FTC Lacks ‘Sound Reason’ to Block Microsoft/Activision, Say ex-Antitrust Enforcers

Eight former FTC and DOJ antitrust enforcers from Democratic and Republican administrations asked the 9th U.S. Circuit Court of Appeals to affirm the district court's denial of the FTC's motion for a preliminary injunction on Microsoft’s Activision Blizzard buy (see 2307110031). Their brief was one of seven amici briefs filed Wednesday (docket 23-15992), all in opposition to the FTC's merger challenge on appeal.

Microsoft/Activision would be “a combination of complementary assets,” said the eight former antitrust enforcers, including Alden Abbott, ex-FTC general counsel from 2018 to 2021, and Deborah Garza, former acting DOJ Antitrust Division chief from 2007 to 2009. Activision’s games “are a complement to Microsoft’s gaming products,” they said. There’s a consensus “that non-horizontal transactions like this one, unlike those between competitors, generally pose less risk -- and may offer benefits -- to competition,” they said.

The district court correctly concluded “that the collapse of the FTC’s economic model,” which was the principal basis for its claim of likely harm, left the commission “without any sound reason to prevent the transaction from proceeding,” said the eight former enforcers. “The FTC’s failure to defend that economic model on appeal is reason enough to affirm,” they said.

Modern antitrust law “recognizes the consensus that vertical and horizontal mergers are different,” said the eight former enforcers. A horizontal merger “eliminates a competitor from the market, and so, by definition, increases concentration,” they said. Vertical mergers, by contrast, “generally pose less risk to competition and are more likely to offer procompetitive benefits,” they said. “Because a vertical merger may be procompetitive, the key evidence in a vertical-merger challenge often is sound economic analysis,” they said.

But the FTC “offered no sound economic analysis showing the transaction probably would be anticompetitive,” said the eight former enforcers. The FTC offered an economic model in the district court purporting to show that, after the purchase, Microsoft would have a financial incentive to withhold Call of Duty from the Sony PlayStation, they said. But the U.S. District Court for Northern California “rejected that model because it rested on unproven assumptions, and on appeal the FTC has simply abandoned it rather than suggest that the court erred,” they said.

The agency instead argues that “structural” factors in the market support its claim that Microsoft will withhold Activision games from the PS5, said the former enforcers. But those arguments “lack a sound economic foundation,” and the FTC’s decision to proceed “without quantitative support” strongly supports affirmance, they said.

One issue raised by the FTC in its appeal is that it was improper for the district court to consider Microsoft’s agreements to make Activision’s games available on third-party platforms post-merger in determining whether the FTC met its statutory burden to obtain a preliminary injunction, said another amici brief from former attorneys general of Alaska, Colorado, Nebraska and Tennessee, including three Republicans and one independent. “In practice,” that means that such agreements “would be ignored by the court in a preliminary injunction action,” they said. But they also wouldn’t be considered “until the later stages of a trial before the administrative law judge, whose recommendations are subject to lengthy appeals often lasting years,” they said.

Yet Microsoft’s third-party agreements “are an immutable part of the competitive landscape,” said the former state AGs. The agreements “thus go to the heart of the issue” before the district court “and every adjudicator that will follow -- whether the post-merger markets are likely to operate in a substantially less competitive way,” they said.

'Reality' Ignored

To consider how competitive those markets will be “without factoring in all the marketplace facts would be to ignore reality,” said the former state AGs. “Of great importance” to state antitrust enforcers, they said, the FTC’s position, if adopted, “would discourage merging parties from proactively addressing competitive concerns early in the investigative and litigation process -- efforts that have the potential to bring enormous benefits more quickly to the public.”

The U.S. Chamber of Commerce “has a significant interest in preventing the government from adopting a novel and unlawfully aggressive approach to vertical mergers,” said its amicus brief. If the FTC’s position is “embraced” by the 9th Circuit, it would “greatly undermine countless transactions that benefit consumers,” the chamber said. The chamber has “repeatedly called attention” to the FTC’s “legally dubious approach” to vertical mergers, including the Microsoft-Activision merger at issue in this appeal, it said.

