throbber
Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 1 of 35
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`No. 23-15992
`
`IN THE UNITED STATES COURT OF APPEALS
`FOR THE NINTH CIRCUIT
`
`FEDERAL TRADE COMMISSION,
`Plaintiff-Appellant,
`
`
`v.
`
`MICROSOFT CORP., and
`ACTIVISION BLIZZARD, INC.,
`
`Defendants-Appellees.
`
`On Appeal from the United States District Court
`for the Northern District of California
`No. 3:23-cv-2880; Hon. Jacqueline Scott Corley
`
`BRIEF OF FORMER ANTITRUST ENFORCERS
`AS AMICI CURIAE IN SUPPORT OF APPELLEES
`AND AFFIRMANCE
`
`
`
`Aaron M. Panner
`Derek C. Reinbold
`KELLOGG, HANSEN, TODD, FIGEL
` & FREDERICK, P.L.L.C.
`1615 M Street, N.W., Suite 400
`Washington, D.C. 20036
`(202) 326-7900
`apanner@kellogghansen.com
`dreinbold@kellogghansen.com
`
`Counsel for Amici Curiae
`
`September 13, 2023
`
`
`
`
`
`
`
`
`
`
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`

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`TABLE OF CONTENTS
`
`Page
`TABLE OF AUTHORITIES ....................................................................... ii
`INTERESTS OF AMICI ............................................................................. 1
`ARGUMENT ............................................................................................... 3
`I.
`Antitrust Law Reflects A Basic Distinction Between
`The Competitive Consequences Of Horizontal And
`Non-Horizontal Mergers .......................................................... 3
`II. The FTC Offered No Sound Economic Analysis
`Showing The Transaction Probably Would Be
`Anticompetitive ...................................................................... 15
`CONCLUSION ......................................................................................... 24
`CERTIFICATE OF COMPLIANCE
`CERTIFICATE OF SERVICE
`ADDENDUM
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`
`
`
`
`i
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`

