UNITED STATES V. BAZAARVOICE: THE ROLE OF CUSTOMER TESTIMONY IN CLAYTON ACT MERGER CHALLENGES

By Gregory J. Werden¹

I. INTRODUCTION

In June 2012 Bazaarvoice, Inc. acquired its primary competitor PowerReviews, Inc. The Antitrust Division of the U.S. Department of Justice promptly began investigating, and in January 2013, the Department brought suit in the Northern District of California seeking to unwind the deal. Following extraordinarily extensive third-party discovery and a three-week trial, Judge William H. Orrick held that the acquisition violated Section 7 of the Clayton Act.² Bazaarvoice then stipulated to the entry of a final judgment unwinding the deal, so there was no appeal.

The court found that Bazaarvoice was by far the largest provider of "product ratings and reviews platforms," which are software tools and associated services for soliciting and disseminating customer feedback on e-commerce websites. PowerReviews was the second largest provider of such platforms.³

Vendors of product ratings and reviews platforms create, and implement on e-commerce websites, an interface for collection and display of purchaser feedback on specific products, including ratings on a five-star scale. Vendors also perform "moderation" services by screening out fraudulent, offensive, and other reviews that do not comport with the site’s standards. Vendors can provide "syndication" so that a website also displays feedback collected on other sites. E-commerce websites use feedback to decrease returns and increase "conversion" rates, i.e., the rates at which visitors to their sites make purchases. A website’s owner also may have its platform vendor track and analyze purchaser sentiment.⁴

Bazaarvoice contended at trial that no tangible anticompetitive effects, e.g., price increases, had occurred since the acquisition was completed.⁵ It further contended that such effects would not occur because of competition from potential vendors of product ratings and reviews platforms, such as Amazon and eBay, which self-provide ratings and reviews solutions.

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Bazaarvoice relied heavily on customers’ views on how the acquisition had affected them and would affect them going forward. Judge Orrick noted that "none of the more than 100 current, former and potential customers who testified . . . believed that the acquisition had harmed or would harm them."⁶

Judge Orrick found that "the customers were the most credible sources of information on their need for, use of and substitutability of social commerce products, as well as regarding their companies’ past responses to price increases," but he held that "[t]heir testimony on the impact and likely effect of the merger was speculative at best and is entitled to virtually no weight."⁷

Judge Orrick found customers’ beliefs about future anticompetitive effects unhelpful because: "customers generally do not engage in a specific analysis of the effects of a merger. Many of them had given no thought to the effect of the merger or had no opinion. [And t]hey lacked the same information about the merger presented in court . . . ."⁸

Detailing the individual customer witnesses, Judge Orrick explained that: (1) "[c]onsidering competitive alternatives for [product ratings and reviews platforms] is not part of customers’ day-to-day activities";⁹ (2) "[m]any customers testified that they had never given any thought to the merger or had no opinion about it";¹⁰ (3) "[o]thers were either unaware of alternatives or had conducted a limited review of their alternatives";¹¹ and (4) "others did not currently use" the product.¹²

Some in the antitrust community found Judge Orrick’s reasoning "remarkable" and argued that customer "views regarding the ultimate competitive effects of a merger [often] should be given great weight."¹³ This article explains that there was nothing remarkable about the treatment of customer testimony in Bazaarvoice.¹⁴

II. WHAT CUSTOMERS DO AND DON’T KNOW

A central issue in nearly every merger case is the scope of the relevant market in which competitive effects of the transaction are to be assessed. The parties usually dispute how readily customers of the merging firms would substitute to other products in the face of a

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small price increase. As noted above, Judge Orrick recognized that customer testimony is highly relevant to this key issue. Moreover, the federal enforcement agencies—the Justice Department and the Federal Trade Commission ("FTC")—explained in 2006 that:

