Introduction

On Monday, the FTC lost its bid to preliminarily enjoin Microsoft’s acquisition of Activision, the maker of the popular video game, “Call of Duty.”  Based on a vertical foreclosure theory, this case marks the fourth loss for the antitrust agencies on a vertical theory of harm in recent years—starting with the AT&T-Time Warner case in 2019.  The opinion from Judge Jacqueline Scott Corley finds the FTC unlikely to succeed on the merits in showing that Microsoft’s ownership of Call of Duty would substantially lessen competition in the console, video game library subscription, and cloud gaming markets. 

The FTC will attempt to obtain a stay pending appeal before Judge Corley’s temporary restraining order expires at 11:59 PM on July 14th and the parties are allowed to close.  The FTC filed its notice of appeal late Wednesday, July 12th.

The Opinion

Judge Corley rejected the FTC’s contention that it need only show that the transaction is likely to increase the new firm’s ability and/or incentive to foreclose rivals, reasoning that the FTC must show that the new firm has the ability and incentive to foreclose because the Clayton Act forbids mergers which will probably substantially lessen competition (and not those which might substantially lessen competition).

The court held the FTC to a burden that it show the new firm “(1) has the ability to withhold Call of Duty, (2) has the incentive to withhold Call of Duty from its rivals, and (3) competition would probably be substantially lessened as a result of the withholding.”

The court highlighted the lack of evidence that Microsoft would have the incentive to foreclose its rivals from Call of Duty post-merger and credited Microsoft’s commitments to maintain the game on existing platforms and its commitment both in public and in court to continue to sell Call of Duty to Sony.  The court also found persuasive evidence that Microsoft’s reputational and financial position relied on it not foreclosing Call of Duty from its rivals post-merger.

The opinion is significant because it adds to the list of losses for the agencies on vertical theories of competitive harm in recent years.  Though heavily redacted, there appears to be no citation to bad documents or testimony from the merging parties in the opinion, and the court found that the FTC’s expert economist’s model actually weighed in favor of the premise that it would not be profitable for Microsoft to withhold Call of Duty from PlayStation.  The court found that the expert’s model, which was based on an assumed input, supported the conclusion that the costs in lost PlayStation sales of Call of Duty would not outweigh the increase in sales of Xbox consoles to consumers who would purchase an Xbox to play Call of Duty if it was not available on PlayStation. 

The court additionally found that the expert’s opinion did not take into consideration Microsoft’s agreements to continue to provide ongoing Call of Duty access to Nintendo and cloud streaming services and the reputational harm it would face from withholding Call of Duty.

The FTC argued that Microsoft’s contractual commitment to Nintendo should only be considered by the court as a remedy to a Section 7 violation, i.e., the competitive effects evaluation should proceed as if that contract did not exist and that the burden of proof for the remedial analysis should fall on the parties. The court rejected that analysis, which is a significant legal finding for future mergers.

The court also found nothing to support the FTC’s assertion that the new firm might engage in partial foreclosure (e.g., a later release of Call of Duty on other consoles than Xbox or features available in Xbox’s Call of Duty that are unavailable on other consoles). 

Judge Corley rejected the FTC’s contentions in the remaining markets, finding that the FTC had not raised serious questions as to whether the merger will substantially lessen competition in the game library subscription services market and that Microsoft’s post-FTC complaint agreements with five cloud-streaming providers mean the “merger will enhance, not lessen, competition in the cloud-streaming market.”

Additionally, Judge Corley rejected the FTC’s reliance on the Brown Shoe factors, finding that the FTC had not raised any arguments that had not been examined in the foreclosure analysis and that Microsoft’s investment in game developers and publishers allows for increased innovation in content.

Key Takeaways

In addition to adding to the list of recent losses on vertical theories, the opinion is significant because it gives no precedential value to the FTC’s citation to its own opinion in Illumina articulating that its burden is to show only that the deal increases the ability or incentive of the merged firm to foreclose rivals, not both.

Further, Microsoft’s ten year commitment to keep Call of Duty on PlayStation for 10 years on parity with Xbox mattered in the court’s analysis—signaling that behavioral remedies are still a strong option for parties subject to a vertical merger challenger, and parties may be able to get ahead of certain arguments by the antitrust enforcement agencies by crafting effectively-tailored behavioral remedies. 

This marks the second loss this year for FTC Chair Lina Khan in a tech case, next to the Meta-Within decision.  The FTC will appeal the decision to the U.S. Court of Appeals for the Ninth Circuit.

Finally, FTC and DOJ are expected to release a draft version of new merger guidelines sometime this year, and it is anticipated that the guidelines will deal with both horizontal and vertical theories of harm.  How effective these guidelines are in practice will depend on their persuasiveness to federal courts in actual merger challenges.  Including novel theories of harm in the new guidelines may not prove effective if courts are unwilling to adopt the guidelines or give them persuasive weight.

This alert was updated after publication to include the FTC’s intention to appeal the decision.