Friday, April 7, 2023

Discovery closes today in two antitrust matters involving Activision Blizzard (FTC merger case and In Re Google Play Antitrust Litigation) while UK CMA is preparing remedies working paper

Coincidentally, today is the cutoff date for fact discovery in two disparate antitrust actions involving Activision Blizzard King (ABK):

  • the FTC's adjudicative proceeding (in-house lawsuit) over ABK's acquisition by Microsoft, and

  • the In Re Google Play Store Antitrust Litigation in the Northern District of California, where Epic Games and Match Group are pursuing a per se violation claim against Google based on its "Project Hug" agreements with game makers. ABK received $360 million, which ensured its loyalty to the Google Play Store for several years. In this particular case, ABK is a third party, but an important one. Because of this new theory, fact discovery in that litigation was reopened.

The purpose of this post is to discuss the next steps in those cases, also in United States et al. v. Google--a case pending in a court on the other coast (D.C.) but with factual overlaps--and the Microsoft-ActivisionBlizzard merger review in the UK, where some filings were released yesterday and an important new document is expected to be sent to Microsoft and ABK next week. Let's start with the merger-related parts.

  1. FTC adjudicative proceeding enters expert phase

  2. CMA remedies working paper expected while Sony is panicking

  3. Curative sanctions--and trial date and format--to be determined in Google Play case in N.D. Cal.

  4. Implications for sanctions motion in United States et al. v. Google (D.C.)

FTC adjudicative proceeding enters expert phase

After today's fact discovery cutoff, the focus in the FTC's Microsoft-ActivisionBlizzard process shifts to the experts:

  • The FTC is to provide its expert witness reports within four weeks (May 5).

  • A week later (May 12), the FTC has to provide to Microsoft's and ABK's lawyers its final proposed witness and exhibit lists with a view to the August trial.

  • Another two weekslater (May 26), Microsoft and ABK have to provide their expert witness reports.

  • By May 30, the deal parties have to provide their final proposed witness and exhibit lists.

  • June 9 is the deadline for the FTC's rebuttal expert reports that respond to Microsoft's and ABK's expert witness reports.

  • The deadline for expert depositions is two weeks later (June 23).

The most important question, however, is how much taxpayers' money the FTC really intends to waste on this. It's not even going to achieve its objective of moving the legal goal posts.

I've previously argued (mostly on Twitter) that the close of fact discovery is a point at which the FTC could--and in my personal opinion should--think hard about at least that PlayStation theory of harm. It would not be a sign of weakness, but of rationality, to recognize that Sony's theory is unsupported by any facts. There is no shred of evidence, and the numbers just don't work out.

The theory has been rejected or abandoned by a U.S. court and at least seven other regulators so far (Japan's JFTC having been the latest) as I discussed in a recent post. That's 8-0 against the theory. A recent report on the Phase III investigation in China suggests that it's also just about cloud gaming, in which case the score would already be 9-0. It's furthermore highly likely that Australia's ACCC and New Zealand's ComCom will agree with the UK CMA rather than the U.S. FTC. And decisions in some other jurisdictions could also come down anytime.

There could soon be a point at which a dozen or more regulators will have rejected the theory, and the FTC would come across as the "Flat Earth Society" in this regard. That would be bad, especially because America's consumers need a strong FTC to tackle the real issues facing them.

Why produce expert reports when a theory of harm is so clearly untenable? It doesn't even give the FTC any meaningful leverage in remedies discussions because it's just so very weak. Of course, it would be even better if the FTC could settle the entire case. In that case, the expert reports would not just be more focused but they wouldn't be needed anymore at all. If that is not possible in the very short term, I think a voluntary dismissal of Sony's theory--assuming that after today's fact discovery cutoff there simply won't be any evidence to build a foreclosure case--would be a logical thing to do.

Structurally, those FTC adjudicative proceedings are not entirely dissimilar to ITC Section 337 investigations, which I follow all the time. It is common and expected that parties narrow their ITC cases through voluntary dismissals. It's simply necessary to keep those ambitious schedules, and the ITC's ALJs even want to see periodical reports on efforts to streamline a given case. Could there be a clearer case for streamlining an FTC in-house lawsuit than this present situation?

CMA remedies working paper expected while Sony is panicking

The UK Competition & Markets Authority (CMA) amended its provisional findings on March 24 based on a consideration of all of the evidence and arguments before it, and consigned the PlayStation theory of harm to the dustbin of merger review history.

There was a deadline on March 31 for responses to that update, and it appears that Microsoft obtained an extension by a few days. Yesterday the CMA published the public redacted versions of the feedback it received from Microsoft (PDF), Sony (PDF), and UCL researcher Joost Rietveld (PDF).

I commented quickly in the form of a four-part Twitter thread and provided further observations in subsequent tweets.