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`
`
`CASES
`
`TABLE OF AUTHORITIES
`
`Page
`
`Alberta Gas Chems. Ltd. v. E.I. Du Pont De nemours & Co.,
`826 F.2d 1235 (3d Cir. 1987) ............................................................. 7
`Brown Shoe Co. v. United States,
`370 U.S. 294 (1962) ..................................................... 4, 8, 14, 20, 22
`Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,
`429 U.S. 477 (1977) ........................................................................... 8
`Continental T.V., Inc. v. GTE Sylvania, Inc.,
`433 U.S. 36 (1977) ............................................................................. 8
`Fruehauf Corp. v. FTC,
`603 F.2d 345 (2d Cir. 1979) ................................................... 9, 11, 21
`FTC v. Advocate Health Care Network,
`841 F.3d 460 (7th Cir. 2016) ........................................................... 18
`FTC v. H.J. Heinz Co.,
`246 F.3d 708 (D.C. Cir. 2001) ................................................... 13, 18
`FTC v. Whole Foods Mkt., Inc.,
`548 F.3d 1028 (D.C. Cir. 2008) ....................................................... 18
`Grappone, Inc. v. Subaru of New England, Inc.,
`858 F.2d 792 (1st Cir. 1988) .............................................................. 8
`Hospital Corp. of Am. v. FTC,
`807 F.2d 1381 (7th Cir. 1986) ........................................................... 8
`Leegin Creative Leather Prods., Inc. v. PSKS, Inc.,
`551 U.S. 877 (2007) ........................................................................... 8
`Mississippi River Corp. v. FTC,
`454 F.2d 1083 (8th Cir. 1972) ........................................................... 5
`
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`
`Republic Tobacco Co. v. North Atl. Trading Co.,
`381 F.3d 717 (7th Cir. 2004) ........................................................... 13
`U.S. Steel Corp. v. FTC,
`426 F.2d 592 (6th Cir. 1970) ......................................................... 5, 6
`United States v. Aluminum Co. of Am.,
`148 F.2d 416 (2d Cir. 1945) ............................................................... 6
`United States v. Anthem, Inc.,
`855 F.3d 345 (D.C. Cir. 2017) ................................................... 14, 16
`United States v. AT&T Inc.,
`310 F. Supp. 3d 161 (D.D.C. 2018) ................................................... 7
`United States v. AT&T, Inc.,
`916 F.3d 1029 (D.C. Cir. 2019) ............................... 13, 14, 18, 21, 22
`United States v. Baker Hughes Inc.,
`908 F.2d 981 (D.C. Cir. 1990) ......................................................... 14
`United States v. Kennecott Copper Corp.,
`231 F. Supp. 95 (S.D.N.Y. 1964) ....................................................... 5
`United States v. Philadelphia Nat’l Bank,
`374 U.S. 321 (1963) ......................................................................... 13
`
`
`STATUTES
`Celler-Kefauver Act (Anti-Merger Act), Pub. L. No. 81-899,
`ch. 1184, 64 Stat. 1125 (1950) ........................................................... 4
`Clayton Act (Antitrust Act), Pub. L. No. 63-212, § 7,
`38 Stat. 730 (1914) ........................................................................ 3, 4
`15 U.S.C. § 18 ............................................................................................ 14
`15 U.S.C. § 18 (1950) .............................................................................. 4, 5
`
`
`iii
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`OTHER AUTHORITIES
`10 Phillip E. Areeda & Herbert Hovenkamp,
`Antitrust Law (4th ed.) .......................................................... 3, 10, 11
`Ward S. Bowman, Jr.:
`The Prerequisites and Effects of Resale Price Maintenance,
`22 U. Chi. L. Rev. 825 (1955) ............................................................ 7
`Tying Arrangements and the Leverage Problem,
`67 Yale L.J. 19 (1957) ........................................................................ 7
`Complaint, United States v. Visa Inc., No. 20-cv-7810
`(N.D. Cal. Nov. 5, 2020), ECF No. 1 ............................................... 20
`Aaron Director & Edward H. Levi, Law and the Future:
`Trade Regulation, 51 N.W. U. L. Rev. 281 ....................................... 7
`Guidelines on the Assessment of Non-Horizontal Mergers
`Under the Council Regulation on the Control of
`Concentrations Between Undertakings, 2008 O.J.
`(C 265) 7, https://perma.cc/HF79-ECLN ........................................ 10
`D. Bruce Hoffman, Acting Dir., Bureau of Competition, Fed.
`Trade Comm’n, Vertical Merger Enforcement at the
`FTC (Jan. 10, 2018), https://perma.cc/6AXA-QJDY ...................... 12
`Herbert Hovenkamp, Competitive Harm from Vertical
`Mergers, 59 Rev. of Indus. Org. 139 (2021) .................................... 13
`Jon Sallet, Deputy Assistant Att’y Gen., U.S. Dep’t of
`Justice, The Interesting Case of the Vertical Merger
`(Nov. 17, 2016), https://perma.cc/DL7D-4SLJ ............................... 12
`Lester G. Telser, Why Should Manufacturers Want Fair
`Trade?, 3 J.L. & Econ. 86 (1960)....................................................... 7
`
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`U.S. Dep’t of Justice:
`Merger Guidelines (1968),
`https://perma.cc/ZNE3-VYGB ....................................................... 5, 9
`Merger Guidelines (1982),
`https://perma.cc/9VKM-9795 ................................................ 9, 11, 13
`Non-Horizontal Merger Guidelines (1984),
`https://perma.cc/C2QY-CS5T ...................................................... 9, 10
`U.S. Dep’t of Justice & Fed. Trade Comm’n:
`Horizontal Merger Guidelines (2010),
`https://perma.cc/76D4-NUHJ ......................................................... 10
`Merger Guidelines (Draft July 19, 2023),
`https://perma.cc/9Z59-BP7M ........................................................... 14
`Christine A. Varney, Comm’r, Fed. Trade Comm’n, Vertical
`Merger Enforcement Challenges at the FTC (July 17,
`1995), https://perma.cc/Z6QN-AUKY ............................................. 12
`Christine S. Wilson, Comm’r, Fed. Trade Comm’n,
`Reflections on the 2020 Draft Vertical Merger
`Guidelines and Comments from Stakeholders
`(Mar. 11, 2020), https://perma.cc/7XQZ-LTDW ............................. 12
`
`
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`INTERESTS OF AMICI1
`Amici are former antitrust enforcers who have devoted substantial
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`portions of their careers to promoting vigorous enforcement of the
`
`antitrust laws for the benefit of competition and consumers. Amici have
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`served in the U.S. Department of Justice and the Federal Trade
`
`Commission, in both Republican and Democratic administrations,
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`where they were responsible for – among other matters – the evaluation
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`of proposed mergers and acquisitions across industries.
`
`Amici believe that, over the last several decades, antitrust
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`enforcement has benefited from a bipartisan consensus that applying
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`rigorous economic analysis to enforcement decisions advances sound
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`antitrust policy and the goal of promoting economic welfare. To be sure,
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`economic science is inexact, predictions are necessarily uncertain, and
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`so there is room for disagreement about the likely impact of a proposed
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`transaction and the weight to give potentially competing considerations.
`
`
`1 No party’s counsel authored this brief in whole or in part; no
`party or party’s counsel contributed money intended to fund preparing
`or submitting this brief; and no person other than amici or their counsel
`contributed money intended to fund preparing or submitting this brief.
`Fed. R. App. P. 29(a)(4)(E). All parties have consented to the filing of
`this brief. Fed. R. App. P. 29(a)(2). Amici are listed in an addendum
`bound with this brief.
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`
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`

