

Jackson Lewis Law firm

The Minnesota Supreme Court has affirmed an arbitrator’s eye-popping award of $525 million plus prejudgment interest totaling $96 million and post-award interest in a trade secrets dust up between Seagate Technology, LLC and Western Digital Corporation, et al. Seagate Technology, LLC v. Western Digital Corporation, et al and Sining Mao, No. A12-1994 (Minn. October 8, 2014).  The Court’s decision is replete with lessons about the legal boundaries, risks, and protections for litigants in arbitration. It is notable also for the magnitude of the award which was, in part, the consequence of falsified evidence.

Seagate designs and manufactures hard disk drives for computers. Sining Mao was a senior director for advanced head concepts at Seagate working on technology that involves incorporating tunneling magnetoresistance (“TMR”) in to read heads to improve storage capacity. When he was hired by Seagate, he signed an employment agreement which included a requirement to preserve the confidentiality of trade secrets and to return company documents. The employment agreement contained an arbitration clause which stated, in part, that the “arbitrator may grant injunctions or other relief in such controversy” arising out of the agreement.  Arbitration was subject to the rules of the American Arbitration Association (“AAA”).

Mao left Seagate in September 2006 to join Western Digital, a competitor. Seagate then commenced a district court action seeking injunctive relief and alleging misappropriation of trade secrets related to TMR technology.  Western Digital invoked the arbitration clause of Mao’s employment agreement with Seagate, and the district court stayed the lawsuit pending arbitration.

Things started to go south for Western Digital and Mao argued that three of the alleged trade secrets had been publicly disclosed before Mao left Seagate because they were included in a PowerPoint presentation he gave at a conference.  Seagate argued that Mao had fabricated and inserted additional PowerPoint slides containing the information after the fact to make it appear as if this information had been made public.  The arbitrator found that “[t]he fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides at the time of the conferences.” The arbitrator found that the fabrication and Western Digital’s complicity was an egregious form of litigation misconduct that warranted severe sanctions.

Specifically, the arbitrator precluded any evidence or defense by Western Digital and Mao disputing the validity of the three trade secrets or any defense to the allegation of misappropriation or use of the three trade secrets, which resulted entry of judgment on liability and monetary damages in the amount of $525 million, calculated based on an unjust enrichment method. Western Digital brought a motion to vacate the award in district court. The district court granted the motion in part, finding that the arbitrator exceeded the scope of his authority under the arbitration agreement.  The Minnesota Court of Appeals reversed the district court on the ground that Western Digital had waived its right to challenge the arbitrator’s ability to issue punitive sanctions by not raising the issue with the arbitrator himself (and because Western Digital had earlier sought sanctions against Seagate in the same matter).

The Minnesota Supreme Court affirmed the Court of Appeals although based on a different analysis. The Supreme Court held that Western Digital did not waive its right to challenge the Arbitrator’s authority under Minnesota statutes regarding arbitrations and requests for vacatur, specifically Minn. Stat. Section 572.19.   The high Court then went on to conclude that the arbitrator did have the authority to impose the disputed sanctions, looking at the employment agreement, AAA arbitration rules, and case law.

The Court noted that:

Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a higher degree of confidentiality. But the benefits come with costs, including significantly less oversight of decisions, evidentiary and otherwise, and very limited review of the final award. Here, despite the best efforts of experienced appellate counsel to argue otherwise, Mao and Western Digital’s decision to demand arbitration necessarily limited the availability of the protections and advantages of the judicial system.

It is unclear if a district court could have reached the same result as the arbitrator in the Seagate case, but the Minnesota Supreme Court’s decision suggests that arbitrators can have greater discretion than judges.  The case certainly highlights the fact that arbitration may not always be the best forum, depending on which side of the dispute you are on.