Microsoft argues that even the updated provisional findings still overstate the incentive for foreclosure (though the result is now that foreclosure is unprofitable), and that the "residual" concerns over cloud gaming are based on a foreclosure theory that isn't any "stronger" only because it has not undergone a similar revision. In any event, Microsoft points to its access deals with Nvidia, Boosteroid, and Ubitus. So even though Microsoft continues to argue for unconditional clearance, remedies are on the table.

Professor Rietveld lays out a "typology" of cloud gaming services, and disputes that such services even constitute an antitrust market. In the following tweet he explained his decision to chime in (and thankfully shared the first tweet of my thread on those submissions):

Sony's submission is the clearest sign yet of the PlayStation maker staring into the jaws of defeat without any realistic chances of snatching victory from them. By calling the evolution of the CMA's take on the console market theory of harm (which was a rational decision in recognition of hard facts) "irrational", Sony invokes the standard for appellate review (by the UK Competition Appeal Tribunal).

While some Microsoft submissions throughout the process have also reminded the CMA of the applicable appellate case law, there's a difference between saying at an early stage that a certain potential theory of harm would not be appeal-proof and doing what Sony did on March 31, which is to call an actual procedural step--the fact that the CMA amended its provisional findings-"irrational".

Sony can't prevent the merger from closing through an appeal. It won't achieve a subsequent divestiture either.

I couldn't resist but to do a "how it started / how it's going" tweet (a popular format on social media) to juxtapose Sony's earlier take on the CMA's work and its new aggressive stance. Let me show you the two annotated screenshots here (click on an image to enlarge):

There are five months and three days between those documents. But even at the beginning of March, Sony's position was still that it "welcome[d] the CMAs comprehensive review of the evidence in reaching this conclusion" and "agree[d] with the CMA's findings."

Now Sony slams the methodology and the conclusions, though the CMA had already previously--and rightly--rejected some of Sony's "evidence" for obvious deficiencies.

Sony's "Hail Mary" involves hyperbole so outlandish that parts of the internet are already ridiculing it:

"Any degradation in the price, performance, or quality of play on PlayStation or any delays on release would quickly harm SIE’s reputation and cause a loss of engagement and of players. As SIE’s CEO, Jim Ryan, explained to the CMA at the Remedies Hearing, if PlayStation received a degraded version of Call of Duty, it would 'seriously damage our reputation. Our gamers would desert our platform in droves and network effects would exacerbate the problem. Our business would never recover.'"

How can Mr. Ryan say that with a straight face? He should recognize his error and preserve his reputation. Right now he appears to be doing neither.

It's obviously clear that there would be no irreparable harm. Microsoft's Xbox has a much smaller market share than the PlayStation, and CoD has given Sony's customers some exclusive benefits for a while, yet there are no signs of irreparable harm to the Xbox, as the CMA also indicated in its findings.

Seeking Alpha has picked up a Deal Reporter story according to which the CMA is expected to issue its remedies working paper (the article mistakenly uses the singular form, "remedy") next week. This is what the CMA's guidelines (PDF) say about that document:

4.64 A remedies working paper, containing a detailed assessment of the different remedies options and setting out the CMA’s provisional decision on remedies, will be sent to the merger parties for comment following the response hearings. This paper will also set out the CMA’s views on whether the merger gives rise to RCBs, and if so, whether the proposed remedy should be modified in order to preserve those benefits. The merger parties will typically have at least five working days to respond to the remedies working paper. Third parties may also be consulted about the proposed scope of remedies and their views on any RCBs, and the remedies working paper may in some cases be published on the CMA website, but only if the CMA deems wider consultation to be necessary. In most cases, the remedies working paper is not published.

4.65 Following consultation on the remedies working paper and any further discussions and meetings with parties that the CMA considers necessary, the CMA will take its final decision on both the competition issues and any remedies.

Will this be one of the minority of cases in which the CMA does publish the remedies working paper and allows non-parties to comment?

There would obviously be a lot of curiosity due to the high profile of the case. But there has been so much discussion about remedies already, and why should the CMA invite Sony--especially after its unreasonable and unrealistic March 31 response to the updated provisional findings--to waste more time and insult human intelligence? Given that its console market theory of harm is dead, Sony is no longer important to the remedies process.

So while I would love to see that remedies working paper, I couldn't blame the CMA for concluding that it's now just for the CMA to hammer out the details with the deal parties. Sony may try to appeal clearance decisions in whatever jurisdictions if it wants to waste time, money, and energy, and be ridiculed. I think Sony won't want to do any of that.

Curative sanctions--and trial date and format--to be determined in Google Play case in N.D. Cal.

What makes the fact discovery cutoff in the Google Play Store (Epic Games et al. v. Google) case particularly important is the fact that Judge James Donato of the United States District Court for the Northern District of California has already determined that there will be non-monetary sanctions on Google for its automatic deletion of sensitive chats (on top of some reimbursement of fees, which won't move the needle). So Google's wrongdoing will have consequences for the adjudication of the case. There will have to be some jury instructions that up the ante for Google. But Judge Donato wanted discovery to be completed first so that there would be the most solid factual basis for determining the extent of the prejudice that the plaintiffs have suffered.