Customers typically are the best source, and in some cases they may be the only source, of critical information on the factors that govern their ability and willingness to substitute in the event of a price increase . . . . Customers also provide relevant information that they uniquely possess on how they choose products and suppliers.¹⁵

The agencies’ 2010 Horizontal Merger Guidelines restated the importance of evidence from customers on "how they would likely respond to a price increase, and the relative attractiveness of different products or suppliers."¹⁶

The role of customer evidence in resolving the dispute over the scope of the relevant market is to provide the data. Customers can no more be expected to comprehend the legal concept of the relevant market than an accident victim can be expected to comprehend the law of negligence. And it is the rare case in which the experiences of all of the merging firms’ customers are the same.¹⁷ With significant heterogeneity among the merging firms’ customers, no one customer could see the picture that eventually emerges from the mosaic of evidence elicited at trial, even if all the evidence came from customers.¹⁸

Furthermore, customers, even collectively, lack much of the information on which the federal enforcement agencies and courts rely in assessing the likely competitive effects of a merger. The Horizontal Merger Guidelines explain that the agencies rely on "substantial information from the merging parties," declaring that "[d]ocuments created in the normal course are more probative than documents created as advocacy materials,"¹⁹and adding further that "[i]nformation from firms that are rivals to the merging parties can help illuminate how the market operates."²⁰

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In particular, the Guidelines state that the agencies find very useful documents indicating the merging firms’ intentions:

Explicit or implicit evidence that the merging parties intend to raise prices, reduce output or capacity, reduce product quality or variety, withdraw products or delay their introduction, or curtail research and development efforts after the merger, or explicit or implicit evidence that the ability to engage in such conduct motivated the merger, can be highly informative in evaluating the likely effects of a merger. Likewise, the Agencies look for reliable evidence that the merger is likely to result in efficiencies.²¹

When anticompetitive action is planned post merger, customers are apt to be the last to know. Merging firms might disseminate misinformation calculated to quell opposition or even elicit customer support for the merger.²²

Judge Orrick stressed that the customers testifying in Bazaarvoice had given little thought to the competitive effects of the merger. That should have come as no surprise because customers would not rationally invest resources in assessing a supplier merger for an input that accounts for a small fraction of their total cost, as in Bazaarvoice, especially if their rivals would suffer equally from any anticompetitive effects.²³

III. WHAT JUDGES KNOW

The role of customer testimony in merger cases came into sharp focus with the 2004 rejection of two merger challenges relying on such evidence. In United States v. Oracle Corp., Judge Vaughn R. Walker of the Northern District of California viewed the opinions of customers selected by the Justice Department as "speculation . . . not backed up by serious analysis that they had themselves performed or evidence they presented."²⁴He was struck by the witness’s failure "to present cost/benefit analyses" or "data from actual or probable" procurements of the software products at issue in the case.²⁵

In FTC v. Arch Coal, Inc., Judge John D. Bates of the District of the District of Columbia viewed the testimony of customers selected by the FTC as merely stating the "truism" that "a decrease in the number of suppliers may lead to a decrease in the level of competition in the market."²⁶ He noted that: "Customers do not, of course, have the

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expertise to state what will happen in the [relevant] market, and none have attempted to do so."²⁷

Judge Bates explained in a subsequent speech that the key issue is "competency of the evidence."²⁸ He welcomed testimony from customer witnesses to "facts" on which they are "competent to testify" because they have "actual knowledge," but not "predictions or projections about the future."²⁹ He declared that "customer evidence, often highly subjective and not buttressed by rational experience or demonstrable expertise, is unlikely to prove persuasive to federal judges in establishing likely anticompetitive effects."³⁰ Judge Walker similarly stressed "competency" in a subsequent speech, also declaring that: "Customer testimony that is not substantiated by some type of market analysis cannot substitute for the predictions of an expert."³¹

The judges’ remarks resonate with the Federal Rules of Evidence. Customer witnesses are not qualified as experts, so their testimony is subject to Rule 701, requiring that opinions be "helpful" and "rationally based on the witness’s perception."³² The Rules permit customer witnesses to offer facts and opinions based on their experience of the marketplace, but not to offer idle speculation or beliefs lacking foundation.

