Context: Even though Microsoft legally closed the acquisition of Activision Blizzard King (ABK) in October, the U.S. Federal Trade Commission (FTC) is litigating in a long-shot attempt to force a divestiture, with support from console market leader Sony (previous article on this topic).
What’s new: The FTC released various documents on Friday, including an order (PDF) by its Administrative Law Judge (ALJ) D. Michael Chappell that allows the FTC to look into the cloud streaming agreement with Ubisoft that was key to UK clearance from a “what might have been” perspective: what terms might have made it into the contract and who–other than the French company–might have become the acquirer of those rights. The ALJ also lets the FTC’s litigation counsel quiz Activision about the Ubisoft agreement, though to a lesser extent than counsel requested. The ALJ declined, however, to grant the FTC’s litigation counsel’s discovery motion concerning negotiations between Microsoft and ABK on the three-month renewal that was announced in the summer. Other documents relate to disagreements between Microsoft on one side and the FTC and Sony on the other.
Direct impact: The FTC’s fishing expedition has been curbed very significantly, and the order states in no uncertain terms that (to put it differently) some of the FTC’s discovery requests were way overreaching. A decision on how to proceed with respect to Microsoft’s motion to compel (called differently in the FTC, but that’s what it would be called in district court) should come down shortly.
Wider ramifications: The FTC displays its determination to fight the deal even after it has been consummated. Given how unlikely the FTC is to succeed (as the final decision on a divestiture would be made by a federal court on appeal), discovery disputes have little bearing on who will win or lose. In this case, however, an un-American alliance between the FTC and Sony is baffling.
This article will now discuss in separate sections the two discovery disputes: the one between Microsoft and the FTC and the one between Microsoft and Sony, into which the FTC tries to inject itself. The first of the two sections has three subsections (one for each distinct part of the discovery order).
The FTC is clearly not committed to the transparency of its in-house proceedings. Some of those documents were several days old when released. Instead of keeping the publicly accessible version of the case file up to date, the FTC staff apparently uploads documents only in batches, and often with very significant delay. It looks like the staff only decided to do a multi-document update because they didn’t want to delay the publication of an order. But prior to the order, they should already have uploaded the pleadings in due course.
FTC’s discovery request denied, one key part described as “strained attempt”
In terms of its chances of success, the FTC is tilting at windmills here. That explains why Microsoft and its now-subsidiary ABK try to limit the scope of any further discovery: such waste of resources is bad enough if U.S. taxpayers’ money is wasted (in terms of assigning public servants to what should be a total non-priority), but even worse when a private party is affected.
ALJ Chappell, however, has consistently taken a rather permissive approach to discovery motions in this case. And there is no legal basis for limiting discovery because a case is an extremely long shot. Here, the FTC just went way too far, which resulted in a “granted in part, denied in part” decision that sounds like 50-50 but–if one looks at this more closely–the result is arguably less useful than that for the agency’s litigation counsel’s purposes.
Just before the end of 2023, the FTC actually scored a relatively rare win in a merger case, securing a preliminary injunction in New York against a low-profile merger in the wider health care context (FTC statement). The standard applied by the court in that case may actually not have been the one the FTC hopes for in the ABK case, but potentially the facts were such (at least the way the judge viewed them) that the FTC got a better outcome than against the ABK deal.
Getting back to the FTC’s ABK proceedings, the discovery order has three parts, each discussed in a separate subsection now.
Order, part I: ABK testimony on Ubisoft and Sony agreements
Microsoft and ABK (still formally two legal entities and jointly referred to as “the Respondents” in the order) opposed as duplicative that ABK would have to make an executive available for a deposition on multiple aspects of the Ubisoft and Sony agreements already answered by Microsoft. ALJ Chappell did not explicitly disagree that the four discovery questions Microsoft and ABK criticized are identical to questions the FTC also posed to Microsoft, but allowed the related discovery for the most part so long as there is a possibility that Activision may be able to contribute relevant information.
The judge reached that part of the decision because some of Activision’s denials of knowledge (in a sworn declaration) were too vague for his taste. But Activision’s clear-cut denial of having built an economic model or impact assessment of the Ubisoft deal did satisfy ALJ Chappell, so the FTC can’t quiz an Activision executive about what would presumably have been the most useful part for the FTC’s purposes. What the FTC is left with now is the opportunity to ask Activision questions about topics where the answers will likely amount to “sorry, don’t know (much)!”