Jackson Lewis P.C. © 2014
ARTICLE BY

V. John Ella
OF
Jackson Lewis P.C.

“The Good Wife” Defends Genetically Modified Organisms (GMOs)

Schwegman Lundberg Woessner

Last Sunday’s episode of “The Good Wife” featured a Christian mediation between a farmer (Robert Joy) sued by a Pioneer-like company, represented by the actor Richard Thomas, for saving GMO corn seed for replanting. The facts were a mash-up of J.E.M. Ag Supply v. Pioneer Hi-Bred., 534 U.S. 124 (2001), and Monsanto Canada v. Schmeiser, 1 S.C.R. 902 (2004). In the former case, JEM was selling Pioneer’s hybrid seed that had been “saved” by farmers from a previous crop of the seed, in violation of the shrink wrap-type license on the original Pioneer seed they had purchased at JEM. In Monsanto-Canada, a farmer saved and replanted glyphosate-resistant canola seed from a field he claimed was contaminated by “GMO” pollen from neighboring fields.

In J.E.M. Ag Supply, the only defense mounted by J.E.M. was that utility patents should not be issued on plants and, fortunately, the Supreme Court disagreed, in a decision that includes both plants made by conventional breeding techniques and transgenic modifications. In Monsanto Canada, the farmer was found to have infringed Pioneer’s patents.

In the “Good Wife” episode, the farmer was accused of saving seed in violation of the agribusiness’ patents. He argued that his field had been contaminated by “seed” blown from neighboring GMO fields, but Florick Agos presented an expert witness who “testified” that such blow-over would only “contaminate” about 6% of a non-GMO crop per year. The farmer and the agribusinessman were friends and after the farmer admitted he had replanted the transgenic canola, they settled the dispute with the farmer agreeing to pay some small amount of damages, as I recall.

The major issue for patent attorneys working in the ag biotech area (and for agribusiness itself) is the public perception –despite decisions upholding the patentability of plants in the U.S. or of the transgene or the transformed plant cell in Canada—that it is wrong to patent living organisms. At the end of the “Good Wife” mediation scene, one of the parties – the preacher? – exclaims that he is shocked that plants can be patented. J.E.M. was one of the last Supreme Court decisions that expanded the scope of patent rights. The Canadian Supreme Court was divided in ruling for Monsanto. As succinctly summarized by the majority:

“Inventions in the field of agriculture may give rise to concerns not raised in other fields—moral concerns about whether it is right to manipulate genes in order to obtain better weed control or higher yields. It is open to Parliament to consider these concerns and amend the Patent Action should it find them persuasive.”

© 2014 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.
ARTICLE BY

Warren Woessner
OF
Schwegman, Lundberg & Woessner, P.A.

Only two more weeks until the Retail Law 2014 Conference – October 15-17, 2014, Charlotte, NC

The National Law Review is pleased to bring you information about the upcoming Retail Law Conference:

Retail Law 2014: At the Intersection of Technology and Retail Law
Retail Law 2014: At the Intersection of Technology and Retail Law

Register Today!

When

October 15-17, 2014

Where

Charlotte, NC

The 2014 Retail Law Conference takes place October 15-17 in Charlotte, NC. This year’s program is stronger than ever with relevant, compelling and interactive sessions focused on the legal issues affecting retailers. In partnership with the Retail Litigation Center (RLC), RILA will host legal counsel from leaders in the retail industry for the fifth annual event.

This year’s Retail Law Conference will feature issues at the intersection of technology and law, how the two spaces interact and the impact that they have on retailers. Topics will likely include:

  • Anatomy of a Data Breach: Prevention & Response
  • Privacy: Understanding New Technologies & Data Collection
  • Advertising Practices: Enforcement & Social Media
  • ADA Implications for New Technologies
  • Legal Implications for Future Payment Technologies
  • Policies & Procedures of The “Omnichannel” Age
  • Patent Litigation “Heat Maps”
  • Union Organizing Campaigns
  • Wage & Hour Litigation
  • EEOC Enforcement
  • Foreign Corrupt Practices Act
  • Corporate Governance & Disclosure
  • Election 2014
  • Dueling Views of The U.S. Supreme Court
  • Legal Ethics

The Retail Law Conference is open to executives from retail and consumer goods product manufacturing companies. All others, such as law firms and service providres, must sponsor in order to attend, and can do so by contacting Tripp Taylor at tripp.taylor@rila.org.

