Although Axon Enterprise (NASDAQ:AAXN) purchased body camera maker Vievu nearly two years ago, the Federal Trade Commission only recently alleged that the acquisition reduced competition in the marketplace. Now, it wants Axon to divest certain assets to restore equity to the marketplace.

Axon sees it differently, though. In an extraordinary turn of events, it's suing the regulatory agency, claiming the FTC's actions are unconstitutional because it's trying to deprive it of its property without due process.

Police officers putting on body cameras.

Image source: Axon Enterprise.

Reining in an agency run amok

In June 2018, a month after the deal closed, the FTC notified Axon it was investigating the transaction for anti-competitive behavior. The complaint it ended up filing against Axon on Jan. 3, 2020, contends the acquisition reduced competition in what was already a highly concentrated market. All five FTC commissioners voted in favor of suing Axon over the Vievu case, and a trial is slated to begin on May 19.

Axon had been cooperating with the regulatory agency, but negotiations apparently fell apart around Christmas, when the stun-gun maker says the FTC told it the only to avoid getting sued "was to surrender a 'blank check' divestiture." If that were to happen, the agency alone would decide which customers, contracts, employees, and services Axon would be allowed to keep.

The extreme move would essentially allow the FTC to create a competitor out of Axon's own assets, give it complete access to its technology, and do so without any recourse. And the agency has apparently never lost a case -- even when an administrative judge has ruled against the FTC, the commissioners have always voted to overrule the decision.

Thick as thieves

Axon apparently believes the FTC has gone unchecked for too long and is suing the agency in federal court for violating its rights to due process and equal protection. Moreover, Axon contends the FTC is just plain wrong. 

While no one suggests Axon isn't the dominant player in the body cam market, or that Vievu was its primary competitor at the time, there are numerous competitors it goes up against, such as Motorola Solutions -- which acquired camera maker WatchGuard last July -- as well as Panasonic, Coban, and many others. 

There are also non-traditional cameras coming onto the market that could be a potent competitive force. Samsung has had some success selling its Galaxy smartphones as a body camera alternative. Other smartphone makers are similarly working to use their cameras and wireless networks as competing systems.

Standing on the brink

Also, Axon has some other reasonable arguments. In its view, Vievu should have been treated as a "failing firm," making the acquisition different from an antitrust perspective. Axon contends Vievu was "effectively insolvent" at the time of the deal and it struggled at a significant competitive disadvantage because it had failed to invest in dashboard camera options. There were also no other competing bids for the firm, so it likely would have gone under if Axon hadn't bought it.

While Vievu had won a major contract with the New York City Police Dept., beating out Axon to supply the law enforcement agency with body cams, it also hadn't won a major contract in nearly two years prior to the acquisition, and its technology was deficient.

There were numerous reports at the time that Vievu's cameras (and those of numerous other manufacturers) were subject to security flaws that could allow hackers to gain access to the systems and tamper with evidence, and one of Vievu's NYPD cameras caught fire, leading the department to remove 3,000 of the cameras from use.

Tipping the scales of justice

Axon Enterprise asserts that the FTC can't operate as a law unto itself. CEO Rick Smith says, "If the FTC believes it has a strong case against us, it should prove it in federal court before a neutral judge. Our action today seeks to ensure that will happen."

While Axon makes a strong case that the FTC is running roughshod over its rights and exceeding its authority, the lawsuit the body camera maker has filed against the agency is fraught with risk. There's a saying in policing that it's better to be tried by 12 than carried by six, but juries -- and the judges who preside over them -- are unpredictable.

If Axon loses, it will likely be stripped of valuable assets. The resulting company would then be able to use the technology Axon has spent years and hundreds of millions of dollars developing against it. The stakes are extremely high for Axon Enterprise in its lawsuit against regulatory overreach.