DOJ Loses Oracle/PeopleSoft Antitrust Challenge.(Department Of Justice)

Article by Howard W. Fogt, Jr., Michael A. Naranjo and Gregory E. Neppl

On September 9, 2004, the United States District Court for the Northern District of California rejected, in a rare defeat for the Antitrust Division, the government's challenge of the tender offer by Oracle Corporation to acquire PeopleSoft, Inc., a major rival to Oracle in the development and licensing of Enterprise Resource Planning ("ERP") software. In its decision in favor of Oracle's bid, the District Court concluded that the government had failed to demonstrate that the Oracle/PeopleSoft combination was likely to substantially lessen competition in a relevant product and geographic market in violation of Section 7 of the Clayton Act. According to the Court, the government had failed to (1) establish that a post-merger Oracle would have sufficient market shares, in properly defined product and geographic markets, to apply the burden-shifting presumptions of anticompetitive effects as set forth in U.S. v. Philadelphia National Bank, 374 U.S. 321 (1963), (2) demonstrate a likelihood of substantial anticompetitive effects under a theory of coordinated effects, or (3) demonstrate a likelihood of substantial anticompetitive effects under a theory of unilateral effects. Moreover, the Court explicitly rejected, as unfounded, several important principles of the DOJ/FTC merger guidelines and, equally significant, refused to accord any substantial weight to evidence of customer concerns about the impact of the merger.

Market Definition

Perhaps most determinative of the Court's ruling in favor of Oracle was its rejection of the government's definition of the product market to include only the "high function" financial and human resource software sold by Oracle, PeopleSoft, and SAP AG. Significantly, such software was considered by the Court to be differentiated products, i.e., not perfect substitutes for one another due to the customization and configuration involved. In addition, the Court determined that the government's proposed market . including only software manufactured by Oracle, PeopleSoft and SAP - was inappropriate as it improperly excluded viable alternatives to the Oracle, PeopleSoft, and SAP products, such as outsourcing, enterprise software solutions by mid-market vendors like Lawson and AMS, best-of-breed solutions targeted at specific business functions, and prospective products from nascent market entrant, Microsoft. The Court also rejected the government's attempt to confine the relevant geographic market to the United States and instead concluded that the relevant market was a worldwide market. Broadening the relevant market in this fashion dramatically reduced, in the Court's view, the competitive significance of the transaction.

Unilateral Effects Analysis

A critical part of the Court's decision is its "unilateral effects" analysis. A claim that a merger is anticompetitive because of so-called unilateral effects is premised on the assumption that the horizontal merger would lead to increased prices because it eliminates direct competition between the two merging firms, even if all other firms in the market continue to compete independently. As fashioned by the Court, the following four factors make up a differentiated products unilateral effects claim: (1) the products controlled by the merging firms must be differentiated (i.e., not perfect substitutes); (2) the products controlled by the merging firms must be close substitutes such that the customers of one of the merging firms would turn to the other in response to a price increase; (3) other products must be sufficiently different from the products of the merging firms such that a small, but significant and non-transitory, price increase would be profitable to the merging firms; and (4) repositioning by the non-merging firms, so as to eliminate market power created by the merger, must be unlikely.

Addressing the unilateral effects claims, the Court first looked to the analysis set forth in Philadelphia National Bank and the Horizontal Merger Guidelines to determine whether the government was entitled to a presumption that the merger would violate Section 7 of the Clayton Act. Pursuant to the analysis by the Supreme Court in Philadelphia National Bank, "a postmerger market share of 30 percent or higher unquestionably gives rise to the presumption of illegality". Similarly, under the Horizontal Merger Guidelines, "anticompetitive effects are presumed where the market concentration data fall outside ...