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`Amici might disagree about hard cases. But amici agree on the need to
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`base antitrust-enforcement decisions on the best available tools of
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`economic analysis (along with other informative evidence) and the
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`overarching goal of promoting increased output and higher quality.
`
`Given this shared perspective, amici have viewed with concern the
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`FTC’s decision to pursue a challenge to the proposed merger here and
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`believe the district court decision, denying the FTC’s motion for a
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`preliminary injunction, should be affirmed. Amici elaborate on two
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`points below. First, the merger is a combination of complementary
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`assets – Activision’s games are a complement to Microsoft’s gaming
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`products. There is a consensus that non-horizontal transactions like
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`this one, unlike those between competitors, generally pose less risk –
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`and may offer benefits – to competition. Second, the district court
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`correctly concluded that the collapse of the FTC’s economic model,
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`which was the principal basis for its claim of likely harm, left the
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`Commission without any sound reason to prevent the transaction from
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`proceeding. The FTC’s failure to defend that economic model on appeal
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`is reason enough to affirm.
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`2
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`

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`
`I.
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`ARGUMENT
`
`Antitrust Law Reflects A Basic Distinction Between The
`Competitive Consequences Of Horizontal And Non-
`Horizontal Mergers
`For a few decades after the Clayton Act was amended to apply to
`
`non-horizontal mergers, enforcers aggressively policed vertical mergers
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`based on broad suspicion that such mergers could unfairly disadvantage
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`competitors of the merged firm. But over time, both courts and
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`enforcers came to recognize that this “severe approach to vertical
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`mergers” was in fact “much more severe than was warranted by any
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`acceptable economic theory of competitive harm.” 10 Phillip E. Areeda
`
`& Herbert Hovenkamp, Antitrust Law ¶ 1000a (4th ed.). Today,
`
`enforcers challenging vertical mergers must make a case-specific
`
`showing – informed by sound economic analysis – that the merger will
`
`harm competition and consumers.
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`A. Section 7 of the Clayton Act originally focused on stock
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`transactions that allowed horizontal competitors to form large trusts.
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`The act barred acquisitions “where the effect of such acquisition may be
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`to substantially lessen competition between the corporation whose stock
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`is so acquired and the corporation making the acquisition,” among other
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`3
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`

