Context: Yesterday (February 7, 2024), the Federal Trade Commission (FTC) filed a letter with the United States Court of Appeals for the Ninth Circuit, arguing that a recent announcement of 1,900 job cuts at Activision Blizzard strengthened its case for an injunction. The FTC said that it would become difficult to spin off ABK in the event the FTC prevails (at the end of multi-year litigation) if ABK no longer has everyone on board to operate as an independent company.
What’s new: Today, Microsoft’s lawyers filed a responsive letter with the appeals court. The filing explains that what the FTC says does not change anything about its failure to raise a serious question as to whether Microsoft was likely to engage in vertical input foreclosure in certain markets (video game consoles, multi-game subscription services, cloud gaming). The letter also notes that those job cuts would not prevent Microsoft from spinning off ABK in the hypothetical event that it would be necessary. And “[c]onsistent with broader trends in the gaming industry, […] Activision was already planning on eliminating a significant number of jobs while still operating as an independent company.”
Direct impact: Microsoft’s letter refocuses the court on what’s the key question on appeal, which is whether the FTC has enough of a case to be entitled to an injunction. It’s unlikely that the FTC’s letter, now that Microsoft has responded to it, sways the appeals court. While it’s possible that the appeals court doesn’t agree with every single aspect of Judge Corley’s reasoning, the FTC appears to be too far from winning. The FTC’s letter also looked almost like an attempt to urge the appeals court to decide. The hearing was held more than two month ago, but given that the merger was already consummated in October, this is not as urgent as an appeal over the denial of a preliminary injunction normally would be.
Wider ramifications: The scenario of the merger ever being undone by way of a forced divestiture or spin-off is highly unlikely. But the FTC keeps litigating. By pure coincidence, today is also the day when the FTC (as part of its in-house litigation, where a trial will take place shortly after the appeals court has ruled on the FTC’s PI appeal) is scheduled to depose a Sony witness, trying to discredit the 10-year Call of Duty agreement the PlayStation maker concluded with Microsoft in July. While the FTC’s litigation counsel didn’t want it (January 26, 2024 games fray article), the FTC’s Administrative Law Judge granted Microsoft’s lawyers’ request to get the same amount of time (3.5 hours) to ask questions. Ubisoft may already have been deposed about the cloud rights divestiture that enabled UK clearance of the acquisition.
The FTC’s litigation team leaves no stone unturned. Given that the likelihood of a forced divestiture is extremely low, it is puzzling that this case is such a high priority to the FTC’s in-house litigators.
The FTC’s litigation counsel has been trying in different contexts (such as ahead of Judge Corley’s PI hearing in June) to preclude Microsoft from presenting evidence regarding agreements with companies like Nintendo, Nvidia, Boosteroid, and later Sony and Ubisoft. One term for those types of contracts is “remedial agreements” as they create facts comparable to merger remedies (though in this case there isn’t even a competition concern that would make any remedies necessary). The latest attempt is that they argue Microsoft can’t say there was no detailed internal analysis of those deals, yet have its executives testify. But they may still have some useful information, as games fray noted on X (formerly known as Twitter):
The FTC’s position that such remedial agreements should not be considered as relevant facts is also at issue in the Ninth Circuit appeal where the above-mentioned letters were filed concerning ABK job cuts. The three-judge appellate panel didn’t take a clear position on those agreements at the hearing, but a different U.S. appeals court actually cited Judge Corley’s decision several times in another case and held that such contracts must be considered. The Fifth Circuit is widely regarded as the most conservative U.S. appeals court, but the panel that agreed with Judge Corley (a Biden appointee) consisted of two Democrats and only one Republican. The three agreed unanimously in the Illumina-Grail case. That isn’t binding on the Ninth Circuit, but the view may very well be adopted there. The FTC is now trying the same with its own in-house court, as mentioned above.