If Judges Bates and Walker are to be the guide, no court will give weight to customers’ beliefs about post-merger competition unless the court is convinced that they were rationally formed from experience of the marketplace: No court will give weight to the unsupported belief of a defense-selected customer that the market will remain sufficiently competitive after the merger, or to the unsupported belief of a government-selected customer that the market will not remain sufficiently competitive after the merger.

Customer testimony raises most standard evidentiary issues going to admissibility and weight. For example, if a customer witness were to rely, not on her personal experience, but rather what she has heard coworkers say, that testimony would be inadmissible hearsay.

Customer witnesses also can be biased. Judge Walker observed that "the choice of customers is almost always a product of selection bias. Seldom does it appear that the customers’ views represent the general customer population. Instead, it may often seem that the customers willing to come forward are those uniquely situated to be harmed or benefited by the transaction."³³ The Horizontal Merger Guidelines also note that

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"customers may oppose, or favor, a merger for reasons unrelated to the antitrust issues raised by that merger."³⁴

IV. WHAT ANTITRUST LAWYERS NEED TO KNOW

The federal enforcement agencies take the position in their Horizontal Merger Guidelines that the "conclusions of well-informed and sophisticated customers on the likely impact of the merger itself can help" the agencies and the courts "because customers typically feel the consequences of both competitively beneficial and competitively harmful mergers."³⁵ The agencies thus are confident that experience of the marketplace can provide a sound basis for such conclusions.

Experience of the marketplace could provide a sound basis for customer testimony on competitive effects when the merger has been consummated long enough to make useful direct observations of its actual effects. At the time of trial, customers could have already had the opportunity to observe first-hand how the merged firm and its close rivals behave after the merger and could be in a position to contrast that with the pre-merger situation.³⁶

Experience of the marketplace also can be the basis for critical customer testimony on particular issues important to a court’s assessment of likely future effects from an unconsummated merger. Whether the entry of new competitors would prevent significant anticompetitive effects often is an important issue, and that issue often is informed by customer testimony on the willingness to purchase from a new entrant with an unproven product.³⁷

Nevertheless, the agencies recognize that: "When direct customers of the merging firms compete against one another in a downstream market, their interests may not be

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aligned with the interests of final consumers, especially if the direct customers expect to pass on any anticompetitive price increase."³⁸ The merging firms’ customers could know enough to realize that they would not be the ones to feel any anticompetitive consequences of the merger.

Customer indifference to a merger could be portrayed by merging firms as evidence that the merger would be competitively benign. But the indifference of direct customers can mean that any harm from the merger would be felt downstream. Consumers, not retailers, are most likely to bear the competitive brunt of mergers between competing consumer goods manufacturers. Absent indications that direct customers would suffer a merger’s anticompetitive effects, there is little reason to listen to their views on likely effects.

Some of the merging firms’ customers might benefit from a merger that proves anticompetitive. Under a variety of circumstances, price increases from an anticompetitive merger benefit some customers by disproportionally harming other customers.³⁹ The Horizontal Merger Guidelines observe that: "A customer that is protected from adverse competitive effects by a long-term contract, or otherwise relatively immune from the merger’s harmful effects, may even welcome an anticompetitive merger that provides that customer with a competitive advantage over its downstream rivals."⁴⁰

When some customers favor a merger that other customers oppose, a trial judge might find that customer testimony is inconsistent and hence unhelpful. But the inconsistency of customer views need not reflect poor information or mere speculation; it also can arise when all customers agree that the merger would be anticompetitive.