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`effects. Clayton Act (Antitrust Act), Pub. L. No. 63-212, § 7, 38 Stat.
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`730, 731 (1914) (emphasis added). The acquired-acquiring language
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`meant the original act did not “appear to preclude the acquisition of
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`stock in any corporation other than a direct competitor.” Brown Shoe
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`Co. v. United States, 370 U.S. 294, 313 (1962); see also id. at 313 n.21.
`
`In 1950, Congress granted enforcers broader authority, amending
`
`the Clayton Act to cover vertical transactions. See Celler-Kefauver Act
`
`(Anti-Merger Act), Pub. L. No. 81-899, ch. 1184, 64 Stat. 1125, 1126
`
`(1950) (codified at 15 U.S.C. § 18 (1950)); Brown Shoe, 370 U.S. at 317
`
`n.30 (describing the legislative history). Through this amendment,
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`Congress “hoped to make plain that § 7 applied not only to mergers
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`between actual competitors, but also to vertical and conglomerate
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`mergers whose effect may tend to lessen competition in any line of
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`commerce in any section of the country.” Brown Shoe, 370 U.S. at 317.
`
`Midcentury enforcers aggressively employed their new
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`enforcement authority. In 1964, the U.S. Department of Justice
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`successfully challenged a merger between a copper producer and a
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`copper fabricator, on the basis that, although vertical mergers “often
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`lead to economic and efficient operation” and so are “desirable from an
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`4
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`

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`economic standpoint,” they are “undesirable from a social standpoint.”
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`United States v. Kennecott Copper Corp., 231 F. Supp. 95, 103 (S.D.N.Y.
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`1964). In its 1968 merger guidelines, DOJ asserted that almost any
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`“large vertical merger” would likely violate § 7 because the
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`procompetitive efficiencies would rarely, if ever, offset the
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`anticompetitive harms.2 And in the early 1970s, the FTC prevailed in
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`two cases challenging transactions because of likely harm to less
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`efficient local rivals. See Mississippi River Corp. v. FTC, 454 F.2d 1083,
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`1091-92 (8th Cir. 1972); U.S. Steel Corp. v. FTC, 426 F.2d 592, 593, 601-
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`03, 609-10 (6th Cir. 1970).
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`Courts and enforcers thus pointed to the very efficiencies of
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`vertical mergers as evidence of anticompetitive harm. In the FTC’s
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`challenge to a merger between an upstream cement supplier and a
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`downstream distributor, for example, the court was particularly
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`
`2 See U.S. Dep’t of Justice, Merger Guidelines 9-10 (1968) (“While
`it is true that in some instances vertical integration may raise barriers
`to entry or disadvantage existing competitors only as the result of the
`achievement of significant economies of production or distribution . . . ,
`integration accomplished by a large vertical merger will usually raise
`entry barriers or disadvantage competitors to an extent not accounted
`for by, and wholly disproportionate to, such economies as may result
`from the merger.”), https://perma.cc/ZNE3-VYGB.
`
`5
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`

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`concerned that the merged firm would “ha[ve] decisive cost advantages
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`over non-integrated competitors.” U.S. Steel, 426 F.2d at 603. The
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`court explained that “[v]ertical integration creates a more assured level
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`of plant utilization, an elimination of any significant sales and
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`marketing expenses to ones’ own ready-mix subsidiary, and the ability
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`to integrate the storage and distribution facilities of the cement and
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`ready-mix company into a single urban terminal.” Id. But the court did
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`not list those cost-saving benefits as a reason to find the transaction
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`lawful; those benefits instead supplied, according to the court, “very
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`substantial evidence” of illegality. Id. at 604.
`
`This skepticism towards vertical mergers reflected a belief that
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`antitrust policy should serve the interests of small competitors. As
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`Judge Learned Hand put it, antitrust law at the time advanced a
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`regime of small business “for its own sake and in spite of possible cost.”
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`United States v. Aluminum Co. of Am., 148 F.2d 416, 429 (2d Cir. 1945).
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`B. The cost soon became clear, though, as economic evidence
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`showed that many non-horizontal mergers increase, rather than harm,
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`6
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`

