In early February, a district court judge rejected the FTC’s preliminary injunction suit to block Meta’s purchase of Within, a developer of a virtual reality-dedicated fitness app. Steve Salop writes that the legal standard the judge used to evaluate the FTC’s case placed an excessive burden on the FTC, and alternative standards would have been more sensible. In addition, the FTC should consider expanding its argument if it pursues the case or in similar cases in the future.

A California district court judge’s decision in early February rejected the Federal Trade Commission’s preliminary injunction suit against Meta’s purchase of Within, the developer of a virtual reality-dedicated fitness app. This decision is a step backwards for antitrust and competition. The judge placed an excessively high evidentiary burden on the FTC, based on an outmoded 1981 precedent that deserves to be abandoned. A step forward would be to replace this legal standard with one based on modern economics that more easily shifts the burden to the defendants.

The Section 7 Standard of Proof

While the court accepted the viability of potential competition theories, the court’s standard of proof required the FTC to show a “reasonable probability,” which it defined as “noticeably greater than 50%,” that Meta would enter the VR-dedicated fitness app market without the acquisition of Within. This standard for potential entry substantially exceeds the usual Section 7 evidentiary burden for horizontal mergers, where “reasonable probability” is normally treated as a probability lower than more-likely-than-not. For these mergers, the government only needs to show an “appreciable danger,” and where “doubts are to be resolved against the transaction.”

The court’s excessive Section 7 evidentiary standard is also inconsistent with the treatment of restraints on potential or nascent competition in Sherman Act litigation, where one normally would expect a higher standard. For example, in its application of Section 1 in FTC v. Actavis Inc., the Supreme Court did not require the FTC to show that Actavis’ patents were more-likely-than-not to be invalid or uninfringed to justify preventing Actavis from paying generic pharmaceutical companies to stay out of its market.

Similarly, in U.S. v. Microsoft Corp. the DC Circuit court did not require the US Department of Justice to show that Netscape and Java were more-likely-than-not to reduce Microsoft’s monopoly power to justify condemning Microsoft’s exclusionary conduct under Section 2. Instead, the DC Circuit found their exclusion to be sufficient for causation by Microsoft because even “the exclusion of nascent threats is the type of conduct that is reasonably capable of contributing significantly to a defendant’s continued monopoly power.”

Fiona Scott Morton and I have proposed that courts should apply a rebuttable anti-competitive presumption to cases where a dominant firm acquires one of a very limited number of potential entrants, and Carl Shapiro has made a similar proposal. While some conservative commentators may disagree, former FTC Chair Joseph Simons also proposed a more intrusive legal standard for potential competition mergers. This is because concerns about “false negatives” (including under-deterrence) in these cases are more worrisome than concerns about “false positives” (including over-deterrence) for several reasons.

The first reason to shift the evidentiary burden more easily to the defendant is that dominant firms have powerful incentives to eliminate or neutralize nascent or potential competition in order to protect their monopoly profits. The dominant firm thus can outbid equally efficient smaller rivals by sharing these profits, though this outbidding surely does not mean that its acquisition is pro-competitive. 

Second, “market self-correction” will not occur if the dominant firm is permitted to acquire key nascent competitors or entrants that would lead to more competition.

Third, the dominant firm has better market information than the agencies. So, it can perceive higher level competitive threats before they become apparent to the agencies, as might have been the case with Facebook’s acquisitions of Instagram and WhatsApp.

Fourth, if an acquisition is prohibited, the dominant firm typically can achieve most (if not all) efficiency benefits from de novo entry or a less concerning transaction. The efficiencies then can flow to an alternative purchaser or partner, which then will force the dominant firm to compete harder and lower prices, even if the alternative purchaser is somewhat less efficient.

Fifth, the existence of alternative acquirers also debunks the claim that the lower evidentiary standard will lead to fewer start-ups or less innovation. An “invest and exit” strategy will still be viable by selling to other non-dominant firms.

To illustrate the adverse competitive consequence of placing a high evidentiary burden on the plaintiff, consider an example based on one devised by former FTC Chair Simons. Suppose there are three (and only three) potential entrants into a market dominated by a single firm. Furthermore, suppose the probability that any one of them will enter is 20%, a probability independent of whether any of the others enter. If the evidentiary standard is more-likely-than-not, then the dominant firm could acquire one of the potential entrants. Indeed, given the 20% likelihood of entry, the dominant firm would be permitted to acquire all three. This is because the probability that at least one of them would enter is only 48.8%. A standard that would allow these three acquisitions clearly is too high.