Think Tanks Ask Supreme Court to Clarify Definition of “Foreign Official” in FCPA (Foreign Corrupt Practices Act)

Katten Muchin Law Firm

Two think tanks, the Washington Legal Foundation and the Independence Institute, have filed anamicus brief in the Supreme Court on behalf of petitioners Joel Esquenazi and Carlos Rodriguez, who were recently convicted of violating the Foreign Corrupt Practices Act (FCPA). The amiciseek clarity of the definition of “foreign official” in the FCPA.  The FCPA prohibits certain persons or entities, including US businesses, from paying a “foreign official” for the purpose of obtaining or retaining business. The FCPA defines “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”

Esquenazi and Rodriguez were executives of Terra Telecommunications Corp., a Florida company that purchased phone time from foreign vendors and resold the time to US customers. Terra conducted business with Haiti-owned vendor Telecommunications D’Haiti S.A. (Haiti Teleco). Prosecutors argued that Esquenazi and Rodriguez made payments to Haiti Teleco officers to obtain lower rates. To determine whether Haiti Teleco was an “instrumentality” under the FCPA, the trial court instructed the jury to consider whether the company “provided services to the citizens and inhabitants of Haiti,” and whether it was majority owned by the Haitian government. Defendants were convicted, and Esquenazi was sentenced to 15 years’ imprisonment and Rodriguez received seven years’ imprisonment. The US Court of Appeals for the Eleventh Circuit affirmed, finding that an “instrumentality” is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own,” and setting forth a list of factors.

Amici contend that the business community needs concrete guidance in this undeveloped area. They argue that the Eleventh Circuit’s definition is overly broad because (1) Haiti Teleco was never designated a government entity; (2) Haiti Teleco issues common stock, and the government was not an initial stockholder; and (3) Haiti Teleco, as a telephone service provider, does not perform a traditional government function.

Brief for Esquenazi and Rodriguez as Amici Curiae Supporting Petitioners, Esquenazi, et al. v. U.S., Sup. Ct. No. 14-189 (Aug. 14, 2014).

ARTICLE BY

Bruce M. Sabados
Margaret J. McQuade
OF
Katten Muchin Rosenman LLP

Attend the Retail Law 2014 Conference – October 15-17, 2014, Charlotte, North Carolina

The National Law Review is pleased to bring you information about the upcoming Retail Law Conference:

Retail Law 2014: At the Intersection of Technology and Retail Law
Retail Law 2014: At the Intersection of Technology and Retail Law

Register Today!

When

October 15-17, 2014

Where

Charlotte, NC

The 2014 Retail Law Conference takes place October 15-17 in Charlotte, NC. This year’s program is stronger than ever with relevant, compelling and interactive sessions focused on the legal issues affecting retailers. In partnership with the Retail Litigation Center (RLC), RILA will host legal counsel from leaders in the retail industry for the fifth annual event.

This year’s Retail Law Conference will feature issues at the intersection of technology and law, how the two spaces interact and the impact that they have on retailers. Topics will likely include:

  • Anatomy of a Data Breach: Prevention & Response
  • Privacy: Understanding New Technologies & Data Collection
  • Advertising Practices: Enforcement & Social Media
  • ADA Implications for New Technologies
  • Legal Implications for Future Payment Technologies
  • Policies & Procedures of The “Omnichannel” Age
  • Patent Litigation “Heat Maps”
  • Union Organizing Campaigns
  • Wage & Hour Litigation
  • EEOC Enforcement
  • Foreign Corrupt Practices Act
  • Corporate Governance & Disclosure
  • Election 2014
  • Dueling Views of The U.S. Supreme Court
  • Legal Ethics

The Retail Law Conference is open to executives from retail and consumer goods product manufacturing companies. All others, such as law firms and service providres, must sponsor in order to attend, and can do so by contacting Tripp Taylor at tripp.taylor@rila.org.

Forever 21 Faces Point-of-Sale Data Collection Class Action Lawsuit

Covington BUrling Law Firm

Fast fashion retailer Forever 21 Retail Inc. faces a putative class action lawsuit alleging that the retailer violated California law by requesting and recording shoppers’ credit card numbers and personal identification information at the point-of-sale.

Forever 21 shopper Tamar Estanboulian filed the lawsuit on September 7 in U.S. District Court for the Central District of California.  Estanboulian alleges that Forever 21 has a policy requiring its cashiers to request and record credit card numbers and personal identification information from customers using credit cards at the point-of-sale in Forever 21’s retail stores in violation of the Song-Beverly Credit Card Act of 1971, California Civil Code § 1747.08.  The complaint further alleges that the retailer pairs the obtained personal identification information with the shopper’s name obtained from the credit card used to make the purchase to get additional personal information.

