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FTC Loses Challenge to Meta-Within Deal, but Court Accepts Viability of Potential Competition Theories
February 6, 2023 Download PDF
- The Federal Trade Commission (FTC) lost its bid for a preliminary injunction blocking Meta Platforms’ proposed acquisition of Within Unlimited after a federal court found that the FTC failed to establish that it was likely to succeed on the merits in light of the evidence presented.
- Nevertheless, the court accepted that, properly proven, actual potential competition or perceived potential competition by an acquiror in the market in which a target operates could be bases for viable claims of harm to competition under Section 7 of the Clayton Act.
In an order publicly released on February 3, 2023, Judge Edward J. Davila of the United States District Court for the Northern District of California denied the motion of the FTC to grant a preliminary injunction blocking Meta Platforms Inc.’s acquisition of virtual reality (VR) app developer Within Unlimited, Inc. Judge Davila also denied the defendants’ motion to dismiss the complaint. The FTC had asserted that the proposed acquisition would violate Section 7 of the Clayton Act because it may substantially lessen potential competition in a market for ”VR dedicated fitness apps, meaning VR apps ‘designed so users can exercise through a structured physical workout in a virtual setting.’” The FTC has decided not to appeal the ruling in federal court, though it has not yet announced whether it will continue a related administrative proceeding.
Market Definition. Meta and Within argued that the FTC’s proposed market of VR dedicated fitness apps was too narrow, and that the market at least includes “fitness apps on gaming consoles and other VR platforms, and non-VR connected fitness products and services.” The court sided with the FTC and rejected defendants’ arguments in favor of a “broad fitness market,” noting that a broader market did not preclude the existence of a submarket of VR fitness apps. In finding for the FTC, the court cited “practical indicia” of a market drawn from the Supreme Court decision in Brown Shoe. Here, those practical indicia included industry or public recognition of a market for VR dedicated fitness apps; several “peculiar characteristics and uses” that distinguish VR fitness apps from “both other VR apps and non-VR fitness offerings”; distinct customers (here, a younger male demographic); and distinct prices. Among other things, the court also pointed to the portability of VR headsets to distinguish VR fitness apps from large exercise machines like stationary bikes, and the “unique combination of production inputs” required for VR dedicated fitness apps. And the court cited evidence, including the companies’ own documents, that VR dedicated fitness apps have distinct customers and distinct pricing.
Actual Potential Competition and Perceived Potential Competition Theories. The FTC argued that the deal violated Section 7 of the Clayton Act because Meta is both an actual potential competitor and perceived potential competitor in the market for VR dedicated fitness apps, and the acquisition would “substantially lessen [this] potential competition.” The court recognized both theories as viable bases for violations of Section 7 of the Clayton Act.
According to the court, however, potential competition theories are viable only where the market is substantially concentrated: “Because both doctrines posit that potential competitors can or will soon impact the market, there would be no need for concern if the market is already genuinely competitive.” On this point, the court determined that the FTC carried its burden in establishing a prima facie case that the market was sufficiently concentrated by presenting evidence that the market shares of each firm in the market resulted in a measure of market concentration that is “well above” the threshold for a highly concentrated market according to the FTC and Department of Justice Horizontal Merger Guidelines. The court rejected defendants’ argument “that the FTC was required to plead oligopolistic, interdependent, or parallel behavior” among firms in the market and also found that the defendants failed to show that the market was “in fact genuinely competitive” notwithstanding what the concentration figures showed.
With respect to the actual potential competition theory, the defendants argued that the theory was not viable “because it has never been fully endorsed by the Supreme Court.” The court declined “to reject the theory outright,” noting that the doctrine has had a “consistent, albeit distant, history of judicial recognition.” In considering its application, the court found that the FTC failed to establish that “Meta had ‘available feasible means’ for entering the relevant market de novo.” In doing so, the court used a “reasonable probability” standard, which asks whether “an event has a better than fifty percent chance of occurring with a ‘reasonable’ probability representing an even greater likelihood of the event’s occurrence.” The court framed the question as: “Is it reasonably probable that Meta would have entered the VR dedicated fitness app market de novo if it was not able to acquire Within?”
Looking first at objective evidence, the court found that Meta has the financial and VR personnel resources to enter the market, but that “it lacks the capability to create fitness and workout content, a necessity for any fitness product or market” and also “lacked the necessary studio production capabilities to create and film VR workouts.” The court found that “the record [was] inconclusive as to Meta’s incentives to enter the relevant market,” noting that there “are certainly some incentives for Meta to enter the market de novo, such as a deeper integration between the VR fitness hardware and software,” but that “it is not clear that Meta’s readily apparent excitement about fitness as a core VR use case would necessarily translate to an intent to build its own dedicated fitness app market if it could enter by acquisition.” The court also found that “the subjective evidence indicates that Meta was subjectively interested in entering the VR dedicated fitness app market itself, either for hardware development or defensive market purposes.” But it ultimately concluded “that Meta did not have the ‘available feasible means’ to enter the relevant market other than by acquisition.” In considering the subjective evidence, the court gave little weight to the testimony of executives and relied more on contemporaneous statements in their documents.
With respect to the perceived potential competition theory, the court wrote that in addition to a highly concentrated market, the FTC must establish “(1) Meta possessed the ‘characteristics, capabilities, and economic incentive to render it a perceived potential de novo entrant’; and (2) Meta’s ‘premerger presence on the fringe of the target market in fact tempered oligopolistic behavior on the part of existing participants in that market.’” On the first point, the court found that “the objective evidence in the record is insufficient to support a finding that it was ‘reasonably probable’ Meta would enter the relevant market for purposes of the perceived potential competition doctrine.” The court also found that “the subjective evidence of the in-market firms’ perceptions” did not “move the needle” in favor of the FTC’s argument. On the second point, the court wrote that “the FTC must produce some evidence—direct or circumstantial—that Meta’s presence had a direct effect on the firms in the relevant market,” but that the evidence presented was insufficient.
Significance. The court’s decision is significant because it accepted that the actual potential competition and perceived potential competition theories are viable. However, courts may reject arguments that are highly speculative about what the potential entrant may do—or what other market participants perceive a potential entrant may do—in the future. In particular, where the perceived potential competition theory applies, there must be some evidence that the perception of potential entry had a direct effect on firms already in the market. This suggests that companies exploring a possible acquisition of a target where the perceived potential competition theory may apply should carefully evaluate the extent to which the target perceives the acquiror as a potential competitor, including what the target’s internal documents say and whether its commercial behavior has in fact been influenced by the perception of potential competition.
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