Tag: DOJ

Sizing Up the Competition: Antitrust Enforcement and the Bazaarvoice Ruling

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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. 

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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.

The Department of Justice Continues to Bring the "Heat" in Pursuing Health Care Fraud

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The False Claims Act (31 U.S.C. §§ 3729 – 3733) (the FCA) penalizes individuals and companies (often government contractors) who defraud the government by either submitting a false request for payment or avoiding payment of an obligation to the government. In May 2009, the Department of Justice (DOJ) and Department of Health and Human Services jointly announced the formation of the Health Care Fraud Prevention and Enforcement Action Team, or the “HEAT” initiative, to specifically target fraud in the health care industry, and using the FCA as a primary tool.

 

According to the DOJ’s own estimates, the HEAT initiative has been successful. Indeed, the DOJ claims that in only five years, it has recovered more than $13.4 billion based on its pursuit of FCA and other claims against alleged perpetrators in the health care industry.

 

It is no shock based on those numbers that the DOJ remains as determined as ever to bring the “HEAT” against the health care industry. For example, on Feb. 25, 2014, the DOJ announced a $15.5 million settlement under the FCAagainst a chain of diagnostic testing facilities in New Jersey and New York. The DOJ alleged that the facilities falsely billed federal and state health care programs for tests that were not performed or not medically necessary and by paying kickbacks to physicians. Three whistleblowers received over $2.5 million in connection with the settlement.

 

On Feb. 10, 2014, the DOJ announced the settlement of FCA allegations against an addiction clinic, clinical lab, and two doctors in Kentucky for $15.75 million, approximately $12 million of which represent funds to be refunded to the federal government. The settlement arose out of allegations that the targets defrauded Medicare and Kentucky Medicaid by seeking reimbursement for unnecessary tests or tests that were more expensive than those performed.

 

These and other settlements demonstrate the DOJ’s ongoing commitment to aggressively pursuing allegations of fraud in the healthcare industry.

Article by:

Kathleen L. Matsoukas

Of:

Barnes & Thornburg LLP

 

Call Waiting: Department of Justice (DOJ) to Maintain Scrutiny of Wireless Industry Consolidation

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The wireless industry has seen steady consolidation since the late 1980s.  Recently, in late 2013, reports began circulating about a potential merger between Sprint and T-Mobile, the nation’s third and fourth-largest wireless carriers, respectively.  Last week, however, in an interview with the Wall Street Journal, William Baer, the assistant attorney general for the antitrust division at the Department of Justice (DOJ), cautioned that it would be difficult for the Agency to approve a merger between any of the nation’s top four wireless providers.

T-Mobile’s CEO, John Legere, stated that a merger between his company and Sprint “would provide significant scale and capability.”  Baer, on the other hand, warned that “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,”  As a result, any future consolidation in the wireless industry is likely to face a huge hurdle in the form of DOJ’s careful scrutiny of any proposed transaction.

Much of the DOJ’s interest in the wireless industry stems from the Agency’s successful challenge of a proposed merger between T-Mobile and AT&T in 2011.  Since then, Baer believes consumers have benefitted from “much more favorable competitive conditions.”  In fact, T-Mobile gained 4.4 million customers in 2013, bringing optimism to the company’s financial outlook after years of losses.  In the final two quarters of 2013, T-Mobile’s growth bested that of both Sprint and AT&T.  The low-cost carrier attracted customers and shook up the competition by upending many of the terms consumers had come to expect from wireless carriers, as well as investing in network modernization and spectrum acquisition.  This flurry of activity has pushed the competition to respond with its own deals, resulting in “tangible consumer benefits of antitrust enforcement,” according to Baer.

The DOJ’s antitrust division has kept careful watch over the wireless industry the past few years. That scrutiny will remain, as the Agency persists to advocate that four wireless carriers are required for healthy market competition.  The cards are beginning to play out from the Agency’s decision, and as Baer stated, “competition today is driving enormous benefits in the direction of the American consumer.”

