FTC, Microsoft Spar in Oral Argument Over Validity of Activision Injunction Denial

The FTC's appeal of the district court’s July 11 denial of its motion for a preliminary injunction to block Microsoft’s Activision Blizzard buy (see 2307110031) “is every bit about the right process for merger review as it is about the denial of relief,” FTC attorney Imad Abyad told the 9th U.S. Circuit Court of Appeals in oral argument Wednesday.

The merger at issue “stands to reshape the entire gaming industry by giving Microsoft the chance to dominate it for years to come,” said Abyad. “Yet the district court waved it through with little scrutiny by misapplying Section 13(b) of the FTC Act,” he said.

Precedent in the 9th Circuit entitles the FTC to a preliminary injunction under Section 13(b) “if it shows serious questions as to the antitrust merits,” said Abyad. The U.S. District Court for Northern California “misapplied that in multiple ways,” he said. Its “most obvious” misapplication was that it relied on Microsoft’s “proposed remedies and some purported efficiencies” to deny the FTC the injunctive relief it had requested, he said.

The remedies and efficiencies “in fact do not belong at all in a Section 13(b) proceeding,” said Abyad. That’s because a Section 13(b) proceeding “is supposed to be very narrow in scope,” and it’s supposed to give “readily available relief to the government,” he said. “Most importantly, it is not going to ascertain the nature or the scope or the quantum of the harm,” he said. “So if you don’t know what the harm is, how can you say that these proposed remedies or these purported efficiencies would fix that harm?” he said. “That’s at the core of the district court’s decision, and that is the biggest problem we have with the decision,” he said.

In the subscription-gaming market, “the district court accepted that Activision’s content will be available only on Microsoft’s GamePass, and will not be available on rival platforms,” said Abyad. “It accepted that, but found that the increased access to that content by consumers would be procompetitive,” he said. “That itself is also wrong as a matter of law because the comparison is wrong,” he said. “The right comparison is not the market before the merger versus the market after the merger,” he said. “The comparison is the future, with and without the merger,” he said.

The district court’s finding that Microsoft would have no incentive to “foreclose” Activision titles from rival platforms “was made only in the console market, and that in itself is built on multiple legal errors,” said Abyad. The district court found that Microsoft’s incentive to foreclose “can be negated by the testimony of Microsoft executives that they do not intent to do that,” he said. “But intent as a subjective matter does not negate economic incentives to foreclose,” he said.

The FTC's case in the district court against Microsoft's Activision buy "was built on the idea that a single game made by a single company is the key to competition in the dynamic gaming industry," said Microsoft attorney Rakesh Kilaru of Wilkinson Stekloff in reference to Activision’s Call of Duty. “In evaluating that claim, the district court heard testimony from 16 different witnesses, as well as any testimony the FTC wanted to enter from the more than 50 depositions that were taken in this case,” he said.

The district court also considered “every document the FTC submitted from the millions it received over its 18-month review of the merger,” said Kilaru. “But after reviewing all that evidence, the court correctly concluded that the agency had failed to show a likelihood of success on the core theory that the FTC actually presented at trial -- that Microsoft would foreclose rivals from Activision content,” he said.

The FTC’s counsel wrongly asserts “that all the district court did was look at the world as it exists today,” said Kilaru. “That is not accurate,” he said. In the subscription-gaming market, U.S. District Judge Jacqueline Scott Corley said that the FTC’s “primary argument appears to be that even without the merger, Activision will contract to put its content, including Call of Duty, on subscription services,” he said. So Corley “was explicitly talking about the future without the merger,” said Kilaru.

The FTC’s argument “is that the world without the merger is better than the world with the merger,” said Kilaru. “That would be the claim, and the district court found, as to what the world would look like without the merger, that these games won’t go on subscription and cloud,” he said. Corley then found that “with the merger, they will go on subscription and cloud,” he said.

The burden was on the FTC “to present economic evidence supporting a theory that in the future, there will be harm to competition” in the subscription-gaming market, post-merger, said Kilaru. “They didn’t present that evidence, both because they didn’t show that this content would ever go on rival services, and because the evidence, which the district court properly relied on, is that Microsoft wasn’t going to actually take the content away from anyone else,” he said.