V. CONCLUSION

Customer testimony has long been important in merger cases under Section 7 of the Clayton Act, and it undoubtedly will remain so. But all evidence must be carefully scrutinized. Customers know some facts critical to a case from experience of the marketplace, but they do not know other critical facts. Customers might have a sound basis for predicting a future competitive effect based on experience of the marketplace, but judges are rightly skeptical and give such predictions no weight when no basis for them is presented. Courts may agree with Judge Robert H. Bork "that economic actors usually have accurate perceptions of economic realities,"⁴¹ but they recognize that customers are not competent to testify outside the scope of their perceptions.

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Notes:

^1. The author is Senior Economic Counsel in the Antitrust Division of the U.S. Department of Justice. The views expressed herein are not purported to reflect those of the U.S. Department of Justice. Colleagues provided helpful comments on an earlier draft of this article.

^2. United States v. Bazaarvoice, Inc., No. 13-CV-00133-WHO, 2014 WL 203966 (N.D. Cal. Jan. 8, 2014).

^3. See id. at *1-2.

^4. See id. at *6.

^5. The Department disputed this claim. Judge Orrick found the evidence inconclusive and observed that post-acquisition evidence has little probative value when it can be manipulated, as Bazaarvoice had the incentive and opportunity to do. Id. at *57-61.

^6. Id. at *61.

^7. Id.

^8. Id. (citations omitted).

^9. Id.

^10. Id.

^11. Id. at *62.

^12. Id.

^13. Tim Muris & Christine Wilson, Bazaarvoice: Protecting Consumers by Silencing the Consumer?, CPI Antitrust Chronicle, Mar. 2014 (1), https://www.competitionpolicyinternational.com/file/view/7137; see also Franco Castelli, Key Lessons from the Recent Bazaarvoice Decision, CPI Antitrust Chronicle, Mar. 2014 (1), https://www.competitionpolicyinternational.com/file/view/7141 ("[C]ustomer views regarding the likely competitive effects of a merger" should be "given considerable weight . . . when customers support a merger of two competing suppliers.").

^14. For a similar view, see Sean P. Gates, Is the Customer Never Right? Bazaarvoice and Customer Testimony in Merger Litigation, Antitrust, Spring 2014, at 61.

^15. U.S. Dep’t of Justice & Fed. Trade Comm’n, Commentary on the Horizontal Merger Guidelines 9 (Mar. 2006), available at http://www.justice.gov/atr/public/guidelines/215247.pdf; see also Vaughn R. Walker, Search for a Competition Metric: The Role of Testimony of Customers, Competitors and Economists, Competition L. Int’l, Apr. 2006, at 3, 4 ("[O]ne marginal customer can tell us far more about the existence of an alleged market boundary than ten inframarginal customers who proclaim that meaningful substitutes do or do not exist.").

^16. U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 2.2.2 (Aug. 19, 2010), http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf.

^17. That rare case was United States v. Archer-Daniels-Midland Co., 866 F.2d 242 (8th Cir. 1988). It concerned high fructose corn syrup ("HFCS"), which at the time was used almost entirely in soft drinks. Only the cost of achieving a desired sweetness mattered to soft drink companies, and all would switch from HFCS back to sugar at the same relative prices.

^18. The picture never becomes clear if the trial provides too few pieces of the mosaic. United States v. Engelhard Corp., 970 F. Supp. 1463, 1470-81, aff’d 126 F.3d 1302 (11th Cir. 1997), was such as case. The Department challenged the proposed merger of two producers of gel quality attapulgite ("GQA"), a mineral with diverse applications. The alternatives to GQA and the price inducing switching both varied across uses.

^19. U.S. Dep’t of Justice & Fed. Trade Comm’n, supra note 16, § 2.2.1.

^20. Id. § 2.2.3.

^21. Id. § 2.2.1.

^22. Cf. United States v. Ivaco, Inc., 704 F. Supp. 1409, 1428 (W.D. Mich. 1989) (placing little weight on customer testimony supporting the transaction because it was premised on the belief that the merger would lead to the development of a new product yet the evidence at trial did not support that belief).

