FTC Loses Preliminary Injunction Bid In Challenge Of Technology Company’s Acquisition Of Virtual Reality Fitness App Maker
02/14/2023On January 31, 2023, the United States District Court for the Northern District of California denied the Federal Trade Commission’s (“FTC”) request for a preliminary injunction to block a technology company’s (the “Company”) acquisition of a virtual reality fitness app maker (the “Fitness App”. The Court found that the FTC failed to show that the Company was reasonably likely to enter the virtual reality dedicated fitness app market absent the deal. Federal Trade Commission v. Meta Platforms Inc. et al., No. 5:22-CV-04325-EJD (N. D. Cal. Feb. 3, 2023).
The Company and the Fitness App signed an Agreement and Plan of Merger for a proposed acquisition on October 22, 2021. The FTC sued for a preliminary injunction on July 27, 2022, alleging that the deal was likely to substantially lessen competition or tend to create a monopoly under Section 7 of the Clayton Act in the “virtual reality dedicated fitness app market”—defined as VR apps that are “designed so users can exercise through a structured physical workout in a virtual setting anywhere they choose to use their highly portable VR headset.” The FTC alleged that the deal would deprive that market of competition that would otherwise have been created by the Company’s independent entry.
Noting that the Ninth Circuit had not yet had occasion to provide guidance on “actual potential competition” doctrine, the court adopted the Fifth Circuit’s “reasonable probability” standard to the two-prong question of whether (1) absent the proposed transaction, the Company would have independently entered the fitness app market and (2) its entry would create a substantial likelihood of ultimately producing deconcentration of that market or other significant procompetitive effects.” United States v. Marine Bancorporation, Inc., 418 U.S. 602, 633 (1974).
Over the course of a seven-day evidentiary hearing, the parties presented evidence about the Company’s intentions to enter the fitness app market and steps it had taken to do so. The FTC argued that the Company had already been exploring the possibility of transforming its own musical virtual reality game into a fully-fledged fitness app through external partnerships before deciding to move forward with the acquisition at issue instead. Defendants responded with evidence to show that, although the Company had considered the potential of the musical game as a “vector into fitness as a game-adjacent use case” at the time the Company acquired it and briefly explored a partnership to develop the proposal, the Company abandoned the idea for reasons independent of the Fitness App deal.
The court held that the FTC had failed to establish a likelihood that it would ultimately succeed on the merits of its Section 7 claim based on the actual potential competition theory. More specifically, the court agreed with defendants, finding that the proposal to develop the Company’s own game into a fitness app “did not enjoy uniform or even widespread support among [the Company’s] personnel who were researching VR fitness opportunities,” and that the timeline of discussions was inconsistent with the FTC’s theory. The court found that it was not “reasonably probable” that the Company would enter the market for virtual reality dedicated fitness apps if unable to consummate the acquisition and that it had no other “available feasible means” for doing so. Having held that the FTC had not met its burden on the first element, the court did not rule on the secondary question of whether, if the Company had entered independently, its entry would have been substantially likely to deconcentrate or result in other procompetitive effects in the relevant market.
The court’s decision to deny the FTC’s motion for preliminary injunction leaves the agency with a choice about whether or not to push ahead with a trial before an administrative judge regardless. The FTC has not pursued an in-house challenge after losing a preliminary injunction for more than three decades, but it remains to be seen whether the agency chooses to do so given the current climate of more aggressive enforcement in this space.