DOJ Sues to Block Sabre’s Acquisition of Small Disruptive Rival, Farelogix

On August 20, 2019, the DOJ filed a civil antitrust lawsuit in the U.S. District Court for the District of Delaware seeking to block Sabre Corporation’s (“Sabre”) $360 million acquisition of Farelogix, Inc. (“Farelogix”).

Complaint

The DOJ alleges that Sabre and Farelogix compete head-to-head to provide booking services to airlines.  Booking services are IT solutions that allow airlines to sell tickets and ancillary products through traditional brick-and-mortar and online travel agencies to the traveling public.  The DOJ alleges that the acquisition would eliminate competition that has substantially benefited airlines and consumers in both the traditional and online markets.  The complaint further alleges that the transaction would allow Sabre, the largest booking services provider in the United States, to eliminate a disruptive competitor that has introduced new technology to the travel industry and is poised to grow significantly.

As alleged in the complaint, Sabre is the dominant provider of booking services in the United States with over 50% of airline bookings through travel agencies.  Sabre operates a global distribution system (“GDS”), which is a digital platform that provides booking services to airlines in addition to other functionality.  The DOJ characterizes Farelogix as an innovative technology company that has stepped in to address the needs of airlines and their customers.  The DOJ says that Farelogix has injected much-needed competition and innovation into stagnant booking services markets by developing new technology {new distribution capability} that empowers airlines to make a wider array of offers to travelers who book tickets through travel agencies.  This new technology enables airlines to make more varied and personalized offers to consumers who book through travel agents, including bundles of ancillary products such as wi-fi, lounge passes, entertainment options, and meals – choices not available to travelers through Sabre’s legacy technology.

The DOJ also points to some hot docs in its complaint.  The DOJ alleges that Sabre executives acknowledged that acquiring Farelogix would eliminate a competitive threat and further entrench Sabre in booking services.  For example, on the day Sabre announced its intention to buy Farelogix, Sabre’s chief sales officer texted a colleague that one major U.S. airline would “hate” it.  The colleague replied, “Why, because it entrenches us more?”  Similarly, a Farelogix executive observed that buying the company would allow Sabre to “tak[e] out a strong competitor vs. continued competition and price pressure.”  Sabre’s internal documents show that Sabre’s attempt to acquire Farelogix follows many other attempts by Sabre to neutralize its competitor, including a campaign to “shut down Farelogix.”  Indeed, Farelogix has long complained about Sabre’s tactics, alleging that Sabre has sought to stifle competition.  For example, in 2013, Farelogix’s Chief Executive Officer alleged that “Sabre has wielded its monopoly power in an attempt to destroy Farelogix and prevent competition….”  Moreover one Sabre sales executive noted after the announcement of the acquisition that the airline’s “FLX [Farelogix] bill is going up big time.”

The DOJ’s complaint alleges that Sabre has used a broad range of contractual and technical barriers to prevent entry or expansion by suppliers that could threaten its control over bookings through travel agencies. For instance, Sabre’s contracts include provisions that inhibit airlines’ use of an alternative supplier like Farelogix, even when doing so would be less expensive for airlines.  As recently as 2018, Farelogix denounced these restrictions, complaining that airlines’ GDS contracts “effectively prohibit working with third parties or make doing so cost prohibitive.”  In January 2019, a Sabre senior vice president acknowledged that airlines view Sabre’s restrictions as “abusive but there’s nothing they can do because they need the distribution and they are tied with a contract.”

The DOJ alleges that the two relevant markets are highly concentrated but acknowledges that Farelogix’ share is very small.  The DOJ alleges, however, that Farelogic’s market share understates its competitive significance in the current and in future markets.

In summary, the DOJ alleges that Sabre controls over 50 percent of bookings through traditional and online travel agencies in the United States, so airlines must sell tickets through Sabre to reach a broad set of U.S. travelers. Sabre has used this power to suppress Farelogic’s entry and expansion.  Nevertheless, Farelogix’s presence in these markets has led to lower prices and increased innovation that would be lost if the merger is not blocked.

Lessons Learned

The DOJ’s block of Sabre’s proposed purchase of Farelogix demonstrates that it is willing to challenge large dominant companies that seek to acquire small nascent rivals in technology markets that are highly concentrated.  Sabre’s proposed acquisition of Farelogix is a dominant firm’s attempt to take out a disruptive competitor that is an important source of competition and innovation.  The DOJ is taking the position that acquisitions of small disruptive rivals in highly concentrated markets can result in higher prices, reduced quality, and less innovation regardless of the target’s low market share.  The DOJ views the transaction as part of an emerging trend of large technology firms acquiring nascent competitors to keep them from emerging as full-fledged rivals.

This complaint also demonstrates that the DOJ will use merging parties’ own words against them when challenging their deal.  Here, the hot docs in Sabre’s text messages, documents, emails, and corporate filings support the DOJ’s decision to block the merger. Historically, “hot docs” provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.  The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and, particularly, the judge.  The DOJ will focus on supposed “hot docs” to support its case because the buyer appears to be touting the intended anticompetitive consequences of the acquisition.  This case demonstrates why corporate executives must be mindful about what they write as careless and inappropriate language in company documents can have an extremely negative effect on a merger review.  A good rule of thumb is to write every document so that neither you nor the company would be embarrassed if it appeared on the front page of the Wall Street Journal.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com