No Court Has Ever ‘Preliminarily Enjoined’ Vertical Merger, Say Microsoft, Activision

Microsoft’s proposed Activision Blizzard buy involves a “vertical merger” of the sort that the U.S. antitrust agencies “have rarely sought to enjoin” and have lost “every recent case in which they tried.” So said the Microsoft-Activision 9th Circuit answering brief Wednesday (docket 23-15992) in the FTC’s appeal of U.S. District Judge Jacqueline Scott Corley’s denial of its preliminary injunction to block the transaction from going through (see 2307110061).

Vertical mergers “are generally understood to be procompetitive and benefit consumers,” and Microsoft/Activision “is no exception,” said the brief. From the day the deal was announced, “Microsoft made clear that it would make Activision’s popular videogames more broadly accessible,” it said.

That approach “is good business for Microsoft,” said the brief. Xbox has been “lagging in third place for decades” behind Sony and Nintendo, “so its gaming division must distribute on many different platforms to have sustainable economic success,” it said. The strategy is also good for consumers, who benefit from a more open, competitive landscape, where they’re free to choose where and how to access their games, it said.

The FTC’s primary theory during the five-day evidentiary hearing before Corley was that Xbox would harm competition by withholding Activision’s flagship Call of Duty franchise from the PlayStation 5, said the brief. Corley rejected that argument on “nine independent factual grounds,” it said. Now on appeal, the FTC has “pivoted” to focus on alleged harm in the emerging subscription and cloud gaming markets, it said. But the FTC “failed to introduce even basic evidence supporting these alternate theories,” and Corley “rejected them on multiple independent factual grounds as well,” it said.

The FTC tries without success “to transform its failures of fact into errors of law,” said the brief. Contrary to the FTC’s suggestion, Corley “properly applied” Section 13(b) of the FTC Act in denying the preliminary injunction, it said. Precedent in the 9th Circuit requires the district court to consider whether the FTC raised questions about the merits so serious, substantial, difficult and doubtful as to portend likely success, it said.

Corley “did just that,” said the brief. She said the FTC hasn’t raised serious questions of whether the proposed acquisition is likely to substantially lessen competition in the console, library subscription services or cloud gaming markets, it said.

In attacking Corley's “straightforward application” of the law, the FTC reveals that its true purpose “is to change the law to allow it to obtain a preliminary injunction essentially whenever it wants,” said the brief. The FTC “faults the district court for citing cases that addressed antitrust challenges on the merits, rather than just Section 13(b) cases,” it said. But every court to consider a Section 13(b) case, including the 9th Circuit, “has done the same thing,” because the statute requires consideration of the commission’s likelihood of ultimate success, it said.

The FTC similarly claims that it was improper for Corley “to consider all manner of relevant and probative evidence,” said the brief. The evidence presented at the five-day evidentiary hearing in June included “the likely real-world consequences of the merger, methodological shortcomings in the FTC’s expert analysis, and the sworn testimony of senior company executives,” it said: “No case suggests that Article III judges are rubber stamps for the FTC, duty-bound to ignore any evidence that harms the FTC’s case.”

The FTC likewise “misses the mark” in challenging Corley’s consideration of the commercial contracts Microsoft has with its rivals to guarantee them access to Call of Duty for the coming decade, said the brief. Her decision didn’t turn on those contracts, it said. Corley provided distinct reasons for her ruling that are “adequate and independent grounds” for the 9th Circuit’s affirmance of her injunction denial, it said. But there also was nothing wrong with considering this evidence, “which powerfully rebutted the FTC’s foreclosure case,” it said.

The law is clear that courts “should compare the real world with a merger to the ‘but-for’ world without it,” said the brief. “No principle of law or logic requires courts instead to evaluate an artificial post-merger world where signed, binding contracts vanish,” it said. There’s “nothing sensible,” or legally justified “about requiring courts to address imaginary problems and discouraging parties from reaching real-world, pro-competitive solutions,” it said.

No court has ever “preliminarily enjoined” a vertical merger under Section 13(b), said the brief. Corley “correctly declined to break new ground in this case,” applying settled law to factual findings that the FTC doesn’t “meaningfully challenge,” it said. The 9th Circuit should affirm Corley’s denial, it said.