According to the complaint, Estanboulian purchased merchandise with a credit card at a Forever 21 store in Los Angeles, CA this summer.  The cashier asked Estanboulian for her email address without informing her of the consequences of not providing the information.  Estanboulian alleges that she provided her email address because she believed that it was required to complete the transaction and receive a receipt.  She also claims that she witnessed cashiers asking other shoppers for their email addresses.  Shortly after completing her purchase and leaving the store, Estanboulian received a promotional email from Forever 21.

The proposed Class would include:  “all persons in California from whom [Forever 21] requested and recorded personal identification information in conjunction with a credit card transaction within one (1) year of the filing of this case.”

Forever 21 is not the only retailer that has been hit with a class action lawsuit for its data collection practices at the point-of-sale.  In June 2013, a putative class action was filed in U.S. District Court for the District of Massachusetts against J.Crew Group Inc. alleging that it collected zip codes from customers when they made purchases with credit cards at its Massachusetts stores.  The lawsuit also alleged that J.Crew then used that information to send unsolicited marketing and promotional materials.  The court approved a preliminary settlement in June pursuant to which J.Crew will provide $20 vouchers to eligible class members, up to $135,000 in attorneys’ fees and costs, and up to $3,000 to each of the class representatives.

ARTICLE BY

Morgan Kennedy
OF
Covington & Burling LLP

Kickback-Tainted Medicare/Medicaid Claims for Reimbursement Actionable Under FCA, New York Federal Judge Holds

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The U.S. District Court for the Southern District of New York (“SDNY”) recently issued an opinion making clear that liability now arises under theFalse Claims Act (“FCA”) whenever claims for reimbursement of prescription drugs are submitted under Medicare Part B, Medicare Part D, or state Medicaid programs in connection with which a provider has received a kickback (referred to herein as a kickback-tainted claim).  The SDNY’s decision was based on an interpretation of an amendment to the Anti-Kickback Statute made by the Patient Protection and Affordable Care Act (“PPACA”) in 2010, which implicates claims arising under the False Claims Act (“FCA”).

The FCA allows a private citizen whistleblower (referred to as a relator) with knowledge of fraud against the federal government to file a qui tam lawsuit on behalf of himself and the United States.  Because the FCA provides for treble damages and significant civil penalties, as well as attorneys’ fees and costs, recoveries are often in the multi millions of dollars, providing a strong deterrent to companies and individuals against committing fraud on the government.  In addition, whistleblowers are entitled to an award of between 15% and 30% of any amount recovered, providing an equally strong incentive for those with knowledge of such fraud to come forward.  Health care fraud is particularly rampant, having given rise to over 70 percent of all FCA recoveries over the past decade.

U.S. ex rel. Kester v. Novartis, involved a common form of health care fraud involving kickbacks, where monetary payments or other financial incentives are unlawfully provided to doctors, hospitals, or pharmacies in exchange for referrals or for the prescription of pharmaceutical drugs or supplies.  Specifically, in this case, the government alleged that Novartis had paid kickbacks to certain pharmacies for promoting two Novartis pharmaceuticals (Myfortic and Exjade) in violation of the Anti-Kickback Statute (“AKS”), which prohibits pharmacies from accepting kickbacks in exchange for purchasing or recommending a drug covered by a federal health care program, such as Medicare and Medicaid.

In 2010, the PPACA amended the AKS with the intention of assigning liability under the FCA for violations of the kickback statute.  The FCA prohibits making a fraudulent claim for payment to the Government or submitting false information material to such a claim.  The AKS amendment expressly provided that a “claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].”  42 U.S.C. § 1320a-7b(g).  Novartis argued, however, that the “resulting from” language in the amendment limited, rather than expanded, the reach of the FCA, asserting that liability could not be established without showing that the claims for reimbursement were actually caused by the receipt of a kickback―”i.e. where a pharmacy convinced a physician . . . to prescribe a drug that he would not have otherwise prescribed, or convinced a patient . . . to order a refill that he would not otherwise have ordered.”  Such a strict “but-for” causation requirement not only would have made it difficult to show liability, it would have significantly reduced any recovery to only those situations where “the decision to provide medical treatment is caused by a kickback scheme.”