Article by:

Lisa A. Peterson

Of:

McDermott Will & Emery

Judge Rules in Favor of DOJ Finding Bazaarvoice / PowerReviews Merger Anticompetitive (Department of Justice)

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On January 8, 2014, Judge Orrick of the Northern District of California ruled that Bazaarvoice’s acquisition of competitor PowerReviews violated Section 7 of the Clayton Act.  The ruling was in favor of the U.S. Department of Justice (DOJ).  The public version of the opinion was made available on January 10.  In its self-described “necessarily lengthy opinion,” which spans 141 pages, the court ultimately found that the facts overwhelmingly showed the acquisition will have anticompetitive effects and that Bazaarvoice did not overcome the government’s prima facie case.  The case included 40 witnesses at trial, more than 100 depositions and 980 exhibits.  Dr. Carl Shapiro testified as DOJ’s economist and Dr. Ramsey Shehadeh testified on behalf of Bazaarvoice/PowerReviews.  The court noted that the case presented some difficult issues, including that there were no generally accepted “market share statistics covering the sales of R&R solutions or social commerce solutions and no perfect way to measure market shares.”  And while neither side presented flawless analyses, the court found Dr. Shapiro’s approaches more persuasive than those of Dr. Shehadeh.

Bazaarvoice and PowerReviews each offered sophisticated “R&R platforms.”  R&R platforms provide a user interface and review form for the collection and display of user-generated content (i.e., user reviews) on the product page of a commercial website where the product can be purchased.  Often these are in the form of star ratings and open-ended reviews in a text box.  R&R platforms increase sales for the retailer and have a variety of different features.  The court noted that many on-ine retailers view an R&R platform as “necessary.”  Before the merger, Bazaarvoice and PowerReviews offered similar products and features and targeted similar customers.

The court found that the relevant product market was the narrow “R&R platforms,” rather than the broader “social commerce tools” or “eCommerce platforms.”  The court went through many popular social media platforms such as Facebook, Google+, Twitter, Instagram, and Pinterest, explaining why each was not a substitute for these R&R platforms.  In this relevant market, the court found that PowerReviews was Bazaarvoice’s only real competitor, and thus the merger “would eliminate Bazaarvoice’s only meaningful commercial competitor.”

At the end of the opinion, the court commented on the role of antitrust “in rapidly changing high-tech markets.”  It noted that there is a debate as to whether antitrust is properly suited to assess competitive effects in these markets.  The court declined to take sides and stated that its “mission is to assess the alleged antitrust violations presented, irrespective of the dynamism of the market at issue.”

The case now moves to the remedy phase.  In its complaint, the DOJ requested that the court order Bazaarvoice to divest assets originally possessed by either Bazaarvoice and/or PowerReviews to create a viable, competing business.   However, as Judge Orrick noted, 18 months after the merger, it may not be so simple to divest assets.  The judge scheduled a conference for January 22 with the parties to discuss a possible remedy.

There are several lessons to be gathered from this case.  First, the Bazaarvoice litigation is further evidence that the antitrust agencies are not shy about litigating mergers they feel are anticompetitive.  The DOJ invested significant resources and time – including three full weeks at trial in California – into litigating the case, beginning with its investigation that it launched two days after the firms closed their transaction on June 12, 2012.  It has established a significant record of bringing, and winning, merger cases.

Second, this is a significant event, having a federal district court evaluate a consummated merger transaction.  While the agencies have challenged many non-reportable transactions, almost all have been resolved by consent order, or litigated through the Federal Trade Commission’s (FTC’s) in-house administrative hearing process (where, not surprisingly, the FTC essentially always wins).  Accordingly, parties to a non-reportable transaction that raises significant antitrust risks should expect the agencies to investigate and, if warranted, litigate.

Third, the Court heavily discounted Bazaarvoice’s arguments regarding lack of any actual anticompetitive effect, because the companies knew the DOJ was reviewing the deal and could moderate their behavior.  The court discounted Bazaarvoice’s arguments that none of the 104 customers who were deposed complained that the merger has hurt them.  The court stated “it would be a mistake to rely on customer testimony about effects of the merger for several reasons.”  Among the reasons the court included was “Bazaarvoice’s business conduct after the merger was likely tempered by the government’s immediate investigation; the customers were not privy to most of the evidence presented to the Court, including that of the economic experts; many of the customers had paid little or no attention to the merger; and each had an idiosyncratic understanding of R&R based on the priorities of their company and their different levels of knowledge, sophistication, and experience.”  Thus, while raising prices after a transaction provides strong evidence to support the government’s case, the lack of a price increase does not necessarily support the merging parties’ defense.

