Thursday, April 20, 2023

Microsoft wants private U.S. lawsuit over Activision Blizzard purchase thrown out for good as transaction benefits gamers; politicians take FTC to task; and all eyes on London after another clearance

This post covers several developments related to Microsoft's purchase of Activision Blizzard King ("ABK", NASDAQ:ATVI), all but the first of which I've previously commented on via Twitter:

  1. Microsoft's renewed motion to dismiss private lawsuit in California focuses on lack of standing and irreparable harm, and agreements that actually expand access to Call of Duty; lawyers--not "gamers"--are the actual plaintiffs

  2. Congressional Republicans, think tanks, advocacy groups question FTC's overall direction and particular stance on Microsoft-ABK

  3. Competition Commission of South Africa finds unconditional clearance is warranted

  4. UK Competition & Markets Authority's decision deadline nears--and coincides with Microsoft's participation in Downing Street No 10 games industry event

  5. Google's procedural agreement with Epic Games and Match Group reflects ABK's stronghold in mobile gaming

Microsoft's renewed motion to dismiss private lawsuit in California focuses on lack of standing and irreparable harm, and agreements that actually expand access to Call of Duty; calls lawyers--not "gamers"--the actual plaintiffs

My previous post on Microsoft-ActivisionBlizzard discussed Microsoft's latest cloud gaming deal (with British Telecom subsidiary EE) as well as an amended complaint by class-action lawyers in a private lawsuit that can be described as a "gamers' lawsuit" only if the term is put in quotes.

Sony appears increasingly desperate. Regulator after regulator after regulator has dismissed its console market theory of harm, and no regulator that respects itself will cling to it until the bitter end. As Sony's regulatory capture strategy keeps failing, it steps up its involvement with the private lawsuit. The first sign was that it volunteered material to the class-action lawyers (without simultaneously informing Microsoft) beyond the proverbial call of duty. In fact, some of those documents are--as my previous post on this topic showed--charts that the class-action lawyers used to spruce up their complaint.

While the original complaint was a cheap imitation of the FTC's complaint (and filed shortly after that one, but almost a year after the acquisition had been announced), the amended complaint is a mix of that FTC-based copycat work and Sony talking points. The new parts of the amended complaint were hardly written by the same author(s): different kind of legal reasoning, different writing style, different terminology (for instance, "acquisition" instead of "merger"), and even a different font size and a different numbering of the prayers for the relief (now numbers, previously letters). It will be hard to prove that Sony's outside counsel ghostwrote part of it, but that's just what may have happened.

On Friday, lawyers for Sony (from the Cleary Gottlieb firm as always) entered their formal appearances in the San Francisco litigation, and a few hours later, Microsoft's lead counsel from the FTC case, Beth Wilkinson, submitted her pro hac vice motion. It was hardly a coincidence that Microsoft responds to Sony's increased involvement by bringing out the big guns. It was also known from a recent status report that a discovery dispute between Microsoft and Sony might arise from Sony's suspiciously forthcoming document productions to the class-action lawyers, though discovery matters--unless they have major ramifications--are typically left to non-lead counsel. Another possibility was and remains that the process is nearing the point at which the FTC will also have to move for a preliminary injunction. While the FTC was first to bring a complaint (which the class-action lawyers then piggybacked on), the private litigation is ahead in terms of a request for a preliminary injunction.

The first public filing submitted by (not only, but also) Mrs. Wilkinson is Microsoft's renewed motion to dismiss:

DeMartini et al. v. Microsoft (case no. 3:22-cv8991-JSC, N.D. Cal.): Defendant Microsoft Corporation's Notice of Motion and Motion

As the complaint has been modified, so has Microsoft's strategy for seeking dismissal. But before I discuss the current attack vectors, it's important to understand the interdependencies between the motion to dismiss ("MTD") (by Microsoft) and motion for preliminary injunction ("PI") (by Sony's new friends, the class-action lawyers) briefing processes. Both motions will be briefed near-simultaneously and heard together:

motionsApr 19Apr 21
opposition briefsApr 28May 5
reply briefsMay 3May 8
hearingMay 12May 12

In between, there will also be another status conference (case management hearing) on April 27.

These are the overlaps between MTD and PI:

  • If the MTD succeeds, the PI is dead by definition (which is exactly what happened in the last round).

  • The absence of irreparable harm to the "gamers" who act on the class-action lawyers' (and by now potentially also Sony's) behalf appears to be the basis on which Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California will presumably deny the PI motion. But the plaintiffs' failure to establish an entitlement to a permanent (i.e., post-trial) injunction is also an independent basis for dismissal of the complaint.