The SDNY rejected this unduly narrow interpretation, relying on the legislative history of the PPACA, which it reasoned was aimed at expanding the reach of the FCA, and the Second Circuit’s framework for analyzing false claims set forth in Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001).  In Mikes, the Second Circuit held that a party violates the FCA when it falsely certifies compliance with a statute, regulation, or contract that is a precondition to payment.  Mikes also held that false certifications did not need to take the form of express statements certifying compliance, but rather could be implied when the underlying statute or regulation expressly requires a party to comply in order to be paid.  Under such circumstances, knowingly submitting a noncompliant claim for payment will constitute a violation of the FCA.  To this end, the SDNY held in Novartis that the PPACA expressly made compliance with the AKS a precondition to payment under Federal health care programs.  Consequently, any kickback-tainted claim for reimbursement submitted to the government is a violation of the FCA under this reasoning.  Thus, whereas previously, a whistleblower had to have evidence of an express certification of compliance with the law, now, in order to establish an FCA violation involving kickbacks, a whistleblower need only show that a claim for reimbursement was submitted to the Government in connection with which kickbacks were received.

ARTICLE BY

Anna C. Haac
 
OF 
Tycko & Zavareei LLP

U.S. Bancorp CBM Results in Cancellation of Retirement Capital Access Management Co.’s Patent Claims

Schwegman Lundberg Woessner

In 2011, U.S. Patent 6,625,582, entitled Method And System For Converting A Designated Portion of Future Social Security And Other Retirement Payments To Current Benefits, was assigned to Retirement Capital Access Management Company LLC.  Benefit Funding Systems LLC asserted the ’582 patent against U.S. Bancorp in June of 2012.  Benefit Funding Systems LLC v. U.S. Bancorp, Case No. 1:12-cv-803-LPS (D. Del. filed June 22, 2012).  In response, U.S. Bancorp filed a CBM petition requesting review of claims 1, 13, 14, 18, 30, and 31 of the ’582 patent on March 29, 2013.  U.S. Bancorp asserted that the ’582 patent qualified for CBM review under 35 U.S.C. § 324 and Sec. 18(a) of the Leahy-Smith America Invents Act, Pub. L. 112-29, 125 Stat. 284, 329 (2011), and that these claims were invalid under 35 U.S.C. § 101.

U.S. Bancorp’s CBM Petition states:

The specification states that “[t]he present invention relates generally to a system and method which provides a mechanism for a [beneficiary] of Social Security payments, or of other retirement payments, to access present value of a designated portion of its future retirement payments . . . . [W]ithout encumbering the beneficiary’s rights to its future retirement benefits.” See U.S. Bancorp Ex.1003 (‘582 patent), Col. 1:10-22.

The ‘582 patent explains that “retirement age individuals” are finding retirement benefits or the anticipated timing of those benefits “to be somewhat inadequate to meet their present and future financial needs, expectations, and objectives.” See U.S. Bancorp Ex.1003, Col. 1: 23-29. The ‘582 patent further states that such retirement benefits “have not generally been seen as an adequate source of current capital, particularly to support financing based upon future receipts” due to “the current legislated proscriptions . . . against assigning or otherwise alienating future retirement benefits.” U.S. Bancorp Ex.1003, Col. 1:35- 43. Therefore, the ‘582 patent purports to provide a financial program that allows a beneficiary to access the present value of future retirement payments while complying with U.S. laws restricting alienation of future retirement benefits. U.S. Bancorp Ex.1003, Col. 1:43-49. Curiously though, the ‘582 specification does not explain – and claims do not recite any limitations regarding – how the patented financial scheme complies with U.S. laws. Instead, each independent claim merely includes the limitation that monetary benefits are provided “without violating legislated proscriptions in the United States against alienation of future retirement funds.” See, e.g., U.S. Bancorp Ex.1003, Col. 9:8-9 (claim 1).

(CBM Petition at pp. 4-5.)