Finally, and perhaps most importantly, the case shows the need to be circumspect in preparing ordinary course documents.  Aside from the fact that in reportable transactions, the DOJ and FTC are entitled to “4(c)” and “4(d)” documents about the transaction, once a second request is issued or discovery begins, documents created in the ordinary course of business are discoverable.  This includes Strengths, Weaknesses, Opportunities and Threats (SWOT) analyses, board meeting minutes, business and strategic plans, market and market share analyses, and competitive assessments.  In this case, the court found the ordinary course documents, and particularly those made by the companies’ executives, some of the most persuasive evidence.  The court quoted extensively from the documents and cited numerous documents from Bazaarvoice and PowerReviews that showed that the parties viewed each other as their primary competitor, that there were no other strong competitors in this market, that the two companies operated in essentially a duopoly, and that the intent of the merger was to eliminate a primary competitor.  Despite the parties’ efforts to explain away these documents, the court was not persuaded.  Thus, it is important that companies carefully consider what to include in documents and e-mails, and assume that any non-privileged material may be discovered.

The agencies’ aggressive pursuit of perceived anticompetitive, non-reportable transactions places a premium on parties’ evaluating the antitrust risk.

The public version of the court’s opinion can be found here:http://www.justice.gov/atr/cases/f302900/302948.pdf

Article by:

Carrie G. Amezcua

Of:

McDermott Will & Emery

Senior U.S. Officials Discuss Foreign Corrupt Practices Act (FCPA) Enforcement Trends and Activity

Morgan Lewis

On November 18–21, U.S. regulators attended the 30th International Conference on the Foreign Corrupt Practices Act (FCPA), where they discussed the near-record amount of FCPA penalties in 2013 and disclosed that there are more than 150 ongoing FCPA investigations. Regulators from the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) also explained new developments in cross-border cooperation as well as their efforts to prosecute individual FCPA defendants.

Combined FCPA Penalties

According to Charles E. Duross, Head of the DOJ’s FCPA Unit and Deputy Chief of the Fraud Section, the FCPA Unit is “busier today than [it] ever has been” investigating and prosecuting FCPA misconduct. Although the DOJ may not have initiated as many enforcement actions to date in 2013 as in years past, Duross characterized 2013 as “the fifth biggest year in [the FCPA’s] history in terms of overall penalties” and predicted “that the ranking will move up before the end of the year.” As explained by Duross, “We have a pretty substantial pipeline of matters, and I actually have every reason to expect that, in the coming weeks and months, you will see even more activity, [including] more standard cases as well as . . . ‘grand corruption’ cases.”

Ongoing Investigations

Duross estimated that the DOJ is currently investigating “more than 150 cases” of potential FCPA violations and expects the DOJ to bring “very significant cases, top 10 quality type cases” in 2014. Duross stated that, while the number of investigations fluctuated due to the issuance of declinations, the DOJ has received a “constant inflow” of violations information, ranging from voluntary disclosures to whistleblower complaints. On November 15, the SEC’s Office of the Whistleblower reported that it logged 3,238 whistleblower tips and complaints in 2013, resulting in a combined total of 6,573 tips and complaints since the initiation of the whistleblower program in August 2011.[1] Approximately 150 of those 3,238 tips and complaints have involved FCPA issues, including “some very, very good whistleblower complaints,” according to according to Kara N. Brockmeyer, Chief of the SEC’s FCPA Unit. While the SEC has yet to announce any whistleblower awards for FCPA cases, the agency announced its largest award to date—more than $14 million—to an anonymous whistleblower last month.[2]

Enhanced International Cooperation and Cross-Border Enforcement

Nearly all of the U.S. regulators speaking at the conference trumpeted the increase in global cooperation and cross-border enforcement. In his November 19 speech, Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement, stated that the SEC and DOJ have “capable and committed law enforcement partners worldwide, and their numbers are steadily growing.”[3] The rise in cross-border cooperation and enforcement appears to be attributable, in part, to the enactment of new anticorruption legislation in countries ranging from Brazil to Latvia. As explained by Ceresney:

Over the past five years, we have experienced a transformation in our ability to get meaningful and timely assistance from our international partners. And through our collaborative efforts, the world is becoming a smaller place for corrupt actors. In particular, many of our foreign counterparts have taken important steps this year to strengthen their own anticorruption laws and step up their enforcement efforts. For example, Brazil passed the Clean Company Law, an anticorruption law that, for the first time, imposes criminal liability on companies that pay bribes to foreign government officials. More expansive in its reach than the FCPA, this new law forbids all companies that operate in Brazil from paying bribes to any government official, whether domestic or foreign. In the U.K., the Serious Fraud Office announced its first prosecution case under the Bribery Act. In Canada, the government enacted amendments strengthening the Corruption of Foreign Public Officials Act and prevailed in its first litigated case against an individual for violating this law. And recently, Latvia became the newest country to join the [Organisation for Economic Co-operation and Development] Working Group on Bribery.

