Wednesday, May 31, 2023

CMA's appalling stalling can't prevent courtroom disaster, reinforces 'closed for business' narrative -- Justice Marcus Smith moves forward swiftly and is unconvinced of agency's market definition

Mr Justice Marcus Smith--the UK's top antitrust-specialized judge (President of the Competition Appeal Tribunal (CATribunal or just CAT)) as well as a technically savvy patent judge--has indeed assigned the highest possible priority to the adjudication of Microsoft's appeal of the Competition & Markets Authority's (CMA) attempt to block Microsoft's acquisition of Activision Blizzard King (ABK, NASDAQ:ATVI). In my previous post I already said that this case--the biggest and highest-profile one in the history of the UK and one of the most important antitrust cases the world has ever seen--could further delay the Optis Wireless v. Apple standard-essential patent (SEP) ruling.

But the CMA is thankless for that effort beyond the call of duty. Much to the contrary, the agency continues to lose credibility at a worrying pace. At yesterday's initial case management conference, the CMA came across as the opposite of a responsible and trustworthy regulator. The CMA is digging itself an ever bigger hole instead of finding a way out of the mess it created because Mr Justice Smith isn't having any of that.

The term "case management conference" is almost a misnomer. Yesterday's court hearing lasted almost four hours, which I covered live in a 128-part Twitter thread. The first tweet of that thread has already been viewed about 200K times. You can click on it and work your way down to find my live commentary, or you can go to a web page generated by the ThreadReader app (though the final tweet of that thread is not shown in full there).

For the CMA and its counsel, it was a total disaster. They should be concerned for institutional reasons, and their lead appellate counsel, Rob Williams KC, not only underperformed his world-class counterparts (Daniel Beard KC for Microsoft and Lord Grabiner KC for Activision (which is seeking, and obviously can't be denied the right, to intervene): Mr. Williams's performance was as abysmal as the insane merger ruling he is trying to defend. He was literally stuttering, and it was not attributable to ab speech disorder (otherwise I wouldn't have mentioned it), but close to one.

What's most shocking is actually the CMA's political insensitivity. They didn't get the law, the technology, and the economics right in the Microsoft-ABK case because they were biased. But now it looks like they can't even read the writing on the political walls. There is that well-founded concern over the UK appearing to be "closed for business" as a result of regulatory hubris and arbitrary excess. Politicians have expressed concerns over the CMA's decision, and Prime Minister Rishi Sunak himself told the CMA via a LinkedIn post that generally addressed the issue of overregulation but also through a formal "strategic steer" document that they should make their decisions reasonably fast because businesses are impacted by protracted uncertainty. And what are they doing now? Stalling. It was unbelievable. There was practically zero substance in what the CMA's counsel said. It was all just about excuses, evasions, and pretexts for slow-rolling the proceedings, in a transparent attempt to buy the U.S. FTC time and betting on a hypothetical failure of Microsoft and Activision to agree on an extension of the merger agreement (the current one expires on July 18).

After 13 years of watching litigations of this kind, I can easily identify stalling. The CMA behaved like companies that know they infringe intellectual property rights and just hope to delay the proceedings to avoid the inevitable. The CMA wants to be saved by the bell, and Mr Justice Smith diplomatically reproached them by saying that he assumes the CMA wants to be a responsible regulator and also do its part so this matter gets resolved swiftly.

The image that the CMA projects on the UK's business environment is terrible. If politicians were concerned just based on the decision, they have even more reasons to be concerned after the CMA's litigation conduct came to light yesterday. Their excuses are ridiculous. For instance, despite the fact that Microsoft announced its intent to appeal the decision right after the decision on April 26, Mr. Williams claimed to have had only a couple of days to familiarize himself with the matter.

The CMA knows that even the wide latitude it enjoys due to the deferential Judicial Review standard won't help in the end. Its decision is not defensible. It is a general rule that lawyers will argue the facts if good for them, otherwise the law, and if neither the facts nor the law are on their side, they'll emphasize policy. The CMA's legal argument appears to come down to nothing more than how deferential the standard of review is (in other words, it's not about right or wrong, but that they believe they can get away even with wrong decisions). The facts are totally against them, and Mr Justice Smith, who has previously shown that he can understand far more complex technical questions just based on reading a patent specification, has already read the decision more than once and still can't see how the CMA arrived at the conclusion that cloud gaming was a market (as opposed to the delivery method that industry players say it is). The CMA can't make a policy argument either, other than big being bad. So it resorts to stalling.

The CMA issued that convoluted ruling in late April hoping that if there's a whole lot of factual stuff in there, the appeals court might just not dare to reverse them. They wanted to create a situation where an appellant would have to raise not just a dozen issues but possibly hundreds. And they wanted to plant so many trees that it would be impossible to see the forest. But that isn't working here, with second-to-none lawyers who know how to identify the weakest links of the chain and how to explain the issues to a court--and a presiding judge who sees through the smokescreens. He appears already to have identified that there is no reason (unless the CMA comes up with a surprise argument) why gamers couldn't just install games locally instead of relying exclusively on cloud streaming.

The other two members of the CATribunal panel have "yet to be appointed" according to Mr Justice Smith. He said that either one of the panel members would be an economist, or if none of the three was an economist, they would be assisted by one of the CAT's economists.

How could the CMA possibly shoot itself in the foot by feeding the "closed for business" narrative with its outrageous stalling tactics?

It is a mystery. On Twitter, someone gave one of the reasons: they just haven't previously been held accountable in court the way they are now, as others abandoned their mergers instead of appealing.

The CMA tried to deny the obvious, which is that its decision--and not the FTC's resistance, given that the FTC would need a preliminary injunction from a federal district court--is the only reason the deal can't close. Daniel Beard KC explained yesterday that in Canada an investigation is still ongoing, but enough time has passed that Microsoft could close the deal without breaking the law there by now. Mr Justice Marcus Smith can obviously see that the CMA is an outlier (I'll talk about the latest clearance decision further below) and wasn't impressed with the CMA's attempts to stall. He has set another case management conference for June 12, and while Microsoft would have preferred to start the hearing even earlier, it is definitely impressive that the CAT currently plans to hear the case in late July and early August (weeks of July 24 and 31). What they'll discuss on June 12 is, among other things, whether Microsoft may have to forgo some of the opportunities to rely on expert evidence in order to keep the schedule.

The CATribunal will hand down a judgment in the summer. It's hard to see how the CMA could avoid a potentially humiliating defeat. The best they can do now is find an exit from all of this.

I had to update my timeline chart twice yesterday. First there was news from South Korea, with the Korea Fair Trade Commission (KFTC) granting unconditional approval to the purchase. This means the deal has been approved by the regulators in charge of 39 countries with a collective population size of more than 2.4 billion people (more than 36 times the size of the UK) and an aggregative GDP of $44 trillion (14 times the size of the British economy). And then I also wanted to reflect Mr Justice Smith's case management plans. It's interesting that the FTC trial and the CAT hearing may overlap (click on the image to enlarge):

Since the CMA made its absurd decision on April 26, there's only been good news for the transaction. The week in which the EU cleared at the beginning and China toward the end was remarkable, but so was yesterday when the Korean clearance decision was followed by a CAT hearing that was dreadful for the CMA.

The CMA is now basically being a ghost driver who thinks that all the other cars coming in the opposite direction are on the wrong side of the street. It's high time they turned around.