Claim 1, which is representative of the subject matter, recites:

1.  A computerized method for creating a source of funds based on present value of future retirement payments, comprising the steps of:

a. designating an account in a depository for a beneficiary to receive future retirement payments payable to said beneficiary from a source of said retirement payments for a preselected period of time;

b. designating a benefit provider for providing a monetary benefit to said beneficiary;

c. authorizing said depository to periodically disburse a predetermined portion of said retirement payments deposited in said account to said benefit provider during said preselected period of time;

d. providing said monetary benefit to said beneficiary from said benefit provider based at least in part on present value of a designated portion of said future retirement payments without encumbering said beneficiary’s right to said future retirement payments and without violating legislated proscriptions in the United States against alienation of future retirement benefits;

e. causing said future retirement payments to be deposited into said account throughout said preselected period of time;

f. causing said depository to transfer a portion of said retirement payments deposited into said account to said benefit provider during said preselected period of time; and

g. reimbursing said benefit provider from resources other than said future retirement payments if said transfer of a portion of said retirement payments from said depository to said benefit provider are curtailed prior to said end of said preselected period of time, and making said retirement payments available for the exclusive use of said beneficiary.

The CBM Petition concluded:

Importantly, none of the claim steps is limited to performance on, or by, any specific device or computer. Indeed, no device or computer is needed at all, as all of the steps can be performed by a human.

(CBM Petition at p. 9.)

The Patent Owner (Retirement Capital Access Management Co. LLC) filed a Preliminary Response on July 2, 2013, arguing that the Petitioner failed to carry its burden of showing that it is more likely than not that at least one of the challenged claims of the ’582 patent is unpatentable under § 101, at least in part because:

 

  • the Petitioner cannot show “that, in practice, the claims cover the abstract concept itself”; and

  • the use of a computer as part of the specialized electronic funds transfer is not merely convenient, or done for the purpose of expediting calculations.

 

Despite these arguments, the Board granted institution of CBM review on September 20, 2013.  (CBM2013-00014, Paper 12, Sep. 20, 2013.)  A Patent Owner Response dated November 20, 2013 was filed that set forth the arguments from the Preliminary Response and provided an argument that § 101 is not a proper ground upon which a covered business method review may be maintained.  (Patent Owner Retirement Capital Access Management Company LLC’s Response, Paper 19, p. 37, Nov. 20, 2013.)  A Reply was filed by the Petitioner and an Oral Hearing was held on April 1, 2014.  No depositions were taken, based on the record in PRPS.

The Board issued a final written decision, dated Aug. 22, 2014, canceling each of the challenged claims under 35 U.S.C. § 101.  The Board dismissed Patent Owner’s assertion that CBM review cannot be premised on § 101, stating that the AIA allows for CBM reviews to include certain grounds of invalidity based on conditions for patentability, including § 101:

As recognized by the Supreme Court, § 101 is a condition for patentability. In Graham v. John Deere Co. of Kansas City, 383 U.S. 1, 12 (1966), the Supreme Court stated that the 1952 Patent Act “sets out the conditions of patentability in three sections,” citing 35 U.S.C. §§ 101, 102, and 103. The Supreme Court has also addressed invalidity under § 101 when it was raised as a defense to an infringement claim under § 282. See Mayo Collaboration Servs. v. Prometheus Labs, Inc., 132 S.Ct. 1289, 1293 (2012).

(Decision at p. 9.)

What is also notable about this proceeding is that the CBM review didn’t include:

 

  • anticipation or obviousness grounds (and the necessary submissions of prior art),

  • an assertion of indefiniteness,

  • an expert declaration to support the CBM Petition, and

  • depositions of experts by either side.

 

Indeed, at 36 pages in length, the CBM Petition is roughly half the length allotted by the Board’s rules.  Thus, a relatively short record was produced in this CBM.  However, as covered in a previous post, this is not the only Petitioner to take advantage of this approach (See a similar approach in LinkedIn Corporation v. AvMarkets, Inc., CBM2013-00025.)

ARTICLE BY
Timothy Bianchi

OF
Schwegman, Lundberg & Woessner, P.A.