    The standards differ in nuances. For instance, the PI motion must show an "immediate" danger, but then the analysis of other aspects will be less elaborate.

    The class-action lawyers--potentially with help from their Sony-counsel friends--now know Microsoft's "no irreparable harm" argument (which was foreseeable from the beginning: even if the gamers were right, they'd just have to buy an Xbox (half of them already own one) and pay a little more for games and subscription services, which is just monetary damage) from the MTD. They can try to address it in their PI. But whatever they say in the PI briefing process can be used by Micosoft in its May 3 reply brief in support of the motion to dismiss.

  • Judge Corley interestingly decided that Microsoft's opposition to the PI motion could focus exclusively on the absence of irreparable harm, and on the amount required for a bond. I'll say a few things about the bond further below. The merits don't seem to matter. It's possible that Judge Corley will--unless the motion is deemed ripe for outright dismissal, in which case the PI motion goes away at any rate--take the position that it's too early for the court to resolve all the factual questions, but even if those were (for the time being) considered a wash, the plaintiffs couldn't obtain a PI. Still, even if any of Microsoft's attacks on the theories of harm fell short of what is needed for outright dismissal, they could influence the judge's probability assessment, even if only informally.

Now let's talk about the MTD's attack vectors, and then finally the question of the bond.

The first complaint was so pathetic that Judge Corley was able to dismiss it simply because the plaintiffs' lawyers failed to plausibly allege that Microsoft would make Call of Duty exclusive to its platforms despite forgoing revenue opportunities on the PlayStation and other platforms. A foreclosure theory requires not only that foreclosure would have certain effects but also that there would be an incentive (and not, as here, strong disincentives) to engage in foreclosure.

The amended complaint still doesn't seem to make a plausible case for that, though I can't know for sure because it's heavily redacted (I base this assumption on a combination of the publicly accessible parts as well as what happened in some regulatory processes). But the MTD stage is not the one at which purely factual deficiencies (except in narrow contexts, such as with respect to jurisdictional issues) can be addressed by the court.

Microsoft now has three attack vectors:

  • The starting point of the analysis is whether the plaintiffs (the "gamers", though the lawyers are the real plaintiffs and now appear to be supported by Sony in whatever ways) have standing. Are they legitimately in a position to sue?

  • At the very end, if they were to have standing and to prove harm, there would be the question of whether they're entitled to an injunction. And that is closely related to the standing question. Whether they are actually harmed has bipolar relevance.

  • In between those two poles, there all the merits-related questions. Even though we're at the MTD stage where the hurdle is relatively speaking the lowest that the plaintiffs face, Microsoft argues the court can also throw out the amended complaint's horizontal and vertical theories.

In one respect, the amended complaint already conceded that they lacked standing: the class-action lawyers dropped the labor market theory, which was an attempt to differentiate their case from the FTC complaint. But now the magic term is "distant conjecture" as Microsoft's lawyers describe the fact that the plaintiffs cannot show any concrete (not abstract), imminent, and particularized (affecting them personally) harm. The amended complaint argues that somewhere further down the road--with development cycles for such games being in the 6-10 year range--the alleged anticompetitive effects might kick in. They say that they may buy future versions of Call of Duty or some future games. But courts have thrown out antitrust complaints that failed to provide reasonably specific dates on which the alleged harm would occur.

The standing part may succeed unless Judge Corley decides to take a permissive position at the MTD stage as merger cases are inherently prospective.

Absence of irreparable harm and therefore no entitlement to an injunction would be sufficient to dispose of the complaint, and if I had to bet money on one--and only one--of the MTD's attack vectors, I'd pick this one.

The merits-related argument for dismissal of the horizontal theory (consolidation among competitors) is about the plaintiffs' failure to define a relevant market for Triple-A Games. The numbers they provide are sales figures for publishers, and they don't clearly show what games are inside or outside a boundary. They don't how substitutability. The MTD's merits-based argument against the vertical foreclosure theories has three parts:

  • Microsoft argues the amended complaint fails to explain why its multiple access agreements (Nintendo, Nvidia, Boosteroid, Ubitus, EE) and the offer to Sony don't show that Microsoft neither has the ability nor an incentive to engage in foreclosure. Microsoft uses those agreements as another hurdle for the plaintiffs: they must make a plausibility showing that overcomes the significance of those contracts and the offer to Sony.