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`competition for consumers’ benefit.3 Such transactions can benefit
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`consumers by offering “cost advantages,” such as those listed in U.S.
`
`Steel. They can also align incentives within the merged firm to
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`encourage product innovation or eliminate a problem known as “double
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`marginalization”: “the situation in which two different firms in the
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`same industry, but at different levels in the supply chain, each apply
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`their own markups (reflecting their own margins) in pricing their
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`products.” United States v. AT&T Inc., 310 F. Supp. 3d 161, 197
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`(D.D.C. 2018). When integration eliminates those “‘stacked’ margins,”
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`it can “lead[] to lower prices for consumers.” Id.4
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`Courts in response began shifting the focus of merger analysis
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`towards protecting competition and consumers, not small competitors.
`
`
`3 See, e.g., Ward S. Bowman, Jr., Tying Arrangements and the
`Leverage Problem, 67 Yale L.J. 19, 33-34 (1957); Ward S. Bowman, Jr.,
`The Prerequisites and Effects of Resale Price Maintenance, 22 U. Chi. L.
`Rev. 825, 855-58 (1955); Aaron Director & Edward H. Levi, Law and the
`Future: Trade Regulation, 51 N.W. U. L. Rev. 281, 290 (1956); Lester
`G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & Econ.
`86, 104-05 (1960).
`4 See also, e.g., Alberta Gas Chems. Ltd. v. E.I. Du Pont De
`nemours & Co., 826 F.2d 1235, 1245 (3d Cir. 1987) (“Because of post-
`merger efficiencies allowing it to purchase the acquiring company’s
`output at a better price than in the marketplace, the acquired
`company’s purchasing costs would fall – a procompetitive benefit
`capable of being passed on via lower prices for its products.”).
`
`7
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`

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`In 1977, the Supreme Court emphasized that the antitrust laws were
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`designed for “the protection of competition, not competitors.”
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`Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977)
`
`(quoting Brown Shoe, 370 U.S. at 320); see also Hospital Corp. of Am. v.
`
`FTC, 807 F.2d 1381, 1386 (7th Cir. 1986) (“[T]he Supreme Court,
`
`echoed by the lower courts, has said repeatedly that the economic
`
`concept of competition, rather than any desire to preserve rivals as
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`such, is the lodestar that shall guide the contemporary application of
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`the antitrust laws, not excluding the Clayton Act . . . .”). As then-Judge
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`Breyer later noted, “the antitrust laws protect the competitive process
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`in order to help individual consumers by bringing them the benefits of
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`low, economically efficient prices, efficient production methods, and
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`innovation.” Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d
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`792, 794 (1st Cir. 1988) (Breyer, J.). And because vertical integration
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`could help advance that project, the Supreme Court adopted “a
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`common-law approach” and worked “to temper, limit, or overrule once
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`strict prohibitions on vertical restraints.” Leegin Creative Leather
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`Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 901 (2007) (citing Continental
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`T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 57-59 (1977)).
`
`8
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`