Sizing Up the Competition: Antitrust Enforcement and the Bazaarvoice Ruling

Analysis_Group_logo_1200x900px

High-profile or highly profitable firms are no longer the sole targets of post-merger divestitures by antitrust enforcers. Today, firms that have little or no revenues, including some that operate in emergent industries with little or negative profits, also find themselves subject to merger inquiries, as demonstrated by the recent merger review of Bazaarvoice’s 2012 non-reportable $160 million acquisition of PowerReviews. 

Bazaarvoice merger antitrust

These competing firms were both operating at a loss in the relatively small Ratings and Review (R&R) market. Yet, the nature of competition in the industry and the industry’s potential importance to adjacent industries – combined with statements by the acquirer’s executives prior to the transaction – attracted the scrutiny of antitrust enforcers. Ultimately, Bazaarvoice agreed to divest all of its PowerReviews assets, including employees and client base, to a small competitor, Viewpoints – which had initially entered R&R space by building a solution for Sears – for $30 million.  

This article considers the economic arguments and evidence used by the court to reach its decision in United States v. Bazaarvoice.

Background

R&R platforms offer an online interface for customer reviews of different products, which can help to drive sales, increase product visibility, and offer valuable information on customers to brands and retailers, allowing brands to respond to customer concerns in real time. Leading platforms offer clients the following services: confirmation of the authenticity of customer reviews; moderation of reviews (e.g., removing offensive language); syndication that combines reviews from multiple retailers to increase the visibility of a product; data on retailers and social media analytics to support marketing; and search engine optimization to drive traffic. Bazaarvoice and PowerReviews offered clients all of these services, but Bazaarvoice generally provided more customizable features at higher price points to larger clients. Bazaarvoice offered human moderation of customer reviews, for example, while PowerReviews offered only automated monitoring.

The Department of Justice (DOJ) applied competitive analysis that ignored more traditional focuses on supracompetitive pricing, high margins, and immediate harm to consumers.

In 2012, Bazaarvoice had 800 employees and revenue of $106.1 million; in 2011, the privately held PowerReviews employed just 80 people and reportedly had revenue of $11.5 million. Although PowerReviews did not publicly report its profitability, according to Bazaarvoice executives, the smaller firm was operating at a loss. Similarly, Bazaarvoice itself reported consistently negative operating margins in 2011–2013 that were no higher than -23%.

At the time of the court ruling (January 2014), actual competition from other platforms in the R&R market was marginal, composed primarily of a handful of start-ups with inferior products or of larger firms that offered complementary products. Direct competitors like Pluck, Gigya, Practical Data, Rating-system.com, and European Reevoo were tiny, with few customers and weak services. More established firms that might have acted as potential competitors, such as Google, Facebook, Oracle, and Salesforce, were more interested in partnering with Bazaarvoice than in competing in the R&R market. Meanwhile, Amazon accounted for 28% of e-commerce revenue and maintained (and still does, as of August 2014) its own R&R platform, which was not available to competing retailers. 

Competitive arguments and evidence 

In its review of the transaction, the U.S. Department of Justice (DOJ) applied competitive analysis that ignored more traditional focuses on supracompetitive pricing, high margins, and immediate harm to consumers. The analysis focused instead on the nature of competition in the R&R industry, including barriers to entry and the anticompetitive potential for long-run harm to consumers as detailed in the assessments of Bazaarvoice senior staff.

Low margins: The parties were losing money. Their profits were a far cry from the supracompetitive profits often associated with companies targeted by antitrust litigation. In previous antitrust cases against Microsoft, for example, the company’s margins on Windows and MS Office had played a significant role at trial. Similarly, the potential for enhanced market power and exceptional margins contributed to the DOJ decision to prevent Microsoft from acquiring Intuit in 1994–1995.

Barriers to entry: Bazaarvoice’s extensive syndication network, in particular, became a major component of the case. The DOJ argued that it would be extremely difficult for competitors to develop a comparable syndication network of retailers and brands, allowing Bazaarvoice to leverage anticompetitive economies of scale across many important clients. These advantages, combined with the difficulty of switching from one R&R platform to another – as demonstrated by the reluctance of PowerReviews customers to switch to the Bazaarvoice platform – would effectively block new entrants from the market. While the DOJ’s argument was much less convincing with respect to other barriers to entry, such as the company’s technology and reputation, clearly antitrust enforcers had seized on important elements of the relationship between Bazaarvoice’s value proposition and the growth of the R&R market.

