DealLawyers.com Blog

The FTC’s efforts to stop Microsoft’s pending acquisition of Activision/Blizzard can now be added to the agency’s loss column. Last week, a California federal district court denied the FTC’s bid to stop the deal, and the 9th Circuit quickly affirmed that decision. While the FTC’s lawsuit remains pending, this excerpt from Davis Polk’s memo on the case indicates that the agency has a mountain to climb if it wants to continue efforts to unwind the deal after closing, because the district court found that it was unlikely to succeed on the merits of its case:

Although it was “sharply dispute[d]” between the parties, Judge Corley found that the “likelihood of ultimate success” meant “the likelihood of the FTC’s success on the merits in the underlying administrative proceedings, as opposed to success following a Commission hearing, the development of an administrative record, and appeal before an unspecified Court of Appeals.”

The FTC argued that post-transaction, the combined Microsoft/Activision firm “may deprive rivals—primarily Sony —of a fair opportunity to compete . . . by foreclosing an essential supply—Call of Duty.” Citing the Commission’s decision in the Ilumina/Grail matter, the FTC argued that “it need only show the transaction is ‘likely to increase the ability and/or incentive of the merged firm to foreclose rivals.’” The court rejected that position, writing, “Illumina . . . provides no authority for this proposition, nor could it . . . . If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability [to foreclose], then a party’s incentive to foreclose is irrelevant.”

The court likewise rejected the FTC’s claim that “it need only show the combined firm would have a greater ability and incentive to foreclose Call of Duty from its rivals than an independent Activision.” Judge Corley reasoned that this standard is inconsistent with Section 7 of the Clayton Act, which requires a substantial lessening of competition.

The district court concluded that to establish a likelihood of success on its ability and incentive foreclosure theory, the FTC must show that the combined firm has the ability and incentive to withhold Call of Duty from its rivals, and that competition would probably be substantially lessened as a result of the withholding. The court then found that while the combined firm would have the ability to foreclose competitive access to Call of Duty post-merger, it would not have the incentive to do so.

As a result of these federal court decisions, UK antitrust regulators represent the only remaining impediment to the deal’s closing, and recent media reports suggest that Microsoft may be able to satisfy their objections through a restructured deal more quickly than originally expected.

A recent Reuters article says that the antitrust agencies are struggling to get courts to see things their way when it comes to merger challenges. It points out that the agencies won approximately 65% of their litigated merger challenges between 2001 and 2020, while under the Biden administration the FTC & DOJ have won only 30% of its cases.

– John Jenkins