The FTC wasn’t first to bring up those ABK job cuts as an argument for an injunction. The day before (February 7, 2024), the class-action lawyers using gamers to sue Microsoft over the ABK deal in Judge Corley’s court (in a separate case from the FTC case) announced they would bring a motion for a temporary restraining order (TRO) (which is like a “preliminary-preliminary injunction”) over the very same question:
Does this mean the FTC drew inspiration from the class-action lawyers? It’s entirely possible. This is not a field like patent law where you must be the first inventor to file (as it’s called); no rights are violated here anyway. But it somehow looks like the FTC acted as a “fast follower” of the lawyers in that private lawsuit, where gamers act as formal plaintiffs but the lawyers are actually in the driver’s seat.
Given that government agencies are sometimes slower than private-practice lawyers, it could also be that the FTC came up with that idea independently. But interestingly, one of the class-action lawyers actually performed better at the combined PI appeal hearing in early December than the FTC (one would have expected the opposite, normally).
Let’s now look at the letters. First, the FTC’s letter:
The FTC’s argument is all about urgency and about how it would no longer be possible to just spin off ABK should the FTC prevail a few years down the road.
Here’s now Microsoft’s answer, which (as explained further below) approaches the matter from different angles:
These are court filings, but by virtue of being public, they can also set off media coverage and debate in social networks. Microsoft’s letter focuses on the legal aspects, which is why the first part stresses the FTC simply doesn’t have a case here.
In that first paragraph, Microsoft’s lawyers leverage the fact that the FTC itself has now emphasized recent developments. There were lots of things that happened after Judge Corley’s denial of the FTC’s PI motion in July, however. Microsoft’s letter recalls the Sony deal and the fact that ABK games actually appeared on cloud-gaming services like Nvidia GeForce NOW.
After clarifying that the FTC has no case and thus no need for the appeals court to balance the equities (harm to Microsoft vs. harm to the FTC in the two different outcomes), the letter nevertheless explained why the FTC can’t make the argument that it urgently needs an injunction to prevent irreparable harm.
The first argument in this regard is procedural: the FTC didn’t show any harm from the closing of the deal at earlier stages of proceeding, and it’s too late for that now. Then Microsoft’s lawyers reject the FTC’s assertions regarding the relevance of those ABK job cuts to this case as “incomplete and misleading.” In particular, the letter says significant job cuts were going to happen anyway, which is part of an industry-wide trend:
“Consistent with broader trends in the gaming industry,1 Activision was already planning on eliminating a significant number of jobs while still operating as an independent company. The recent announcement thus cannot be attributed fully to the merger. More important, Microsoft continues fully to stand behind its representations to this Court.”
Microsoft does acknowledge that “some overlap was identified and some jobs were eliminated.” But it says everything was done, and ABK is being run, “in a way that will readily enable {Microsoft] to divest any or all of the Activision businesses as robust market participants in the unlikely event that a divestiture ultimately is ordered.”
The Ninth Circuit is an appeals court. It’s not a trial court where they’d hear fact and expert witnesses. The FTC is not going to get (and obviously hasn’t requested) a special hearing just to discuss the significance of ABK job cuts or the future divestability of ABK if need be.
It’s quite easy for the appeals court to find that the FTC is simply several steps away from prevailing, and to affirm the outcome of Judge Corley’s decision (the denial of a PI) even if maybe the appellate judges would have decided or phrased some details a bit differently.
Today’s letter by Microsoft’s lawyers also serves as a bit of a preview of how they will respond to the announced TRO motion the class-action lawyers have announced.
For the avoidance of doubt, games fray does not view a divestiture of ABK (or even just parts thereof) as a realistic possibility. But for other reasons, it is sometimes interesting or even entertaining to follow the proceedings, and to glean information from the documents. For the gamer community, it is now more important to hear next week from Microsoft’s Xbox division what their future business strategy is going to be. There will be a games fray article on that, but only when the facts are on the table (as opposed to relying on rumors). There’s nothing that Microsoft must do to fend off the FTC’s long-shot lawsuit. Only if it suddenly backtracked, such as by terminating a key remedial agreement, would it have an impact. With litigation pending over the ABK deal, Microsoft must obviously think any potential legal implications through, but games fray does not doubt that what will be announced next week as part of a “business update” will be driven only by how Microsoft’s gaming division believes the market is evolving.