Meta/Within Analysis*

Returning to the Meta/Within case, if the court had applied a more reasonable evidentiary standard to the FTC’s claims, or adopted an anti-competitive structural presumption, the case may have turned out differently. The basic facts are that Within’s Supernatural is the leading VR-dedicated fitness app in a highly concentrated market. Meta owns the leading VR platform and believed that dedicated fitness apps are important for platform success. Meta already owned the Beat Saber fitness app that apparently was capable of being extended into the VR-dedicated fitness space.

These facts might be sufficient to justify an anti-competitive presumption under two anti-competitive theories. First, by acquiring Within, Meta would not need to enter the VR-dedicated fitness app market in another way that would have led to more competition. Second, by acquiring Within, Meta would be able to foreclose access to Supernatural by rival VR platforms and thereby reduce rivals’ ability to compete against Meta’s leading platform.

However, the FTC alleged only the entry theory, claiming that Meta had “available feasible means” to produce its own VR-dedicated fitness app by extending its Beat Saber app in partnership with Peloton. Even Meta CEO Mark Zuckerberg apparently had said that this possibility sounded “awesome.” 

The court found that Meta’s “primary” motivation for acquiring Within was its fear that Apple would lock up Supernatural. This motivation might make business sense, but it is not a cognizable merger efficiency. If Apple’s acquisition (or exclusive) would be pro-competitive, then Meta blocking an Apple transaction likely would be anti-competitive. Alternatively, if Apple’s acquisition of Within (or an exclusive) would have violated Section 1, then Meta’s “self-help” would be similarly condemned by antitrust.  

It appears that Meta argued that the acquisition would help it to design better VR headsets. It is not clear why this motivation would be merger-specific since Meta could have extended the Beat Saber app in partnership with Peloton, which apparently had the necessary entry components to provide this benefit, or acquired another app, or cooperated with Within or others without merging.

An argument that Supernatural is one of many competitors would fail because Supernatural was the leading app. And if Supernatural were not special, then why would Meta have been motivated to acquire it primarily for the purpose of blocking Apple from locking it up?

Lastly, Meta’s acquisition of Within might lack anti-competitive effects if entry were easy. But the court found that entry was not easy, so this argument also fails. It is interesting that the opinion makes Meta’s own views of ease of entry appear contradictory. On the one hand, the opinion suggests that Meta argued that entry was easy. But on the other hand, Meta also seemed to argue that it was not able to enter. It is hard to see how Meta could thread the needle of an argument that entry is easy for everyone but itself.

Given these findings on entry and Meta’s motivations, the FTC might have prevailed if the court had found the FTC’s case sufficient to shift the burden to Meta. However, with its excessive legal standard, the court rejected the FTC’s claims that Meta was a “reasonably probable” entrant absent the transaction, the burden never shifted, and the FTC lost.

Vertical Foreclosure Analysis

The FTC’s case, and the appropriateness of a low evidentiary bar or rebuttable anti-competitive presumption, would have been stronger if the FTC had also included a vertical foreclosure allegation. This vertical foreclosure theory would not even require evidence that Meta was a potential entrant. Instead, it would rely on evidence that Meta would have the ability and incentive to foreclose rival VR platforms’ equal access to Supernatural. The following reasons show this would have been the case:

Ability to Foreclose: Supernatural’s large market share, high market concentration and the barriers entry found by the court indicate that Meta would have the ability to foreclose.

Incentive to Foreclose:  The evidence showed that Meta believed that VR-dedicated fitness apps were important growth factors for a VR platform. The court also found that Meta’s primary motivation for acquiring Within was its fear that its access would be foreclosed by Apple, a fact which essentially concedes the incentive. 

Vertical Merger Efficiencies: Vertical mergers can create efficiency benefits. Elimination of double marginalization (EDM) also might not have been found to be merger specific. Even if merger specific, the incentive to pass on EDM to consumers as lower prices would be mitigated or eliminated by the fact that setting a higher Supernatural license fee would lead to some users switching to other Meta-owned or licensed apps on which Meta earned profits, what economists call the “opportunity cost” or “Chen effect.”

Balancing: Taking all these factors into account, it is not clear that any residual merger-specific benefits would be sufficient to offset the potential consumer harms from Meta’s ability and incentive to foreclose under the Section 7 merger standard.

It is unfortunate that the FTC did not include a vertical foreclosure count. If the FTC does decide to pursue an administrative adjudication, or when it takes on similar cases in the future, I hope that it considers adding a vertical foreclosure count. Aside from this case, efforts need to be redoubled to convince courts to adopt a more sensible evidentiary standard for potential entry mergers.

* This analysis of the Meta/Within decision is only tentative, since it relies almost exclusively on the court’s redacted opinion, not an independent review of the trial record, much of which is sealed.