The FTC shouldn’t be allowed “to construct and knock down straw men when seeking to block a procompetitive economic activity that benefits consumers,” said the chamber. Nor should it be allowed “to completely disregard the real-world circumstances of a merger and real-life agreements that further benefit consumers,” it said. The FTC instead “must produce real-world evidence of competitive harm whenever it seeks to stop vertical mergers, like the Microsoft-Activision merger, that are presumptively procompetitive and thus lawful,” it said.

The district court’s decision denying the FTC’s injunction “took note of contracts that bind Microsoft to provide Activision’s Call of Duty to cloud gaming competitors, a factor pertinent to the FTC’s vertical foreclosure theory,” said the Business Roundtable. Though not essential to the district court’s decision, “it was proper for the court to consider the legally binding commitments entered by Microsoft when weighing the FTC’s ultimate likelihood of success on the merits,” it said.

The FTC is “incorrect” in asserting that merging parties’ proposed remedies are irrelevant at the preliminary injunction stage and mustn’t be considered until after a merits determination of liability, said the Roundtable's amicus brief. Post-merger “market realities,” such as those resulting from binding agreements of the parties, “are directly relevant to whether a plaintiff is likely to succeed in showing that the transaction will result in a substantial lessening of competition,” it said. Any contention that the district court usurped the FTC’s authority by considering such market conditions “is inaccurate and without basis in the law,” it said.

'Speedy Path' to Unionization

The labor neutrality agreement that Microsoft entered into with the Communications Workers of America in June 2022 “represents a groundbreaking and speedy path for Activision employees to choose whether to form a union without fear of intimidation or retaliation,” said CWA's amici brief with the AFL-CIO in support of the merger. If the proposed merger closes, the agreement “will become legally enforceable, will benefit both the workers and the employer, and will offer a blueprint for labor relations in the industry,” it said. Microsoft “has taken a positive, proactive approach to labor market issues here, and has done so in a meaningful, effective way,” it said.

The FTC in recent years “has expressed open hostility to mergers and acquisitions” in the tech industry, said a brief from seven venture capital firms. The FTC’s positions in the Microsoft/Activision appeal are “part and parcel” of the commission's “stated objective of reducing mergers and acquisitions generally,” and in the tech industry “in particular,” said the firms. The agency's positions aren’t only “inconsistent with long-standing legal precedent, but also pose a direct threat to the innovation ecosystem” in which venture capital firms participate, they said.

If the 9th Circuit were to endorse the FTC's positions, “the practical result would be that any proposed transaction that could impact competition would be subject to preliminary injunction and months -- if not years -- of regulatory proceedings in the FTC's administrative court and related appeals,” said the venture capital firms. This new “regime” would have a “substantial chilling effect” on mergers and acquisitions, they said.

The FTC’s arguments on appeal “suffer a multitude of flaws,” said another amici brief from five independent video game publishers and developers whose products are currently offered on Game Pass, Microsoft’s Xbox subscription gaming service. The companies are “especially” bothered by the argument that the FTC has highlighted for the first time on appeal -- that Microsoft/Activision will stifle competition in the market for subscription services, they said. “Even assuming that subscription gaming services are their own product market,” the FTC’s arguments are “inconsistent” with the companies’ “real-world experiences,” they said.

Subscription services like Game Pass “are crucial to the success of indie games,” said the publishers and developers. They increase the odds that players will discover indie games, and lower the cost for players to try them when they do, “since players would otherwise have to buy indie games outright,” they said. Subscription services like Game Pass “increase the odds that indie games can break through into a viable, revenue-generating level of players and viewership,” they said.

Those benefits for indie games are only likely to grow from the addition of Call of Duty to Game Pass, said the publishers and developers. Call of Duty is an “enormously popular franchise that will undoubtedly draw subscribers to Game Pass” if it’s available there, they said. “That rising tide will lift all boats,” they said. “The more subscribers to Game Pass there are, the more opportunities for those subscribers to try indie games that they otherwise might not have played,” they said. The more those indie games are played on Game Pass, “the more likely they are to be played elsewhere too,” they said.