We can expect a huge fight over the non-monetary sanctions, and it will be one of the most difficult decisions a federal judge could have to make in commercial litigation. The wrongdoing is massive, but the case should still be decided correctly.

A case management decision will also have to be made in that litigation, and while it's just about the trial format, it involves a complex set of overlaps and interdependencies.

The procedural background is that the Ninth Circuit granted Google's petition for an interlocutory appeal of the certification of a consumer class seeking $4.7 billion in damages over the Google Play app tax, and on that basis, Google argues that the trial (scheduled to begin in early November) should be postponed because the consumer damages theory might not survive, at least not in its current form. As I mentioned in a tweet, which I also incorporated into a blog post, Google's position is not unreasonable.

Meanwhile, there has been further briefing. Epic Games and Match Group (Tinder) oppose Google's motion because the trial has already been pushed back four times (not once because of those plaintiffs) and they argue that in Epic Games v. Apple the consumer claims were also put on a different schedule and will be tried separately:

In Re Google Play Store Antitrust Litigation (case no. 3:21-md-2981-JD, N.D. Cal.): Epic and Match's Joint Opposition to Google's Motion for a Stay

Epic and Match's desire to go to trial as soon as possible is understandable. While Epic's case was never consolidated into the Pepper consumer class action the way those Google Play Store cases were combined (because it was only about injunctive relief; by contrast, those Google cases are all going to a jury trial), it is true that Apple will now have to deal with some overlaps between those cases.

But there are potential issues because of the relationship between the different claims in the Google cases:

  • The plaintiff states' theory is also about consumer harm. According to Google, the theory is structurally similar to what the Ninth Circuit may overturn now.

  • While Epic's focus is (like in the Apple case) on injunctive relief, Match additionally seeks a damages award. Google is right that Match and consumers (by extension, also the plaintiff states) represent two sides of a two-sided market, and that's why it makes sense to address those claims together so as to avoid inconsistencies. For every cent that was paid, the question is whether it belongs to Google, developers, or consumers.

So there are four types of claim sets: Epic (developer harm, but no damages for now), Match (developer damages), consumer class actions (consumer damages), and plaintiff states (consumer harm). The potential legal ramifications involve that in one or more of the proposed formats, the consumer class may get its day in court without all of them actually having suffered injury (an Article III standing issue), and that there could be Seventh Amendment (right to jury trial in civil litigation) issues because of factually related issues being addressed by different juries in different trials.

For Match this is all about money, while Epic has a more strategic and principled perspective. Let's put it this way: Match is not the perfect match for Epic. But it's the only other major developer at this stage to be prepared to join Epic in suing a gatekeeper.

Google raises potential issues about the proposed formats that can't just be ignored. In my opinion, the only alternative to a complete postponement would be to try Epic's case separately from all others (plaintiff states, Match, consumer class)--and that could actually be done in a bench trial ("injunction prohibiting Google’s anti-competitive and unfair conduct and mandating that Google take all necessary steps to cease such conduct and to restore competition"; "declaration that the contractual restraints complained of herein are unlawful and unenforceable").

I wonder whether Google will also seek appellate review of a sanctions order, and what would happen if such a petition succeeded to the extent that the appeals court would wnt to take a look, but it's too early to tell.

Here's Google's reply in support of its motion to postpone the trial, which will be heard on April 20:

In Re Google Play Store Antitrust Litigation (case no. 3:21-md-2981-JD, N.D. Cal.): Defendants' Reply in Supprot of Motion to Defer or Stay Trial

Implications for sanctions motion in United States et al. v. Google (D.C.)

This here is just a minor update. The motion for sanctions over Google's spoliation of evidence in the search engine case in the District of Columbia was inspired by the sanctions motion in California, and the United States' reply brief very heavily relies on evidence from the California case.

Judge Amit P. Mehta in D.C. will have to make some procedural decisions now, such as whether (or, more likely, when) to conduct an evidentiary hearing.

Any upcoming filings in California concerning the extent of the prejudice could also be used in the D.C. case. Prejudice is issue-specific, but the search engine case also has an Android component, which is why "Project Hug" was discovered there first (while the California case is ahead with respect to spoliation sanctions).

The final document to show in this post is the plaintiff states' reply in support of their motion for sanctions, which is structurally similar to the DOJ's argument but tackles the issue from partly different angles:

State of Colorado, et al., v. Google LLC (case no. 1:20-cv-3715-APM, D.D.C.): Plaintiff States' reply in Support of Their Motion for Sanctions Against Google, LLC and an Evidentiary Hearing to Determine Appropriate Relief