The FTC’s litigation counsel has an obvious objective: to try to elicit or construct inconsistencies between Microsoft’s and ABK’s positions on the significance of the Ubisoft deal. After this discovery decision, it would be a huge surprise if the FTC got any mileage out of it. Only the part about the economic model or impact assessment would have had some potential, but ABK is not in a position to opine on what the company never analyzed.
Order, part 2: FTC’s litigation counsel made pretextual argument for inquiry into negotiations on extension of merger agreement
The second part (of three) was decided completely against the FTC’s litigation counsel, and the way the judge put it is a diplomatic way of saying that the FTC’s counsel was using a transparent pretext to get something they’re not entitled to. The FTC’s litigation team argued that the three-month extension of the Microsoft-ABK merger agreement (the target date was pushed back from mid July to mid October) had a lot to do with the Ubisoft deal, so they also wanted to look into what was discussed in those negotiations. But what they really wanted was an opportunity to find anything interesting (potentially also with a view to the parties’ credibility, and possibly because they could find out how Microsoft and ABK viewed the FTC’s strategy and the overall regulatory landscape last summer). Judge Chappell saw through that:
“[FTC] Counsel contends that the Ubisoft Agreement would not exist absent the negotiations to extend the deadline, and therefore, discovery regarding the extension of the termination date is relevant to the Ubisoft Agreement. This strained attempt to shoehorn discovery into the merger agreement into the discovery into the Ubisoft Agreement allowed under the October 26 Order is unpersuasive and is rejected.”
The verb “to shoehorn” all by itself would already have been a mild rebuke, but the adjective “strained” makes it even worse, and actually a lot worse than what is merely “unpersuasive and […] rejected” (the ultimate conclusion here). In a footnote, one of the litigation team’s theories in this context is also dismissed by saying: “This logic is fallacious.”
Instead of protecting American consumers, the FTC is simply trying to harrass an American company (technically two companies, but meanwhile one has acquired the other) in a desperate attempt to dig up something somewhere that might have a psychological effect on judges or on politicians (as the FTC will sooner or later have to justify its conduct to the government; after the elections at the very latest).
The FTC is acting in this context as if its objective was to vindicate all those (typically Republican and rural) Washington skeptics, including the late Ronald Reagan who said that the solution to problems is to get government out of the way. The FTC is arguably acting like a defiant child, and even its own judge felt forced to say no here.
Order, part 3: “what (and who) might have been”
Microsoft and ABK (opposition to discovery request (PDF)) argued that it was not consistent with the notion of limited discovery into the Ubisoft deal that the FTC wanted to ask questions not only about what was ultimately agreed upon, but also about what terms the parties discussed in negotiations that did not make it into those agreements and about who might have done the deal instead of Ubisoft.
ALJ Chappell, however, believes the FTC’s litigation counsel legitimately requests information on those questions.
The FTC’s litigators’ objective here is obvious: they hope to find matrial that calls into question the strength and enforceability of the agreement that actually exists. By now it appears that the FTC never approached the Ubisoft deal with an open mind. The question for the FTC is not whether they would just accept that deal as a major game changer the way their colleagues and (in this context) former allies over in London did. It’s all just about finding something to criticize about it.
At the preliiminary injunction hearing in federal court in June 2023 it was already quite embarrassing what ridiculous arguments the FTC’s litigators were making against the remedial agreements Microsoft had concluded or offered (Sony accepted the deal only a short while later) by then. United States District Judge Jacqueline Scott Corley struggled to see the FTC’s point, such as when the FTC’s counsel criticized an anything but unusual clause that enables adjustments in unforeseen situations.
If and when this FTC-internal case goes to the trial before the FTC’s own judge, one can expect more of that. Short of Microsoft selling ABK to Sony for a price way below market value, the FTC would probably not consider any deal to have a remedial effect, even when most regulators didn’t ask for any remedies and Microsoft’s agreements with various parties convinced the two agencies that insisted on remedies (without a solid legal basis, but leveraging their ability to kill deals through mere delay, such as by requiring appeals).
FTC and Sony: an un-American alliance against a U.S. merger
The previous article on this topic discussed Sony playing games in terms of feeding anti-deal arguments to the FTC instead of focusing on the questions Sony was actually asked, which are about the 10-year Call of Duty agreement concluded last July. One may question Sony’s wisdom and wonder why they can’t move on. But it’s a lot worse when the FTC goes against a merger between two American companies that is actually good for American consumers, and fails to see how distasteful–and in some people’s eyes even treasonous–it is when the FTC’s lawyers in some key situations act if they were Sony’s lawyers.