    Intellectually, that makes sense. Practically, it will depend on whether Judge Corley believes the plaintiffs just need to make an initial plausibility showing (an MLex report on the most recent status conference suggests she believes the plaintiffs have met the initial hurdle) and Microsoft's counterargument would then be resolved later--or whether she says Microsoft's access agreements are an important fact to be considered and addressed now (and not just later, such as on summary judgment).

  • The access agreements also complicate things for the plaintiffs' argument concerning the multi-game subscription and cloud gaming markets: right now, Call of Duty is not available on various platforms where it will become available thanks to the transaction, so the deal is actually good for gamers (such as the nominal plaintiffs).

  • The distant conjecture argument comes into play again in connection with antitrust harm. Microsoft says that instead of pleading facts that show antitrust harm, the amended complaint just makes conclusory statements.

Dismissal was very likely last time; it's still rather likely based on lack of standing and/or irreparable harm. The arguments about the middle part (horizontal and vertical foreclosure theories) may succeed in requiring the plaintiffs to amended their complaint once again, but the definitive dismissal that Microsoft is requesting now is more likely to happen based on lack of standing and/or irreparable harm.

In the PI part of the May 12 hearing, the bond that plaintiffs would have to post in the (totally hypothetical, in my view extremely unrealistic) event that they were to obtain a PI is also going to be key. As Microsoft's MTD mentions, the harm that it would suffer would include--but not be limited to--the breakup fee in the merger agreement. If Microsoft couldn't close the deal by July 18, it would owe ABK $3 billion.

I've seen some curious and partly even absurd speculation on the internet about what the amount of the bond would be. While the amount of the bond has to be "proper", it does not mean that the plaintiffs' ability to afford a bond would play any role. It's strictly going to be about the damages that wrongful enforcement (if the injunction--which I never expect to come down anyway--got overturned) would inflict. Legal fees with respect to the injunction would be a small amount and are typically hard to recover in the U.S. (unlike in "loser pays" jurisdictions like Germany). But Microsoft would suffer harm in various ways going beyond the $3 billion breakup fee. Let's see what Microsoft will argue in its May 5 opposition brief to the PI motion, but I could see credible theories adding many more billions. However, what I don't see is that the bond would cover ABK's shareholders. At least I haven't seen anything like that in all of the cases I've watched, and while defendants have occasionally tried to make such an argument, I'm not aware of a case in which such a theory got traction. (Apparently Israel is the only common-law jurisdiction where it might work.)

The bond would not necessarily set a ceiling for the damages (though that argument is also occasionally made). It would just serve the purpose of ensuring that Microsoft gets paid up to the amount of the security even if the plaintiffs were to go bankrupt.

With billions at stake, it's impossible that ten random gamers and two relatively small class-action firms could afford that amount. Practically speaking, no bank or insurance company would cover that amount at a low cost. Instead, when amounts are this high, if you want to get a bond you actually have to deposit the money in a bank account. You effectively put the money in escrow with the issuer of the bond.

Should they claim they can afford it, then they're either dreamers or someone deep-pocketed is backing them just to "troll" Microsoft. That one would be Sony and/or Google.

Microsoft's MTD subtly reminds us that those "gamers" are not the real plaintiffs:

"In an analogous case where the plaintiffs sought to enjoin an airline merger on the theory that it would result in higher ticket prices and diminished service, the court found that the plaintiffs had failed to allege irreparable harm because they had 'not demonstrated that the remedies available at law, such as monetary damages, would be inadequate.' Taleff v. Sw. Airlines Co., 828 F. Supp. 2d 1118, 1123, n.7 (N.D. Cal. 2011). Here, too, Plaintiffs allege higher prices and a vague notion of reduced quality. They have not demonstrated that the remedies available at law would be inadequate."

I've looked up the Taleff v. Southwest Airlines complaint, and unsurprisingly the "gamers" formally suing now over the ABK deal were not the nominal plaintiffs then. But the Alioto law firm, which is one of two firms challenging the acquisition of ABK now, was counsel of record. Microsoft didn't capitalize the term "Plaintiffs" in a context that unambiguously refers to the "gamers" in the present case, but the reference to another case where one of the same firms failed to block a merger is telling. It's a law firm that will always find someone who will claim to be harmed as a consumer. And in the end they tend to lose...

Congressional Republicans, think tanks, advocacy groups question FTC's overall direction and particular stance on Microsoft-ABK

A Congressional hearing was held to discuss the FTC's request for a budget increase by hundreds of millions of dollars. The FTC's chair, Lina Khan, faced tough questions particularly from Congresswoman Diana Harshbarger (R-Tenn.) about her agency siding with Sony. And Republicans generally questioned her leadership style, as do some commentators and think tanks. Very recently, the Federalist Society also disagreed with the FTC's approach to Microsoft-ABK.