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`As the Supreme Court honed its approach to vertical restraints,
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`lower courts began incorporating that approach in deciding vertical-
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`merger challenges. In an influential case, Fruehauf Corp. v. FTC, the
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`Second Circuit concluded that for such a challenge to succeed, “[a]
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`showing of some probable anticompetitive impact is . . . essential.”
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`603 F.2d 345, 353 (2d Cir. 1979). That requirement doomed the FTC’s
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`case, which rested on evidence “too ephemeral to sustain” the challenge.
`
`Id. at 360.
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`Enforcers likewise began rethinking challenges to vertical
`
`mergers, reflecting both economic learning and renewed emphasis on
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`the interests of consumers over the interests of less-efficient
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`competitors. DOJ replaced its 1968 merger guidelines, recognizing in
`
`new guidelines that “non-horizontal mergers are less likely than
`
`horizontal mergers to create competitive problems.” U.S. Dep’t of
`
`Justice, Merger Guidelines § IV, at 20 (1982) (“1982 Guidelines”),
`
`https://perma.cc/9VKM-9795; see also U.S. Dep’t of Justice, Non-
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`Horizontal Merger Guidelines § 4 (1984) (“1984 Guidelines”),
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`https://perma.cc/C2QY-CS5T. It also made clear that it no longer
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`subscribed to the old U.S. Steel view that efficiencies produced by
`
`9
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`vertical integration are necessarily anticompetitive because they harm
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`competitors, which improperly subordinated the interests of consumers.
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`See Areeda & Hovenkamp ¶ 1000a (“Today it is almost a commonplace
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`that these historical results cannot stand close scrutiny.”). Instead,
`
`according to DOJ, mergers have “efficiency-enhancing potential . . .
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`[that] can increase the competitiveness of firms and result in lower
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`prices to consumers.” 1984 Guidelines §§ 3.5, 4.24.5 So for decades the
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`enforcement agencies sought to “avoid[] unnecessary interference with
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`mergers that are either competitively beneficial or neutral.” U.S. Dep’t
`
`of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 1
`
`(2010), https://perma.cc/76D4-NUHJ.
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`Consistent with these insights, enforcers rarely litigated vertical
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`merger challenges over the next four decades. The last such case the
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`FTC litigated to conclusion was Fruehauf, in 1979.
`
`
`5 This view now represents international consensus. See, e.g.,
`Guidelines on the Assessment of Non-Horizontal Mergers Under the
`Council Regulation on the Control of Concentrations Between
`Undertakings, 2008 O.J. (C 265) 7, 7 (“Non-horizontal mergers are
`generally less likely to significantly impede effective competition than
`horizontal mergers.”), https://perma.cc/HF79-ECLN.
`
`10
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`C. Modern antitrust law recognizes the consensus that vertical
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`and horizontal mergers are different. A horizontal merger eliminates a
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`competitor from the market, and so, by definition, increases
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`concentration. See Fruehauf, 603 F.2d at 351. “[T]he basic economic
`
`reason for limiting horizontal mergers is well-founded and rather
`
`generally accepted: horizontal mergers increase market concentration,
`
`and high market concentration can substantially lessen competition
`
`among rivals, particularly with respect to price.” Areeda & Hovenkamp
`
`¶ 1000a.
`
`Vertical mergers, by contrast, generally pose less risk to
`
`competition and are more likely to offer procompetitive benefits. A
`
`vertical merger does not eliminate a competitor, and “does not,
`
`therefore, automatically have an anticompetitive effect . . . or reduce
`
`competition.” Fruehauf, 603 F.2d at 351; see 1982 Guidelines § IV, at 20
`
`(a vertical merger “produce[s] no immediate change in the level of
`
`concentration in any relevant market”). Vertical integration “may even
`
`operate to increase competition.” Fruehauf, 603 F.2d at 352. Enforcers
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`11
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`for decades and across administrations have recognized these potential
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`procompetitive benefits and reduced risk of anticompetitive effects.6
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`Because vertical and horizontal mergers are different, they get
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`different treatment. An enforcer challenging a horizontal merger gets
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`the benefit of a “‘presumption’ that the merger will substantially lessen
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`competition” when it “would produce a firm controlling an undue
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`percentage share of the relevant market, and would result in a
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`significant increase in the concentration of firms in that market.” FTC
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`
`6 See, e.g., Christine S. Wilson, Comm’r, Fed. Trade Comm’n,
`Reflections on the 2020 Draft Vertical Merger Guidelines and Comments
`from Stakeholders at 14 (Mar. 11, 2020) (“The vast weight of economic
`scholarship continues to find that most vertical mergers benefit
`consumers.”), https://perma.cc/7XQZ-LTDW; D. Bruce Hoffman, Acting
`Dir., Bureau of Competition, Fed. Trade Comm’n, Vertical Merger
`Enforcement at the FTC at 3 (Jan. 10, 2018) (“[O]verall there is a broad
`consensus in competition policy and economic theory that the majority
`of vertical mergers are beneficial because they reduce costs and increase
`the intensity of interbrand competition.”), https://perma.cc/6AXA-QJDY;
`Jon Sallet, Deputy Assistant Att’y Gen., U.S. Dep’t of Justice, The
`Interesting Case of the Vertical Merger at 4 (Nov. 17, 2016) (“And here
`it’s worth emphasizing that vertical integration can create significant
`efficiencies that benefit suppliers, distributors, and consumers alike.”),
`https://perma.cc/DL7D-4SLJ; Christine A. Varney, Comm’r, Fed. Trade
`Comm’n, Vertical Merger Enforcement Challenges at the FTC (July 17,
`1995) (“Vertical integration can lower transaction costs, lead to
`synergistic improvements in design, production and distribution of the
`final output product and thus enhance competition. Consequently, most
`vertical arrangements raise few competitive concerns.”),
`https://perma.cc/Z6QN-AUKY.
`
`12
`
`

