Wednesday, December 21, 2022

'Consumer' lawsuit over Activision Blizzard acquisition more likely to complicate things for FTC than for Microsoft

It is, admittedly, counterintuitive that a lawsuit against a merger may ultimately be better news for the deal than for a party--here, the Federal Trade Commission (FTC)--that is already litigating against the same transaction. But only because something is counterintuitive does not mean it's necessarily wrong. The only thing that is definitely wrong is to believe that the existence of a lawsuit that only has the potential to benefit lawyers tells us anything about genuine consumer concerns, though some journalists either don't understand the legal services business well enough or aren't sufficiently confident of their analysis to tell their readers the plain truth. But I will do just that. It's party of my differentiation strategy from mainstream media.

So, on Tuesday, two San Francisco-based class action law firms--the Alioto Law Firm and the Joseph Saveri Law Firm--brought a complaint on behalf of ten private citizens against Microsoft over its $69B purchase of Activision Blizzard (NASDAQ:ATVI). For the avoidance of doubt, that case is not--at least not yet--a class action, but whether or not certification will be sought later (and whether it would ever be granted in that case), it's a class action by any other name:

Even if you brought together not just 10 gamers but even the 1,000 or 10,000 most avid gamers in the United States, and if you then--for the sake of the argument--took at face value the most absurd projections of how much more they'd end up spending on games as a result of the challenged transaction, their collective spend on video game hardware and software wouldn't make it even remotely cost-efficient to pursue an expensive federal antitrust lawsuit under the Clayton Act in an attempt to block that transaction.

However, if you're in the class-action business--again, let's not look at it in formal but in economic terms, and in that regard it is the equivalent of a class action--and you aren't already busy with stronger (and likely more lucrative) cases and/or you're interested in publicity, then the gamble may be worth it even if you realize your chances of success are slim. You just spend your time, and you can hope that even if your case is going nowhere, a megacorp defendant may at some point be willing to pay you off to go away, even if only because of the "nuisance value" (the cost of a proper defense) of your lawsuit.

Simply put, whether a class action law firm brings a complaint is a mix of risk-reward considerations such as

  • the size and financial strength of the defendant,

  • the hypothetical magnitude of the matter,

  • the amount of time it takes the class action lawyers to pursue the thing (piggybacking on a government lawsuit saves a lot of time),

  • the lawyers' opportunity costs,

  • the "business development" value of the case, and

  • the likelihood of success, which is often a very low-priority question. Some class actions have a lot of merit, while others are total crapshoots.

In June, Elon Musk tweeted something that I've quoted before:

That tweet isn't entirely wrong, but I would like to distance myself from it in at least three ways:

  1. Not all class-action plaintiffs are "puppets." Generally speaking, however, "consumers" and small companies that lack the wherewithal for high-stakes litigation, can't realistically expect a bottom-line positive outcome from a case, and typically aren't in a position to form their own opinion on the chances of a case, are going to adopt pretty much any advice they get from the class-action lawyers. And the class-action lawyers are then the ones who really invest in it, and who stand to gain something: they're the economic center of gravity as opposed to a service provider.

  2. Mr. Musk's tweet could be understood--and I'm not saying he was insinuating anything, but the brevity of a tweet easily gives rise to misunderstandings--as a conspiracy theory. The problem is, however, what I wrote further above: some journalists just don't figure it out, and some others actually do have an idea but they lack the courage to just spell it out. It is, of course, disappointing that even highly reputable news agencies with reasonably specialized reporters fail to give their readers the necessary context, so I can easily see Mr. Musk's frustration that led to that kind of media bashing. The press could indeed do a far better job in its coverage of class actions.

  3. Sometimes class actions do have very positive effects even from a public-interest perspective, such as Pepper v. Apple, an App Store antitrust case that made it all the way up to the Supreme Court.

In the wake of the FTC's complaint (which is now before its in-house Administrative Law Judge) against the transaction (see my previous commentary: 1, 2, 3), the class-action law firms I mentioned further above brought their complaint--and a motion for a preliminary injunction--in the Northern District of California. Here are the two documents (followed by further commentary):

Dante deMartini et al. v. Microsoft Corporation Complaint to Prohibit the Acquisition of Activision Blizzard by Microsoft corporation in Violation of Section 7 of the Clayton Antitrust Act, 15 U.S.C. § 18 (Northern District of California, case no. 3:22-cv-08991)

DeMartini et al. v. Microsoft (N.D. Cal., case no. 3:22-cv-08991): Motion for Preliminary Injunction

At first sight I don't see that complaint having any more substance than the FTC complaint, and to the extent the class-action lawyers deem Microsoft's 10-year Call of Duty offer insufficient, there's no reason to believe they actually know all of the terms of that offer.