As other countries begin to step up their efforts to combat corruption, it makes our job easier. Countries with strong anti-corruption laws are often great partners to us in combating corruption. Scrutiny from the local government, in addition to us, will often be a strong deterrent to bribery. More and more, our investigations are conducted in parallel with a foreign government.

In remarks made on November 19 at the FCPA conference, Brockmeyer advised attendees that the SEC would start working with more of its foreign counterparts—including those that it has not “necessarily worked with before”—in the future. Ceresney made a similar observation, noting “I am encouraged by the close collaboration [with foreign agencies] and fully expect the pace and extent of our cooperation with foreign agencies to grow in the coming years. Indeed, only recently I have been involved in a case in which we are receiving cooperation from a country that has never before provided any meaningful assistance.”

Continued Focus on Individual Prosecutions

Individuals from both the DOJ and SEC also emphasized their enduring interest in bringing individual FCPA violators to justice. As explained by Ceresney, “A core principle of any strong enforcement program is to pursue culpable individuals wherever possible. . . . Cases against individuals have great deterrent value as they drive home to individuals the real consequences to them personally that their acts can have. In every case against a company, we ask ourselves whether an action against an individual is appropriate.”

Ceresney acknowledged that FCPA enforcement actions against individuals pose unique challenges. For instance, regulators may be unable to reach individuals in foreign jurisdictions, and remedies are often limited or unenforceable. Regulators must also confront difficulties in obtaining foreign documents, collecting evidence, and gaining access to overseas witnesses. According to Ceresney, the SEC is overcoming these challenges by “expanding the availability and use of Memoranda of Understanding with international financial regulators to obtain bank records, other documents, and testimony; using border watches and other methods of obtaining information from foreign nationals; subpoenaing U.S.-based affiliates of foreign companies; and more aggressively seeking videotaped depositions that [the SEC] can use at trial if [it] cannot secure live testimony.”

The SEC currently has pending FCPA actions against executives of three companies, Magyar Telekom, Siemens, and Noble. In April 2013, the SEC obtained its sec
ond-highest penalty ever assessed against an individual in an FCPA case when one of the Siemens executives agreed to pay a $275,000 fine.[4] According to Ceresney, “these cases have sent an unambiguous message that [the SEC] will vigorously pursue cases to hold individuals accountable for FCPA violations—including executives at the highest rungs of the corporate ladder.”

The DOJ similarly has pending FCPA actions against individuals and, according to Duross, is firmly committed to holding individuals accountable for FCPA misconduct. In support of this commitment, Duross cited recent actions against executives from BizJet, Maxwell Technology, and Direct Access Partners. It is worth noting, however, that the DOJ also brought actions against individuals associated with BSG Resources Ltd. and Willbros in 2013. Duross warned that resolutions for corporations—which occasionally precede actions initiated against individuals—do not immunize individual bad actors from subsequent criminal prosecution.

Increased Personnel Resources

According to Duross, the DOJ’s FCPA Unit “has more resources today than at any time before” and is working with “every major U.S. Attorneys’ Office in the United States” on FCPA matters. Duross explained that U.S. Attorneys’ Offices “serve as a force multiplier” for the FCPA Unit and provide a “deep bench of talent” and knowledge about the local jurisdictions. The addition of human resources—including trial attorneys, paralegal assistance, and translators—has improved the DOJ’s ability to investigate and prosecute FCPA misconduct.

[1]. U.S. Sec. & Exch. Comm’n, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program at 1, 20 (Nov. 15, 2013), availablehere.

[2]. Press Release, U.S. Sec. & Exch. Comm’n, SEC Awards More Than $14 Million to Whistleblower (Oct. 1, 2013), available here.

[3]. Andrew Ceresney, Co-Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Keynote Address at the International Conference on the Foreign Corrupt Practices Act (Nov. 19, 2013), available here.

[4]. U.S. Sec. & Exch. Comm’n, Litigation Release No. 22676, Former Siemens Executive Uriel Sharef Settles Bribery Charges (Apr. 16, 2013),available here.

 

Article by:

Of:

Morgan, Lewis & Bockius LLP