Bad documents: These potential anticompetitive implications were explicitly referenced in Bazaarvoice’s own internal documents, which became instrumental in court. The firm’s current CEO remarked that there were “literally, no other competitors” beyond PowerReviews, and the former CEO wrote that after the proposed acquisition of PowerReviews, Bazaarvoice would have “[n]o meaningful direct competitor.” Bazaarvoice senior executives openly acknowledged that syndication networks created high barriers to entry in the R&R industry and clearly described that the elimination of Bazaarvoice’s “primary competitor” would provide “relief from price erosion.” The DOJ seized on these documents, arguing that the merger would increase prices and eliminate the “substantial price discounts” that retailers and manufacturers received as a result of competition between Bazaarvoice and PowerReviews.

Court’s opinion 

In this case, the court noted these apparent competitive weaknesses and remained on the lookout for changes in the R&R market. In fact, in the 18 months from the time of the acquisition on June 12, 2012, until the case’s ultimate outcome on January 8, 2014, the only post-merger evidence that was considered dispositive by the court was
the absence of serious entry to the market. The court explicitly rejected the use of pricing data, suggesting that it could be manipulated. The same pricing data that regulators might have expected to rise above competitive levels – and that therefore could have created space for new entrants in the R&R market at lower price points – was viewed as suspect. The DOJ case was structured instead around the absence of a credible entry threat in the R&R space, despite Bazaarvoice’s annual margins of around -30%. 

For Bazaarvoice, the challenge was less about responding to customer concerns or even to actual prices than it was about addressing the incendiary internal paper trail left by the company’s senior executives.

Discussion 

The court’s focus on the entry threat and its dismissal of pricing policies is curious, because the two issues are highly related. In an industry characterized by prices so low that the market leader is highly unprofitable, new firms have no incentive to enter. To become profitable, Bazaarvoice would have had to double its prices, and yet no evidence presented in the case demonstrated that entry would be impossible at that much higher price level. Surprisingly, the court did not connect these two issues in a meaningful way.

For Bazaarvoice, the challenge was less about responding to customer concerns or even to actual prices than it was about addressing the incendiary internal paper trail left by the company’s senior executives. In fact, as the testifying expert for Bazaarvoice/PowerReviews, Dr. Ramsey Shehadeh, pointed out, customers expressed no reservations about the merger, and Bazaarvoice had not raised prices. Ultimately, the court discounted Bazaarvoice’s arguments related to the absence of actual anticompetitive effects, noting that the firms could moderate their behavior while under antitrust scrutiny and focused instead on the firm’s own internal documents, which had detailed a plan to block competitive pressure. Bazaarvoice found itself fighting its own internal assessment of the competitive effects of the proposed merger, in addition to the DOJ’s economic arguments. The internal documents and emails were far more difficult to explain away than the economic circumstances, resulting in a full divestiture.

ARTICLE BY

Rebecca Kirk Fair
 
OF 
Analysis Group, Inc.

“Do You Want Liability With That?” The NLRB McDonald’s Decision that could undermine the Franchise Business Model (Part II)

 

McBrayer NEW logo 1-10-13

 

Yesterday’s post discussed the decision of NLRB’s General Counsel to hold McDonald’s Corp. jointly responsible with its franchise owners for workers’ labor complaints. The decision, if allowed to stand, could shake up the decades-old fast-food franchise system, but it does not stop there. The joint employer doctrine can be applied not only to fast food franchises and franchise arrangements in other industries, but also to other employment arrangements, such as subcontracting or outsourcing.

This decision could also impact the pricing of goods and services, as franchisors would likely need to up costs to offset the new potential liability. Everything from taxes to Affordable Care Act requirements could be affected if the decision stands.

If you are a franchisor and are currently in what could be determined to be a joint employer relationship, consider taking steps to further separate and distinguish your role from that of your franchisee. While franchisors should always take reasonable measures to ensure that franchisees are in compliance with applicable federal and state employment laws, they should take care to not wield such force over them to give the appearance of a joint-employer relationship.

We will be following the NLRB decision and keep you updated as the issue progresses.

ARTICLE BY

Luke A. Wingfield
 
OF 
McBrayer, McGinnis, Leslie and Kirkland, PLLC