On Twitter I've already taken clear positions, and I just want to repeat them here:

  • I want strong competition enforcement in the tech sector, so I'm not against Mrs. Khan's agenda in general.

  • I just disagree with the FTC's positions on Microsoft-ABK, and in particular I think it's high time they rejoined the antitrust mainstream by dismissing Sony's console market theory of harm like six regulators have done in their final clearance decisions and the EC and the CMA did prior to final decisions.

  • One cannot blame her for not being able to speak out in detail on a pending case. She wasn't being evasive without a reason.

  • Mrs. Khan is right that it's the FTC's job to listen to all parties who provide relevant input, which includes market leaders--even foreign-based ones. It would be pure populism to dispute that duty, and unfair to doubt that the FTC reached its independent conclusions. That said, the FTC should recognize now that Sony's theories and arguments ring hollow. The CMA did a very honorable thing--which in my view shows strength, not weakness--by modifying its previous assessment. Why can't the FTC do that, too? It would be the right thing to do for all intents and purposes.

  • I agree with games YouTuber Destin Legarie that "the FTC is trying to do a lot of good and has accomplished a lot for consumers."

Competition Commission of South Africa finds unconditional clearance is warranted

I just mentioned that six regulators have cleared the deal. The first five were (in chronological order) Saudi Arabia, Brazil, Serbia, Chile, and Japan. The latest is the Competition Commission of South Africa (CCSA), which on Monday announced (PDF) the following:

The Commission has recommended that the Competition Tribunal (Tribunal) approve the proposed transaction whereby Anchorage intends to acquire Activision, without conditions.

The primary acquiring firm is Anchorage, a company registered in accordance with the General Corporation Law of the State of Delaware. Anchorage is a wholly owned subsidiary of Microsoft. In South Africa, Microsoft controls Microsoft (S.A.) Proprietary Limited (“Microsoft South Africa”) and Microsoft 1968 South Africa Proprietary Limited (“Microsoft 1968”). Anchorage does not control any firm/s in South Africa, whether directly or indirectly. Anchorage, Microsoft and all firms controlled by Microsoft are collectively referred to as the “Acquiring Group”.

The Acquiring Group, through Microsoft, is a global technology company active in the provision of several IT-related services. Relevant to the proposed transaction are its gaming activities, which involve the development, publishing, and distribution of games for PCs, consoles, and mobile devices through Xbox Game Studios. Microsoft also publishes games that are developed by other game developers. Microsoft offers Xbox gaming consoles and the Surface series of personal computers.

The primary target firm is Activision, a company registered in accordance with the General Corporation Law of the State of Delaware. Activision is not controlled by any single firm or shareholder. Activision does not control any firm in South Africa. Activision and all the firms it controls shall be referred to as “The Target Group”.

Globally, Activision develops games for PCs, consoles, and mobile devices and publishes them in most countries around the world. Activision does not own any console (such as PlayStation or Xbox) but its games can be played on both of these consoles. One of the popular games developed and published by Activision is Call of Duty.

The primary competition concern in this transaction arose from the (vertical) concern that Microsoft may, post-merger, restrict the distribution of Call of Duty to the Microsoft console, Xbox, or make Call of Duty available on terms that exclude or undermine the ability of other console manufacturers to compete.

The Commission found that the proposed transaction is unlikely to result in significant foreclosure concerns as the parties do not have the ability and incentive to foreclose competing game distributors, particularly Sony (Playstation) and Nintendo (Switch). Furthermore, the merging parties have made undertakings to continue supplying Call of Duty games to other console manufacturers.

Therefore, the Commission found that the proposed transaction is unlikely to result in a substantial prevention or lessening of competition in any relevant markets. The Commission further found that the proposed transaction does not raise any substantial public interest concerns.

The passage that refers to Microsoft's "undertakings" could be misunderstood, but the first paragraph leaves no doubt that the CCSA did not impose any remedies. It merely took note of relevant facts, but the clearance is unconditional.

As the Monday announcement says (I quoted its key parts on Twitter), this is a recommendation to the Competition Tribunal of South Africa. It is hard to imagine, however, that this wouldn't be the final outcome. The process was similar in Brazil, by the way, where the initial clearance decision by CADE also had to be--and indeed was--adopted by another decision-making body.

