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Earlier this week, a WSJ article discussed the FTC’s aggressive approach to antitrust enforcement, noting that the agency has thrown “sand in the gears” of the Wall Street deal machine.  The article cited the FTC’s decision to challenge Meta’s proposed acquisition of virtual reality app developer Within Unlimited an example of the FTC’s combative new approach. This Fenwick memo discusses the FTC’s challenge, and says it involves high stakes not just for the tech sector, but for the FTC as well. Here’s the intro:

Federal Trade Commission Chair Lina Khan has consistently criticized past FTC leadership for being too lenient with Big Tech M&A activity, and for not bringing the “hard cases” that push antitrust law to its limits. Khan and others in the progressive antitrust movement have often cited Facebook’s 2012 acquisition of Instagram as a prime example of the FTC’s failure to act to protect “nascent competition,” thus allowing an allegedly already dominant player to extend and fortify its position to the detriment of the competitive process. Now, 10 years later, Khan has seized an opportunity to put her ideas to the test.

Khan led the FTC’s 3-to-2 vote on July 27th to file a last-minute and unexpected complaint seeking to prevent Meta’s proposed acquisition of virtual reality (VR) app developer Within Unlimited Inc. (Within), maker of the popular VR fitness app Supernatural. The complaint acknowledges that Meta does not compete with Supernatural in its alleged relevant market for “VR dedicated fitness apps.” However, the FTC nonetheless alleges that Meta has the proximity, knowledge and resources to enter with its own product, and thus that its acquisition of Within would substantially lessen competition in that market.

Although such a theory of competition from potential entrants is not entirely novel, as applied in these circumstances the theory is largely untested in court, and could backfire on Khan. Conversely, a victory for the FTC could have a chilling effect on tech M&A activity going forward, particularly by constraining the decisions of larger established incumbents weighing “build or buy” options for growth.

The memo goes on to describe the basics of the FTC’s case.  But the really interesting part of the memo is its discussion of the potential downside risks that the agency faces by bringing this challenge.  First, the article suggests that proving its case on the merits under a traditional antitrust analysis may be an uphill battle.

More importantly, however, there’s the risk associated with litigating the issue of who is a “competitor” under the antitrust laws.  The memo notes that the FTC’s enforcement program benefits from the judicial ambiguity concerning that issue. The Meta case may provide the court with an opportunity to resolve that ambiguity in a way that the FTC won’t necessarily like, and that would hamper its efforts to challenge other “killer acquisitions.”

– John Jenkins