Earlier in February 2023, the Court for the Northern District of California denied the FTC’s preliminary injunction motion to prevent the closing of Meta Platforms Inc.’s acquisition of Within Unlimited, Inc.––a virtual reality (VR) App developer. The FTC has declined to appeal the loss and has paused its administrative in-house challenge. Meta has now closed the transaction. Below we summarize the key points from the opinion and what we think are the two key takeaways for merger practitioners.
As with many contested mergers, a key legal battle in this case was market definition. The FTC proposed a relevant product market consisting of VR dedicated fitness apps, meaning VR apps “designed so users can exercise through a structured physical workout in a virtual setting.” The merging parties, on the other hand, alleged that the FTC’s proposed market definition was too narrow, excluding “scores of products, services, and apps” that are “reasonably interchangeable” with VR dedicated fitness apps, including VR apps categorized as “fitness” apps on Meta’s VR platform, fitness apps on gaming consoles and other VR platforms, and non-VR connected fitness products and services”. Extensively quoting Brown Show and that venerable opinion’s “practical indicia” of a market, the Court held that the FTC made a sufficient evidentiary showing of a well-defined submarket, consisting of VR dedicated fitness apps.
Having won that battle, the FTC argued that the proposed acquisition would violate Section 7 of the Clayton Act by substantially lessening competition in the market for VR dedicated fitness apps. According to the agency, even though Meta was not currently a competitor in the VR dedicated fitness app market, it was both (i) an actual potential competitor, and (ii) a perceived potential competitor in the relevant market. In the first theory, the FTC argued that the transaction harmed competition because Meta would have entered the market on its own. In the second theory, the FTC argued that Meta’s mere presence on the wings of the market before the transaction kept current participants from acting anticompetitively.
The court denied the FTC’s motion for preliminary injunction, finding that the facts did not support either potential competition theory. The court, however, did find that both theories remained good law and, therefore, are available for the FTC and DOJ to support violations of Section 7 of the Clayton Act in the future. Merger practitioners will need to learn, or remember, the necessary elements of these theories, including sufficient market concentration and the acquiring party having the necessary characteristics, capabilities, and economic incentive to enter the market.
Key Takeaway: Old Precedent Comes Back
Most merger practitioners have become used to working with the DOJ/FTC Horizontal Merger Guidelines (HMG) and the opinions that follow their reasoning, especially those from this century. For some practitioners with little to no grey hair, those precedents might be all they have ever known. For example, the district court opinion in AT&T/TimeWarner in 2018 has multiple cites to H.J. Heinz from 2001, Arch Coal from 2004, and Baker Hughes from 1990. Last year’s UnitedHealth/Change opinion cited all those same cases plus Anthem from 2017 and Sysco from 2015. Sure, some older precedent always makes it into opinions and briefs — defendants often cite General Dynamics from 1974 and the government loves 1963’s Philadelphia National Bank — but those exceptions are few.
As the FTC has moved away from the 2010 HMGs but not yet replaced them, practitioners have questioned where to find guidance. If the briefs and opinion in this case are any clue, the answer might be court opinions from forty or more years ago.
For example, look at the cases cited in the potential competition sections of the opinion. Now, it is true that the Supreme Court cases that extensively discuss the theories, such as Marine Bancorp., date from the 1970’s. The district and appellate court cases relied on by the court in the section discussing the continued validity of the actual potential competition theory date from 1984, 1981, 1980, and 1974. The only more recent court opinion mentioned is the FTC’s loss in 2015’s Steris. The Court’s 1973 opinions in Falstaff Brewing gets extensive discussion in ten separate mentions. According to Lexis, that case involving Dizzy Dean’s favorite beer has only been cited twenty times since 2010.
Even when defining the product market, the court spends ten pages going through various indicia found in 1962’s Brown Shoe and only two pages on the hypothetical monopolist test found in the HMGs — and then only “[i]n the interests of thoroughness.” The cases cited in the Court’s legal analysis of product market definition include several from this century but also older ones like Twin City Sports Service (1982), Times Picayune (1953), and Continental Can (1964). So at least until any new Guidelines are issued, merger practitioners might need to spend more time honing arguments based on older cases and less time arguing the intricacies of the HMGs.
Key Takeaway: Competitive Pressure from Apple?
In discussing competition in the VR hardware and various software or app “markets,” the Court describes many different current competitors. While it is difficult to know for certain because of the extensive redactions, it appears that Apple applied extensive competitive pressure on Meta, either as another potential suitor for Within or a current or potential competitor in some VR-related market—or both. Specifically, the judge says in his opinion that Meta was concerned that Apple might “lock in” fitness content (perhaps Within?) that would be exclusive to Apple’s expected VR hardware.
If so, these two Big Tech behemoths pressuring each other, especially in markets neither one dominates, is further support for some of the ideas expressed at least in Nicolas Petit’s Moligopoly Scenario. Paraphrasing one of Petit’s points, these powerful companies might seem like monopolists, but they act more like oligopolists fearful of competitive pressure from other giants and others. In short, none of them wants to miss the next big thing and become the next Blockbuster to some future Netflix. This opinion seems to put considerable weight on contemporaneous documents from Meta and others that describe those types of strategic considerations driving Meta’s behavior. If future cases follow suit, merger practitioners might be able to focus more on well-supported boardroom considerations and less on hypothetical analyses from outside economic experts.
The FTC has––once again––lost another merger challenge under the Biden Administration.
But this time the antitrust agency was able to secure a small victory. Despite the FTC not being able to show: (i) that it was “reasonably probable” that Meta would have entered the relevant market but for the proposed acquisition, or (ii) that there was a direct anticompetitive effect in the relevant market as a result of Meta being perceived by VR dedicated fitness apps developers as a potential threat, a modern court has now held that loss of actual or perceived potential competition by an acquiring party might be valid legal grounds to challenge future mergers under the Clayton Act.
Expect the FTC and DOJ to use either or both potential competition theories to block future mergers. Expect these theories to have a more prominent place in any redo of the HMGs. And until those Guidelines are redone, and even afterwards, expect the agencies to use old cases like Marine Bancorp. and Falstaff more than they have been used in decades.