UK Competition & Markets Authority's decision deadline nears--and coincides with Microsoft's participation in Downing Street No 10 games industry event

The UK CMA's decision date is April 26: next Wednesday. They could also announce their decision a day or two ahead of schedule, but for practical reasons I can't imagine it would still happen today or tomorrow.

The fact that there'll be a games industry event at the prime minister's office on the same day (26th), with Microsoft participating, appears purely coincidental to me:

Some people have also noticed Microsoft ads at London tube stations, promoting the fact that the deal will bring Call of Duty to 150 million more gamers. Some made it sound like Microsoft must be very confident; others speculated that Microsoft was trying to sway the CMA. I would say that those ads (seen together with UK newspaper ads Microsoft placed earlier this year) show the company's commitment to this transaction, and obviously the UK decision is going to very important now. I had faith in the CMA process even when many other commentators didn't, and I hope and trust I won't be disappointed.

On some other occasion I'll discuss the CMA's market test of remedies proposed by Google in the Android app distribution context, an antitrust topic that takes us to the final part of this post:

Google's procedural agreement with Epic Games and Match Group reflects ABK's stronghold in mobile gaming

Yesterday I noticed (and discussed on Twitter) a stipulation that Epic Games, Match Group (Tinder), and defendant Google filed in their antitrust litigation in the Northern District of California over the Google Play Store. It relates to the per se Sec. 1 violation claim I discussed on earlier occasions, such as in November when it became known that Epic and Match were allowed to amend their complaints accordingly and that Google had paid ABK $360 million primarily for the purpose of ensuring ABK's games would remain on the Google Play Store and not be made available through an ABK app store. May I refer you to my earlier writings (with the previous link being a good starting point) on that topic. In a nutshell, per se violation means that if Epic and Match prevailed on showing anticompetitive conduct, there would be no rule-of-reason analysis where Google could present justifications like "privacy" and "security" (which wouldn't be procompetitive justifications anyway).

The enormous importance of ABK as a mobile game maker was now shown again by the agreement between plaintiffs Epic and Match and defendant Google I mentioned:

  1. With respect to Count 4 of Epic’s Second Amended Complaint and Count 6 of Match’s First Amended Complaint, Epic’s and Match’s per se claims are limited to Google’s agreements with the following developers: Activision Blizzard, Inc., RiotGames, Inc. and Supercell.

  2. Neither Epic’s nor Match’s counsel will argue or assert or seek to elicit testimony uggesting that any Games Velocity Program or Apps Velocity Programagreements other than those entered into with Activision, Riot and Supercell were horizontal agreements not to compete that were intended to, and did in fact, prevent the launch of an app store on Android by the counterparty to such agreement andthat are per-se illegal under Section 1 of the Sherman Act. For the avoidance of doubt, nothing herein shall prevent Epic or Match from arguing to the jury that anyo r all GVP and AVP agreements are vertical agreements in restraint of trade thatviolate Section 1 and/or Section 2 of the Sherman Act (or any antitrust or unfair competition state statute).

Google entered into "Project Hug" agreements with about two dozen game makers at the time. ABK got the largest amount. As I've also explained on Twitter, it would be wrong to focus only on King (Candy Crush) when discussing Microsoft's statement that the acquisition of ABK is mostly about gaining a foothold in mobile gaming: mobile versions of various Activision (Call of Duty) and Blizzard games are also very popular. But, of course, Candy Crush is the mobile game that has reached the broadest possible audience, including me (well above level 1,400 as I mentioned on other occasions, though I've only played a few more levels this year).

The effect of that Epic-Match-Google stipulation is that ABK, Riot Games (League of Legends), and Supercell (Clash of Clans, Hay Day) will be the three game makers with respect to which Epic and Match will argue that Google entered into agreements that constituted per se violations of Sherman Act Sec. 1. The other 20 or so "Project Hug" agreements will also be relevant, but not on a per se basis.

ABK firmly denies that the related agreement with Google was anticompetitive. While I agree with ABK on a number of other questions, I respectfully disagree on this one and side with Epic and Match. I don't view ABK as a culprit here: Google masterminded those agreements and signed them with two dozen game makers. I can see why ABK doesn't want to be liable for anything, but to me it's very clear (also based on some of the testimony and evidence already shown by Epic and Match) that the purpose of the deal was to cement Google's Android app distribution de facto monopoly. Those deals also related to cloud services, YouTube ads etc., but in my view those other elements were just fig leaves and the Google Play Store is what Google really cared about.