For the avoidance of doubt, it isn’t and shouldn’t be the FTC’s mission to act as a protectionist trade warriors. But the FTC occasionally acts in ways that have fueled conspiracy theories in the gaming community. While games fray will consistently contradict those who suggest that the FTC or any of its officials are in Sonys pockets, the FTC must ask itself how it wants to be seen.
At the PI hearing in June 2023, the FTC’s counsel tried to elicit further concessions from Microsoft Gaming CEO Phil Spencer. The hearing was livestreamed. Many people were shocked to see the FTC try to secure a better deal for Sony. The FTC’s actual objective was most likely just to portray Mr. Spencer’s testimony (according to which he ruled out removing Call of Duty from the PlayStation) as having loopholes. But just like in the current situation, the FTC’s lawyers are completely oblivious to public perception by doing things that someone in their place would also do if he or she was in Sony’s pocket.
Just like in connection with the Ubisoft deal, the FTC doesn’t want to accept that the Sony deal would be the answer even if the agency’s console market-related concerns had merit (concerns that the regulators in charge of 40+ countries, in that context even the UK Competition & Markets Authority in its original April 2023 blocking decision, rejected).
While Sony’s selective and agenda-driven answers to the FTC’s questions are at least debatable and strategically not very smart, Sony can’t be blamed for opposing Microsoft’s related discovery request. Parties generally (and third parties particluarly) prefer to minimize the discovery burden on them. In a January 2, 2024 filing (PDF), Sony tries to dissuade ALJ Chappell with legal arguments from allowing Microsoft’s motion to compel to go to the next procedural stage.
For instance, Sony notes that Microsoft itself said the “agreements speak for themselves,” and therefore doesn’t see why further discovery should be needed. Of course, Sony turns a blind eye to the fact that Microsoft would never have had a need to take supplemental discovery of Sony if Sony had not used the FTC’s relevant discovery request as an opportunity to campaign against the deal even at this stage where the deal has closed and Sony has a 10-year deal (not even talking about how much more sense it would make for Sony to mend fences with Microsoft and focus on constructive “coopetition”).
What may unite the FTC and Sony more than anything else that they’re both, in different but ultimately similar ways, defying a present reality because of their past defeat instead of optimizing for the future.
The FTC asked ALJ Chappell (PDF) to allow the filing of an opposition brief by which the FTC seeks to support Sony. It was not about a discovery request by the FTC. It was one filed by Microsoft. But the FTC doesn’t want Microsoft to be able to find information that calls into question the anti-deal propaganda into which Sony may have turned its response to the FTC’s discovery request concerning the 10-year Call of Duty deal.
The correct thing for the FTC to do would have been to let Sony itself oppose the discovery request. By rushing to Sony’s aid, the FTC again comes across as being protective of Sony rather than American consumers, much less American companies.
Microsoft-ABK have asked (PDF) ALJ Chappell either to simply consider the FTC submission as not filed or, in the alternative, to also let Microsoft file a reply brief. The documents contains both (arguments for not letting the FTC file and a reply brief that should be accepted in the alternative).
The filing by Microsoft and ABK notes that the only reason the FTC’s counsel provides for why they should have their say (and for the legalistic argument that Microsoft should even have tried to resolve an alleged dispute with them instead of bringing their motion to compel Sony) is deposition time: the FTC argues that if Microsoft’s counsel also examines Sony on certain questions, it means less time for the FTC itself.
Microsoft explains that there was no need to engage in what U.S. courts call “meet & confer” with the FTC as they did so with Sony.
It’s clear that the FTC is not concerned about an hour and a half of deposition time. The FTC is presumably glad that Sony provided anti-deal arguments to them (what exactly Sony gave the FTC is not publicly accessible) and just doesn’t want Microsoft to have the chance to call into question the credibility of that material. Again, the FTC is clutching at straws. It comes across as desperate and defiant, not principled. And one is left to wonder whether the FTC is so obsessed with this case by now that even if they had to go further in their support of Sony (though it’s hard to imagine how much further the FTC could go than at the PI hearing in June), they’d do it (“public perception be damned”).
Given that ALJ Chappell has so far been very permissive in his discovery decisions (except when a request was merely pretextual), it would be out of character for him to deprive Microsoft of the opportunity to conduct discovery of Sony in this situation.
The FTC and Microsoft are now waiting for the Ninth Circuit panel decision on the FTC’s appeal of the denial of a PI. While PI appeals are prioritized, this one is not urgent as the merger has closed. It may take a while. In the meantime, Microsoft can (presumably) take discovery of Sony in order to get the full picture concerning the 10-year Call of Duty deal. And the longer it takes, the more opportunities the FTC has for motions and other measures that are inconducive to its credibility.