District Court's Decision in Antitrust Case vs. Microsoft 'Riddled With Errors': FTC

U.S. District Judge Jacqueline Scott Corley’s July decision to deny the FTC a preliminary injunction to block Microsoft’s acquisition of video game company Activision was “riddled with errors and should be reversed,” said the FTC’s opening brief before the 9th Circuit U.S. Court of Appeals Monday. Microsoft announced the agreement to buy Activision for $68.7 billion in January 2022.

Corley ruled in a 53-page opinion that the FTC didn’t make a strong enough case in its antitrust suit to block the transaction (see 2307110061). The FTC didn’t show it was likely to succeed on its assertion that Microsoft/Activision “will probably pull” its flagship game, Call of Duty, from the Sony PlayStation, said Corley's heavily redacted opinion. The FTC also failed to show its ownership of Activision content “will substantially lessen competition in the video game library subscription and cloud gaming markets,” it said.

In its Monday argument, the FTC asserted the 9th Circuit has often said the commission need only raise “serious and substantial questions on the antitrust merits, not establish the merits themselves.” The district court, however, repeatedly held the FTC to the ultimate merits standard of showing a probability that the merger will "substantially lessen competition,” it said: “This legal error infected the district court’s analysis in multiple respects and improperly led the court to deny preliminary relief.”

The FTC “met its burden” to raise serious questions on the merits by offering “significant evidence” that Microsoft’s buy of Activision could lessen competition in relevant antitrust markets, it said. Activision is currently a “platform-agnostic provider of key input for the gaming industry,” the commission said, saying it showed the combined company would likely “deny, degrade, or delay access to Activision’s content” by Microsoft’s rivals" after the transaction. That would strengthen its “already dominant position in the subscription and cloud markets," and lessen competition among console suppliers, it said.

Recent Microsoft acquisitions support that assertion, the FTC said. Its evidence showed the merger “will likely preclude further collaboration between Activision and other platform providers, impeding innovations that so far have led to significant consumer benefits.”

The district court “misapplied the law” when it accepted as a “countervailing efficiency” that Microsoft would offer Call of Duty only on its GamePass service, to the exclusion of its rivals, the FTC said. To the extent that efficiencies “are even a valid defense” to Section 7 violations of the Clayton Act -- “a doubtful proposition according to the Supreme Court and this Court -- their consideration should be left to the merits proceedings, when the actual harm is determined and can then be weighed against such efficiencies,” it said. The district court failed to evaluate whether Microsoft’s efficiency argument was “cognizable, verifiable, and merger-specific,” said the brief. “Even cursory analysis shows that Microsoft’s expressed plan to make some Activision content available on only its own GamePass service may not qualify as procompetitive,” it said.

“No court before has held that proffered efficiencies precluded preliminary relief under Section 13(b),” the commission said, citing the provision in the FTC Act enabling the commission to sue in federal court to enjoin a defendant that is violating, or about to violate, a law the FTC enforces that’s in the public’s interest.

The court erred by relying on the combining companies' suggested remedies to negate the FTC’s likelihood of success in the case, it said. The record, with "expert economic reasoning," documentary evidence, hearing testimony and Microsoft’s history of acquisitions, "shows a probability that the merged firm will have the ability and incentive to fully or partially foreclose its rivals from Activision’s content in at least three relevant markets,” it said.

That the court relied on Microsoft’s “post-complaint side deals” as a remedy in the cloud gaming and console markets “was doubly wrong,” the FTC said. Proceedings for a preliminary injunction under section 13(b) “are not designed to reach even the question of liability, much less determine the ultimate nature and quantum of the competitive harm,” it said. A court hearing a request for such an injunction "thus lacks a basis to decide whether proposed remedies “are appropriate and sufficient to undo that harm,” it said. The court’s ruling on defendant’s offered remedies “usurped the Commission’s special authority,” it said.

The district court also erred in giving “no weight to the public equities favoring relief,” said the FTC. “The court ignored the public equities of effective enforcement of the antitrust laws and preserving the FTC’s ability to order meaningful relief, when those were Congress’s specific goals in enacting Section 13(b)’s provision for preliminary relief.”