`

`Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 19 of 35
`
`
`
`v. H.J. Heinz Co., 246 F.3d 708, 715 (D.C. Cir. 2001) (cleaned up)
`
`(quoting United States v. Philadelphia Nat’l Bank, 374 U.S. 321, 363
`
`(1963)). But courts have “cautio[ned] about importing relaxed
`
`standards of proof from horizontal agreement cases into vertical
`
`agreement cases. To do so might harm competition and frustrate the
`
`very goals that antitrust law seeks to achieve.” Republic Tobacco Co. v.
`
`North Atl. Trading Co., 381 F.3d 717, 737 (7th Cir. 2004).
`
`This is not to say that vertical mergers never raise competitive
`
`concerns. See 1982 Guidelines § IV, at 20 (“[T]hey are not invariably
`
`innocuous.”). Enforcers view them “with less suspicion overall than . . .
`
`horizontal mergers,” but still examine them for “competitive threats.”
`
`Herbert Hovenkamp, Competitive Harm from Vertical Mergers, 59 Rev.
`
`of Indus. Org. 139, 142 (2021). But because vertical mergers are more
`
`likely to enhance, not harm, competition, enforcers challenging them
`
`“cannot use a short cut to establish a presumption of anticompetitive
`
`effect.” United States v. AT&T, Inc., 916 F.3d 1029, 1032 (D.C. Cir.
`
`13
`
`

`

`Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 20 of 35
`
`
`
`2019). Instead, “the government must make a ‘fact-specific’ showing
`
`that the proposed merger is ‘likely to be anticompetitive.’” Id.7
`
`Because a vertical merger may be procompetitive, the key
`
`evidence in a vertical-merger challenge often is sound economic
`
`analysis. Section 7 proscribes “[m]ergers with a probable
`
`anticompetitive effect,” Brown Shoe, 370 U.S. at 323 (emphasis added),
`
`so § 7 cases involve the “uncertain task” of making a prediction about
`
`the future, United States v. Baker Hughes Inc., 908 F.2d 981, 991 (D.C.
`
`Cir. 1990) (Thomas, J.); see 15 U.S.C. § 18. Economic modeling can
`
`assist in that task by supplying analytical rigor to “the probabilistic
`
`Section 7 world.” AT&T, 916 F.3d at 1038. Enforcers routinely employ
`
`such rigorous quantitative analysis. And courts have become
`
`increasingly familiar with assessing such evidence for “reliability and
`
`factual credibility” in a variety of antitrust cases. United States v.
`
`Anthem, Inc., 855 F.3d 345, 363 (D.C. Cir. 2017).
`
`
`7 The government now contests this premise, expressing renewed
`skepticism of vertical mergers in recently published draft merger
`guidelines. The draft guidelines presume anticompetitive effect from a
`vertical merger when the merged firm will control more than 50 percent
`of a related market. U.S. Dep’t of Justice & Fed. Trade Comm’n, Merger
`Guidelines § II.6(A), at 17 (Draft July 19, 2023), https://perma.cc/9Z59-
`BP7M.
`
`14
`
`