^23. See Ken Heyer, Predicting the Competitive Effects of Mergers by Listening to Customers, 74 Antitrust L.J. 87, 103-09 (2007) (explaining why, in many cases, "it simply does not make economic sense for the customer to invest the time and effort required to become knowledgeable about all the factors that determine whether a proposed merger will prove harmful").

^24. 331 F. Supp. 2d 1098, 1131 (N.D. Cal. 2004).

^25. Id. at 1131.

^26. 329 F. Supp. 2d 109, 145-46 (D.D.C. 2004).

^27. Id. at 146.

^28. John D. Bates, Customer Testimony of Anticompetitive Effects in Merger Litigation, 2005 Colum. Bus. L. Rev. 279, 286.

^29. Id.

^30. Id. at 291.

^31. Walker, supra note 15, at 3.

^32. Fed. R. Evid. 701.

^33. Walker, supra note 15, at 4.

^34. U.S. Dep’t of Justice & Fed. Trade Comm’n, supra note 16, § 2.2.2. In the wake of the Oracle and Arch Coal decisions, both federal agencies argued that customers generally are unbiased. See Thomas O. Barnett, Deputy Assistant Attorney General, Antitrust Div., U.S. Dep’t of Justice, Antitrust Enforcement Priorities: A Year in Review, Remarks Before the Fall Forum of the Section of Antitrust Law, American Bar Association (Nov. 19, 2004) ("[C]ustomers remain the most objective marketplace participants. Their incentives generally are aligned with our goals of protecting competition . . . .)," available at http://www.justice.gov/atr/public/speeches/206455.pdf; Deborah Platt Majoras, Chairman, Fed. Trade Comm’n, U.S. Antitrust Practice—How Does it Affect European Business?, Remarks Before the Studienvereinigung Kartellrecht (Apr. 7, 2005) ("Customers are valuable sources of information about many mergers’ competitive effects because they have the most to lose from an anticompetitive deal, and usually have little incentive to provide misleading information."), available at http://www.ftc.gov/sites/default/files/documents/public_statements/u.s.antitrust-practice-how-does-it-affect-european-business/050411brussels.pdf.

^35. U.S. Dep’t of Justice & Fed. Trade Comm’n, supra note 16, § 2.2.2.

^36. See, e.g., New York v. Kraft Gen. Foods, Inc., 926 F. Supp. 321, 351 (S.D.N.Y. 1995) (assessing the competitive effects of a consummated merger of manufacturers of ready-to-eat breakfast cereals and relying on the opinions of large supermarket chains that tangible anticompetitive effects had not occurred).

^37. See Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 438 (5th Cir. 2008) (citing "customers’ testimony acknowledging reputation . . . as important for choosing bidders"); United States v. United Tote, Inc., 768 F. Supp. 1064, 1078-79 (D. Del. 1991) (finding entry difficult when defense-selected customers testified that they would consider a new entrant’s product once it had "reliably performed" for another customer over a period of "one to two years").

^38. U.S. Dep’t of Justice & Fed. Trade Comm’n, supra note 16, § 2.2.2.

^39. See Joseph Farrell, Listening to Interested Parties in Antitrust Investigations: Competitors, Customers, Complementors, and Relativity, Antitrust, Spring 2004, at 64, 65-66; Heyer, supra note 23, at 91102; Sheldon Kimmel, The Effects of Cost Changes on Oligopolists’ Profits, 40 J. Indus. Econ. 441 (1992). That a direct customer can benefit from an increase in the cost of an input used more intensely by rivals was first noted in the antitrust context by Oliver E. Williamson, Wage Rates as a Barrier to Entry: The Pennington Case in Perspective, 82 Q.J. Econ. 85 (1968).

^40. U.S. Dep’t of Justice & Fed. Trade Comm’n, supra note 16, § 2.2.2.

^41. Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 n.4 (D.D.C. 1986).