On January 31, 2023, Judge Edward Davila of the U.S. District Court for the Northern District of California denied the Federal Trade Commission’s (FTC) motion for a preliminary injunction to enjoin the acquisition of VR game studio Within Unlimited, Inc. by Meta Platforms, Inc. (formerly known as Facebook). The FTC did not appeal, leaving Judge Davila’s opinion as the final word in “potential competition” theories for the foreseeable future. The result is an unusual case in which both the merging parties and the FTC proclaim vindication. While Meta’s satisfaction with the outcome is self-evident, the FTC took the position that Judge Davila’s embrace of the potential competition doctrine is important because “a court’s opinion can have beneficial interpretations of the law that can help us in future cases down the road, and really chart out a new course.”1 It remains to be seen whether the theoretical inroads accomplished by the unorthodox merger challenge truly yields a boon to enforcers in the future, or whether it is a pyrrhic moral victory.
Judge Davila Embraced Potential Competition Framework in Theory
The FTC “challenged Meta’s acquisition of Within on the basis that the merger would substantially lessen potential competition” in the market for VR dedicated fitness apps. Op. at 33. Judge Davila relied heavily on bedrock antitrust law, namely the Brown Shoe “practical indicia” test including “industry or public recognition; peculiar characteristics and uses; unique production facilities; distinct customers; and (to a lesser degree) distinct prices,” to agree with the FTC’s relevant market. Id. at 29.
The majority of Judge Davila’s opinion examines both the viability and the applicability of a challenge premised on potential competition. The FTC asserted two related but distinct theories: first, the merger would harm actual potential competition, meaning Meta would have been likely to design, develop, and compete with its own VR dedicated fitness app in the absence of the merger; and second, the merger would harm perceived potential competition, meaning the mere threat of Meta’s entry stimulated competition in the VR dedicated fitness app market that would disappear once Meta replaced an established competitor.
Judge Davila firmly rejected efforts by Meta to dispose of the entire case on the grounds that the potential competition theory is a “dead-letter doctrine,” holding “given the actual potential competition doctrine’s consistent, albeit distant, history of judicial recognition, the Court declines to reject the theory outright and will apply the doctrine as developed.” Op. at 40.
The FTC Failed to Satisfy the Potential Competition Standard
The FTC’s successes ended with the court’s acknowledgement that the potential competition doctrine exists and is viable. The FTC failed to show either that Meta was an actual potential entrant, or that the acquisition would eliminate competitive pressure that had a direct effect on other actors in the VR dedicated fitness app market.
Actual Potential Competition
To prevail on an actual potential competition theory, the FTC needed to satisfy two elements. First, the potential entrant (in this case, Meta) must have “available feasible means” for entering the VR dedicated fitness app market, and second, that those means offer a substantial likelihood of deconcentrating the market. The FTC failed on both.
The court assessed Meta’s “available feasible means” by looking at whether Meta was likely to enter the market de novo, either by building a VR dedicated fitness app out of whole cloth or through a partnership, namely Peloton. The court looked at numerous aspects of the record including Meta’s fitness expertise, Meta’s lack of production studios, and the profitability of the market, but ultimately rested its conclusion on the lack of subjective evidence that Meta intended to enter the market de novo. Ultimately, the court concluded “it is not “reasonably probable” that Meta would enter the market for VR dedicated fitness apps if it could not consummate the Acquisition. Though Meta boasts considerable financial and VR engineering resources, it did not possess the capabilities unique to VR dedicated fitness apps, specifically fitness content creation and studio production facilities.” Op. at 59.
Perceived Potential Competition
To prevail on a perceived potential competition theory, the FTC needed to prove that Meta possessed the characteristics of a potential entrant and that its “presence on the fringe of the target market in fact tempered oligopolistic behavior on the part of existing participants in that market.” Op. at 60. In the end, the analysis converged with that for actual potential competition above: because it was not reasonably probable that Meta would enter the VR dedicated fitness app market de novo, it was therefore the case that Meta did not exhibit characteristics of a potential entrant or discipline otherwise oligopolistic behavior.
If Not Meta in VR, Then Who Could Ever Satisfy the Potential Competition Test?
It is possible that the FTC lost not only the battle but also the war. While Judge Davila nominally embraced the potential competition theory, his interpretation and application of its tests are so stringent that one cannot help but wonder how the FTC could ever satisfy its burden. Indeed, Judge Davila begins a subsection entitled “Capabilities of Entry” by stating, “There can be no serious dispute that Meta possesses the financial resources to undertake a de novo entry. Meta has spent over $12.4 billion in the most recent fiscal year on its VR business, and it anticipates investing more in the VR space.” Op. at 43. The court also concluded “Meta lacked certain capabilities that are unique and critical to the VR dedicated fitness app market” and refused to make the jump that Meta’s financial clout and corporate commitment to VR would be enough to overcome those shortcomings. Op. at 44.
For more information about this or other issues related to antitrust review of technology mergers, antitrust in the metaverse, or the intersection of gaming and antitrust, please contact Michelle Yost Hale, Brendan Coffman, or another member of the firm's antitrust and competition practice. For more information about gaming companies generally, please contact any attorney in the firm's electronic gaming practice.
[1] Holly Vedova, Director, Bureau of Competition, Remarks at 12th Annual GCR Live: Law Leaders Global Conference, https://www.ftc.gov/system/files/ftc_gov/pdf/vedova-gcr-law-leaders-global-conference.pdf.