`

`Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 21 of 35
`
`
`
`II. The FTC Offered No Sound Economic Analysis Showing
`The Transaction Probably Would Be Anticompetitive
`This case involves a merger between Microsoft and Activision, two
`
`companies that sell complementary products. Microsoft sells Xbox
`
`gaming consoles and Activision sells popular videogames, such as Call
`
`of Duty. The FTC offered an economic model in the district court
`
`purporting to show that, after the merger, Microsoft would have a
`
`financial incentive to withhold Call of Duty from Sony, which sells
`
`competing PlayStation gaming consoles. But the district court rejected
`
`that model because it rested on unproven assumptions, and on appeal
`
`the FTC has simply abandoned it rather than suggest that the court
`
`erred. Instead, the agency argues (at 65) that “structural” factors in the
`
`market support its claim that Microsoft will withhold games. But those
`
`arguments lack a sound economic foundation, and the Commission’s
`
`decision to proceed without quantitative support strongly supports
`
`affirmance.
`
`A. Below, the FTC tried to support its case with quantitative
`
`analysis by offering a model from Professor Robin Lee, an economist.
`
`This model, according to the FTC, showed that “removing Call of Duty
`
`from PlayStation would result in a 5.5% increase in Xbox’s share of the
`
`15
`
`

`

`Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 22 of 35
`
`
`
`Gen 9 console market.” 1-ER-41. If Microsoft could achieve that share
`
`increase, Professor Lee contended, it would be profitable to withhold
`
`Call of Duty from Sony because the benefits of higher Xbox console sales
`
`would outweigh the costs in lost PlayStation Call of Duty sales. Id.
`
`The FTC put great weight on this model. It was the “lynchpin” of
`
`its merger challenge. Id. The district court properly considered
`
`whether the model could bear that weight. See Anthem, 855 F.3d at 363
`
`(affirming district court preliminary injunction order when court
`
`reviewed expert’s calculations for “reliability and factual credibility”).
`
`Professor Lee’s analysis depended largely on one quantitative input:
`
`the “conversion rate,” or the number of affected users who would buy an
`
`Xbox console to play Call of Duty if the game were unavailable on
`
`PlayStation. 1-ER-41-42. At a 20% conversion rate – meaning 1 in 5
`
`PlayStation Call of Duty players would switch to Xbox if they could not
`
`play on PlayStation – the model predicted that withholding Call of Duty
`
`from PlayStation would be profitable. 1-ER-42. But reduce the rate
`
`16
`
`

`

`Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 23 of 35
`
`
`
`slightly to 17.5% and the “model estimate[d] it would not be profitable”
`
`to withhold. Id.8
`
`A model that is so sensitive to input assumptions is only as
`
`reliable as the assumptions themselves. And here, the district court
`
`found that the assumptions were unreliable: “there [wa]s no evidence
`
`to support” them. 1-ER-43-45. Professor Lee “simply assumed a
`
`con[version] rate for his model that would make exclusivity profitable.”
`
`1-ER-45. Given that unreliable, conclusion-driven input, the district
`
`court appropriately concluded that the model’s outputs – predicted
`
`incentives – were also unreliable.
`
`The FTC’s quantitative-analysis-backed case ended there. As the
`
`district court noted, the Commission’s other foreclosure theories lacked
`
`any economic support. “Prof. Lee did not engage in any quantitative
`
`analysis of partial foreclosure.” 1-ER-46. He “did not perform any
`
`quantitative analysis to estimate whether adding Call of Duty to Game
`
`Pass, and not other subscription services, will injure competition.” 1-
`
`ER-49. And he “did not model the cloud gaming market.” 1-ER-51.
`
`
`8 Perhaps more fundamentally, he did not explain how a share
`shift that is “[p]erhaps bad for Sony,” but “good for Call of Duty gamers
`and future gamers” would harm competition. 1-ER-40.
`
`17
`
`

`

`Case: 23-15992, 09/13/2023, ID: 12792020, DktEntry: 71, Page 24 of 35
`
`
`
`B. The FTC’s appeal includes no de

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