What's more interesting than the substance of the case--or, actually, lack thereof--is the procedural impact.

Let's start with the forum choice. The most obvious venue to sue Microsoft would be the Western District of Washington. Activision Blizzard is mostly in the Central--not Northern--District of California. It's just that those class-action lawyers are based in San Fran, and the Northern District is generally popular among antitrust plaintiffs, though what happened in Epic Games v. Apple certainly didn't validate that thinking.

If the FTC had decided to sue in federal court, there's no way that it would have done so in the Northern District of California. But the FTC didn't want to go to federal court at all, and instead brought a case before its in-house court, where defendants prevail maybe once every 25 years, though such statistics don't mean much when a complaint is as weak as in this particular case. Also, the in-house decision isn't the last word: there can always be an appeal.

Now, the FTC's in-house case doesn't prevent the parties from simply closing the deal. If the FTC wants to block the deal, it needs a preliminary injunction from an Article III court. Sources (presumably from inside the FTC) apparently told some reporters that they were concerned about seeking a PI at a stage where the consummation of the transaction wasn't imminent due to critical approvals outstanding in other jurisdictions such as the EU and the UK. That fact may indeed be held against the class-action lawyers' PI motion now, though I would much prefer the district court to deny the PI for a likelihood of success on the merits in the first place. With prejudice in that case. But it's also a possibility that the FTC simply knows how weak its case is in legal terms--they're trying to protect a market leader against a scenario for which Microsoft proposed a structural solution in the form of a long-term license agreement--and is actually afraid of putting its case before an independent judge.

The FTC now faces the choice of how to respond to the fact that some class-action lawyers brought a PI motion. It may just elect to sit on the sidelines and watch what happens. It may also feel that it shouldn't let some federal court--even if a denial of a PI motion in the Northern District of California wouldn't be binding on other district courts--state an opinion on the merits (or, more appropriately, lack thereof) before the FTC even gets started. Also, the FTC knows that whatever happens in federal court, on a very different schedule, has the potential to impact is in-house adjudicative proceeding.

The FTC knew from the beginning that some class-action lawyers would bring a case in federal court (and that those class-action lawyers, unlike the FTC, can't put the case before their in-house judge). The FTC also knew that some class-action lawyers could file a PI motion. Therefore, the FTC is unlikely to do more now than, at most, file an amicus curiae brief in California at some point.

Even though private class-action lawsuits (and I repeat myself again by pointing out that this is not formally--but practically and economically speaking--a class action) are virtually always filed by some lawyers trying to jump on a government plaintiff's bandwagon, I don't think it's a good thing from the FTC's perspective that it has happened here. In other words, it was expected, but it's still bad news for the FTC, especially because of the PI motion that means some things may happen pretty quickly in California.

What the FTC and those class-action lawyers have in common is that they're gamblers betting on a case that has less merit than your average long shot. The commissioners and the FTC staff are way too smart to believe that they have a case. They're suing for the sake of suing. as I've said in a couple of previous posts, and their calculus may be that a defeat would be useful. It would be seen as embarrassing, but nothing is really embarrassing if you just don't care. The "useful" element here would be that the FTC may just want to use a courtroom defeat as an argument for some legislative measure giving it more power. And the class-action lawyers may believe that there's still a pretty good chance of making some money on this even if their case goes nowhere.

For Microsoft, this is an opportunity to get the class-action lawyers' PI motion denied in a way that will expose the weaknesses of the FTC's complaint. The case will be assigned to a district judge shortly, and some judges in that district are really, really good. While most district judges keep their denials of PI motions short, this is a high-profile case, so there is a possibility of an order denying the motion for a preliminary injunction making the strongest case against the case against Microsoft-ActivisionBlizzard.

We may now also see some other class-action lawyers scrambling to bring their own Microsoft-ActivisionBlizzard cases as soon as possible in order to potentially earn some fees as well. Should there be cases in two or more federal districts, there might be venue transfer motions and they could all get consolidated in one place.

But before anything important--other than the assignment of the case to a district judge--happens in the Northern District of California or any other federal district court, we'll see Microsoft's response to the FTC's complaint. The deadline is two weeks from service of process. What I don't know is whether Microsoft was formally served on the day the lawsuit was announced. In that case, the deadline would be tomorrow; otherwise, it won't take long. At the latest, it would have to be next week as Microsoft's counsel--whose most famous courtroom victory got the "Oklahoma Bomber" sentenced to death--entered her appearance on last week's Wednesday.