Tuesday, January 31, 2023

Microsoft offers commitment to U.S. court not to close Activision Blizzard merger before May, but seeks outright dismissal of so-called gamers' lawsuit anyway

On January 19, Microsoft stipulated during a U.S. court hearing (on its motion to stay the so-called gamers' lawsuit in the Northern District of California) that it would not consummate the acquisition of Activision Blizzard King (NASDAQ:ATVI) before March 31, 2023 at the earliest. Microsoft

  • is now prepared to push back that earliest possible closing date to May 1, which would make it possible to hold the preliminary injunction hearing later and have more time for briefing the motion (currently the hearing is scheduled for March 23), but

  • is primarily asking Judge Jacqueline Scott Corley to dismiss the private lawsuit in its entirety. The motion-to-dismiss hearing is requested for March 9, which means that the March 23 case management conference as well as the PI hearing may never have to be held in the first place.

    No particular reason is given. The court did not formally stay the case, but relied on Microsoft's stipulation when setting its initial schedule. Microsoft asks the court to adjudge its motion to dismiss regardless of any commitments not to close the deal before a given date.

Here's Microsoft's motion, filed late Tuesday afternoon Pacific Time:

De Martini et al. v. Microsoft (case no. 3:22-cv-8991-JSC, N.D. Cal.): Defendant Microsoft Corporation's Notice of Motion and Motion to Dismiss; Memorandum of Points and Authorities in Support Thereof

The May 1 date is found in a footnote toward the bottom of page 13 (page 19 of the PDF document).

Microsoft's motion presents three independent grounds for dismissal, the first one of which (failure to plausibly allege anticompetitive effects) has three parts. It would take just one of the other two grounds (unripe claims, lack of standing) for the court to hold that it lacks subject matter jurisdiction (lack of standing could not be cured, but if the claims were just deemed unripe at this point, the plaintiffs could refile at a later stage). Furthermore, Microsoft seeks dismissal of plaintiffs' prayer for injunctive relief--the only remedy the complaint is requesting at this stage.

Depending on what the court agrees or disagrees with, the outcome of this motion could range anywhere from a denial of the motion to a dismissal of the entire complaint with prejudice (meaning that it could not be refiled), with a variety of possibilities in between those binary results. For example, the court could also dismiss some theories of harm without prejudice (allowing plaintiffs to bring an amended complaint).

The Twombly standard applied by U.S. courts is that an antitrust complaint must not merely allege facts that, if taken as true, would support an actionable claim, but that such facts must also be plausible. I see Twombly motions in antitrust cases all the time, and at first sight Microsoft's Twombly arguments suggest to me that the class-action lawyers who brought that complaint prepared it rather hastily. They saw the FTC's in-house lawsuit and obtained some filings from other jurisdictions and tried to piggyback on the regulatory processes with their federal lawsuit. Microsoft's motion attacks (as it must) each of the different theories of harm separately:

  • With respect to horizontal concentration (i.e., both Microsoft and Activision Blizzard make games), Microsoft rejects as "unsupported (and vastly incorrect)" the allegation of having a 23.9% market share "of some undefined market for game publishing" and Activision having a 10% market share.

  • As for vertical foreclosure (Microsoft not making Activision Blizzard's games available to other console makers, subscription services etc.), Microsoft says the complaint has nothing to offer but a "highly speculative theory" and notes that if "[a]n allegation that a company might foreclose competitors' access to a product" sufficed, "almost any pleading would survive the pleading stage and proceed to expensive discovery."

  • The motion says "only a few brief, conclusory statements" in the complaint relate to a theory of a lessening of competition in a video game labor market.

If the court finds the complaint lacking and wanting in one or more of those regards, it may allow plaintiffs to amend their complaint (dismissal without prejudice).

The motion notes that U.S. courts have previously dismissed private antisuit lawsuits against prospective mergers because they were unripe. In particular, Microsoft points to a Seventh Circuit decision in South Austin Coalition Community Council v. SBC Communications, Inc. and the adoption of that reasoning in this district (Northern District of California) in the 2011 AT&T Mobility LLC v. Bernardi decision. The interesting part there is that private litigation is premature when things are in flux. The regulatory reviews can lead to commitments (such as Microsoft's ten-year deal with Nintendo), and regulators can impose remedies. As a result, a case may go away in whole or in part. That fact has been key even in cases where only one regulatory approval was outstanding, and here there are merger reviews in multiple key jurisdictions (plus the FTC's in-house lawsuit).

The regulatory reviews come up again in connection with the first part of Microsoft's argument that those private plaintiffs lack standing. With respect to the alleged effects on a vieo game labor market, Microsoft notes that "[n]one of the Plaintiffs allege that they work in the video game industry or even plan to seek employment in the video game industry" and, therefore, they cannot claim that there would be "a concrete, particularized, and imminent harm to themselves."

The final part of the motion discusses why those plaintiffs are not entitled to an injunction. That one is not surprising at all. We will see it again when Microsoft files its opposition to the motion for a preliminary injunction, unless the court dismisses the complaint before that brief ever gets filed. In its motion to stay, Microsoft argued that the PI request was premature; in its motion to dismiss, it's about the key requirement that an injunction is available only when monetary relief (damages) would be inaquedate. The motion does not put it like that, but in the end it comes down to this: the worst-case scenario for those gamers is that they have to buy an Xbox in addition to a PlayStation, plus they would pay a little more for each game they buy (none of which makes sense, but that's the worst-case scenario even if one agreed with the theories found in the complaint).

In a hypothetical scenario in which the complaint survives the motion to dismiss in part, but at least the claim for injunctive relief is thrown out at this stage, the plaintiffs would have to bring a new complaint seeking damages.

In a couple of weeks we'll see the plaintiffs' opposition to this motion.