District Court Wrongly Denied Microsoft/Activision Injunction, Say Antitrust Scholars

“Partial input foreclosure,” such as if Microsoft were to curtail the flow of Activision Blizzard video game titles to competing console platforms if its Activision buy closes, but without cutting off supply completely, “is harmful to competition,” said 18 antitrust law professors in an amicus brief Wednesday (docket 23-15992) supporting the FTC’s appeal to block the transaction (see 2307110031).

The professors “have no personal interest in the outcome of this case,” said the brief. Yet they urged the 9th Circuit U.S. Court of Appeals to “overturn” the district court’s conclusion that the FTC hasn’t “shown that the merged firm would have the financial incentive to engage in a strategy of partial foreclosure,” it said: “We share an academic interest in guiding the development of antitrust law in a manner that protects consumers and the competitive process, while also encouraging innovation.”

Partial input foreclosure “enables a supplier to raise the costs or reduce the quality of inputs provided to its rivals in the downstream market, making it difficult for rivals to compete,” said the brief. But because the supplier doesn’t totally cut off its rivals, it can “continue to profit from supplying those rivals with inputs in the upstream market,” it said: “In short, the supplier can have its cake and eat it too.”

A partial foreclosure strategy “is generally more profitable than a total foreclosure strategy and the incentives are accordingly different,” said the brief. But the U.S. District Court for Northern California “failed to appreciate this difference” when it denied the FTC’s motion for a preliminary injunction to block Microsoft/Activision, the brief said. The district court wrongly concluded “that just because the merged firm would have an incentive to continue to supply Call of Duty to its competitors, it would have no incentive to engage in a partial foreclosure strategy,” it said.

The district court erroneously concluded that the combined firm’s incentives to engage both in total and partial foreclosure strategies were the same, said the brief. One of the rationales the court offered for rejecting the government’s theory of partial foreclosure was that because the government’s theories of harm under total and partial input foreclosure are the same, “the justifications for dismissing the theories must be the same,” it said.

The district court’s logic was “flawed,” said the brief. It failed to appreciate that the combined firm’s partial foreclosure strategy “is constituted of two sources of profits and, therefore, somewhat different incentives,” it said. The first source involves the profits from increased sales of Xbox game consoles, it said. The second involves profits “from any continuing licensing fees for access to the merged firm’s games,” such as Call of Duty, by developers who will create games for the PlayStation and Nintendo platforms, it said. The court “erroneously focused only on the first,” it said.

The district court also wrongly assumed the combined firm’s partial foreclosure strategy would fail for the same reasons it concluded its total foreclosure strategy would fail, said the brief. But the court’s rationale for concluding the merged firm would have no incentive to engage in a strategy of total foreclosure doesn’t “pertain to a strategy of partial disclosure,” it said. The court found the government’s theory of total foreclosure unconvincing because of evidence Microsoft offered that it planned to continue to provide its competitors access to Call of Duty and that such access was critical to the merged firm’s financial success, it said. The court thus concluded that Microsoft would have no incentive to withhold Call of Duty, it said.

Though Microsoft’s evidence “may be in tension” with a theory of total foreclosure, it’s not “automatically at odds with a theory of partial foreclosure,” said the brief. “Indeed, it is entirely consistent with it,” it said. The merged firm can still give competitors access to Call of Duty but simply degrade the game’s quality, delay the availability of content or increase the licensing fees it charges competitors, it said. The government’s theory of partial foreclosure “is therefore consistent with the evidence offered by Microsoft” and credited by the district court, it said.