Friday, January 6, 2023

Microsoft, Activision Blizzard drop 6 of their 23 defenses, no longer challenge constitutionality of FTC's in-house lawsuit; UK CMA extended deadline by almost two months

On Wednesday, the FTC's Chief (and currently only) Administrative Law Judge (ALJ) D. Michael Chappell handed down an order (PDF) granting parallel motions by which Microsoft and Activision Blizzard--with the FTC's consent--sought to withdraw six of their 23 defenses to the agency's merger complaint. The dropped defenses (16-22) challenged the constitutionality of this proceeding and even of the FTC as an institution. The previous defense #23, which says the FTC oversteps its Section 5 competences, is the new defense #17.

Microsoft's amended answer (PDF) is already available on the FTC's website; Activision Blizzard King's presumably won't take long to show up as well.

When I commented on the original answers, I likened Microsoft's answer to Candy Crush--explosive in a sweet and smooth way--and ABK's to Call of Duty (frontal assault, but with high precision). The defenses, however, were the same, and will again be identical.

I took note of the constitutional challenges and may have been the only commentator so far to put them into the context of the Axon Enterprise, Inc. v. Federal Trade Commission case that is currently being adjudicated by the Supreme Court. As I have commented very favorably on the FTC's work in many instances, even including an entire month-long trial in San Jose four years ago, I'd just like to see the FTC make the right decisions in each case and set the right priorities, while some (especially a few Republican politicians) would like to abolish it.

Lawyers--outside and in-house counsel alike--have a duty to identify and develop all potential defenses, and when there is the possibility (based on how the Axon hearing went) of the conservative SCOTUS majority calling the FTC's in-house adjudicative proceeding into question, it's a natural thing for defendants to do to preserve their rights. But the basis on which the case should be decided is simply its own merits.

What is not known is whether Microsoft and Activision Blizzard (after internally agreeing to drop those defenses) then just asked the FTC whether it would oppose such a motion, or whether this is a harbinger of a thawing period between the agency and the private parties. Whatever the climate may be, the fact that such defenses were raised at all shows that the FTC must act prudently. A forceful but reasonable FTC will continue to have the support of centrist politicians and (enough) Supreme Court judges, but an exceedingly aggressive one that tilts at windmills may end up shooting itself in the foot, or worse.

As an app developer, my number one wish is for the FTC to realize the potential of Microsoft-ActivisionBlizzard to put a serious competitive constraint on the incumbent mobile app stores (initially in jurisdictions like the EU with its Digital Markets Act, and at some point also the U.S.). Regardless of whether one shares the FTC's concerns over the impact of the transaction in question on some other markets, I think the merits of the procompetitive argument concerning mobile app stores are beyond reasonable doubt and perfectly reconcilable with the FTC's mandate, so I can't see why the FTC couldn't recognize that fact as well and figure out a solution. The only beneficiaries of a decision to block that transaction are console market leader Sony and the mobile app store monopolists.

While I'm an independent app maker, I can very much relate to the interests of software companies' employees, too. Bloomberg Law published an interesting article (also yesterday) about the Communications Workers of America (CWA) labor union continuing to support the deal. The article also mentions that approximately 300 workers at ZeniMax studios (mostly game testers, I believe) just unionized.

Over in the United Kingdom, the Competition & Markets Authority (CMA) yesterday gave notice (PDF) of an extension of the deadline of its Microsoft-ActivisionBlizzard inquiry from March 1 to April 26. That's almost two months, but the agency "aims to complete the inquiry as soon as possible and in advance of this date."

The reasons given for this delay include--among others--"a large volume of evidence as well as main party and third party submissions." It was interesting to see that, despite Sony making so much noise about why the deal is allegedly bad for PlayStation gamers and the PlayStation having a far larger installed base than the Xbox, 75% of the answers actually support the transaction (in that post I explain why the result should neither be over- nor underrated). That also applies to the only published submission by a large third party, apparently another game maker.

Earlier this week, Microsoft's lead counsel in the FTC case said that her client was hopeful to work out solutions in the EU and/or UK in the near term, and would then propose the same set of remedies to the FTC as well. The CMA's notice of extension doesn't say that remedies have been proposed, but it is simply a fact that merger reviews take longer when that is the case, so this may have contributed to the extension. At least it's a plausible assumption when connecting the dots between the FTC hearing and the CMA notice.

The stock market didn't react negatively to the UK announcement (the NASDAQ:ATVI stock moved sideways), which shows that professional risk arbitrageurs don't feel it portends a prohibition decision.

All of yesterday's news taken together suggests to me, too, that the plausible explanations for what happened are pretty much in the range from "normal course of business" to "detente on more than one front".