The Federal Trade Commission has recently lost a series of cases seeking to prevent Big Tech mergers and acquisitions. Jay Ezrielev offers several possible explanations for why the FTC has pursued these losing cases and suggests how the agency can refocus its energies to better serve its mission to protect competition going forward.

In yet another setback to the Federal Trade Commission’s competition agenda against Big Tech, a district court rejected the agency’s bid to block the Microsoft/Activision Blizzard transaction. The FTC’s appeals to the Ninth Circuit Court of Appeals and the Supreme Court were to no avail. The Microsoft/Activision Blizzard loss follows the agency’s loss in its challenge of the Meta/Within transaction. These losses raise questions about the agency’s judgment in pursuing bad cases and what it might do differently.

The two cases share many similarities. The acquirers in both transactions are Big Tech firms. Both merger challenges were decided by district court judges appointed by Democratic presidents, Judge Edward J. Davila (appointed by President Barack Obama) overseeing the Meta/Within case and Judge Jacqueline Scott Corley (appointed by President Joe Biden) overseeing the Microsoft/Activision Blizzard case, both in the Northern District of California. In both cases, the main theories of harm did not imply a loss of current competition between the merging parties. In Meta/Within, the FTC challenged the transaction based on the “actual potential competition” and “perceived potential competition” theories where the main concern is the loss of potential future competition. The FTC challenged the Microsoft/Activision Blizzard transaction based on vertical theories of harm. The Agencies (the FTC and Department of Justice Antitrust Division) rarely litigate potential competition and vertical merger cases and have a poor record in winning such cases in court. What the Microsoft/Activision Blizzard and Meta/Within cases also have in common is that the FTC’s evidence in both cases was shockingly weak.

In Meta/Within, the FTC focused its challenge on the effect of the transaction on competition in the supply of virtual reality (VR) dedicated fitness apps. Within’s Supernatural is the most popular VR dedicated fitness app, whereas Meta did not have its own VR dedicated fitness app. In its complaint, the FTC alleged that Meta was a potential entrant in the VR dedicated fitness app market and that Meta’s acquisition of Within would eliminate potential future competition between Meta and Within. The threshold issue for the court was whether there was “reasonable probability” or a “likelihood noticeably greater than fifty percent” of Meta’s entry in the “VR dedicated fitness app market” in the absence of the Meta/Within transaction. The court found the FTC’s theory of harm to be “impermissibly speculative” as it also found that “Meta lacked certain capabilities that are unique and critical to the VR dedicated fitness app market.” Finding no evidence that Meta considered building a VR fitness app on its own, the court concluded that “it is not reasonably probable that Meta would enter the market for VR dedicated fitness apps” in the absence of the Meta/Within transaction. Because the FTC did not meet its burden of demonstrating “reasonable probability” of Meta’s entry, the court did not proceed to the next, even more difficult to establish element of the FTC’s case: “whether Meta’s de novo entry was substantially likely to deconcentrate or result in other procompetitive effects in the relevant market.”

In Microsoft/Activision Blizzard, the main issue of contention was whether the merged firm would withhold Activision’s popular Call of Duty game from Sony PlayStation, Microsoft’s gaming console competitor. The court found that there was “overwhelming evidence of the combined firm’s lack of incentive to pull Call of Duty from PlayStation,” including commitments from Microsoft to continue providing Call of Duty on PlayStation and to expand access to Call of Duty to other vendors. The FTC alleged that Microsoft would have financial incentives to withhold Call of Duty from PlayStation based primarily on the economic analysis of Professor Robin Lee. However, the court found  Lee’s analysis to be based on unsupported assumptions and so plagued with errors as to render it unreliable. The court rejected the FTC’s other evidence and legal arguments as either unpersuasive or irrelevant to the analysis of the competitive effects at issue. In the end, there was not a shred of evidence offered by the FTC that the court found credible in supporting the agency’s case.

Why would the FTC spend significant taxpayer-funded resources and risk harm to its reputation in bringing cases based on such weak evidence, especially under the theories of harm that are difficult for the agencies to substantiate in court? The FTC’s willingness to bring difficult cases based on extremely weak evidence is the most puzzling aspect of the two FTC cases. There are several alternative explanations for why the FTC brought these cases.

1. Perhaps the FTC challenged these two transactions to send a message to Big Tech that it is willing to pursue even weak cases to stop all Big Tech merger activity. However, the takeaway for Big Tech companies is that they can prevail in court when the FTC pursues weak cases. Winning may become even easier as the agency continues to pursue cases that erode its credibility. The real message to Big Tech companies is that their mergers will incur delays and high transaction costs because of the hostile enforcement environment, a message that these companies are already receiving from the agencies’ harsh rhetoric, investigations, draft Merger Guidelines, and proposed rule changes

2. The FTC may also use its losses in court to demonstrate the need for new antitrust legislation. However, this strategy would only be effective if the losses occurred after the FTC presented robust evidence of anticompetitive harm, which was not the case in the Meta/Within and Microsoft/Activision Blizzard challenges. If anything, the court opinions in these cases demonstrate the incompetence of the FTC rather than any need to amend antitrust law.

3. Some FTC commissioners may have thought that the FTC had strong evidence in support of the two cases. It is unlikely that the FTC staff held this view. A divergence in views between the Commission and staff on the strength of an enforcement case suggests a breakdown in the briefing and advisory functions. According to public reports, the staff recommended not challenging the Meta/Within transaction, but Chair Lina Khan overruled the staff. Facebook’s petition for recusal of Chair Khan makes a related point. The petition argues that Chair Khan had already formulated a view regarding the legality of Facebook’s conduct before her appointment as FTC Chair.

4. Some FTC commissioners may have believed that friendly courts were going to support the FTC’s agenda of taking on Big Tech companies despite weak evidence in support of the enforcement cases. This is clearly not the case. Courts will require the FTC to make sound legal arguments and support allegations with credible evidence, regardless of the FTC’s agenda in pursuing cases against big tech.

5. The most troubling possible explanation for why the FTC pursued a litigated challenge in the Meta/Within and Microsoft/Activision Blizzard cases is that the commissioners who voted to authorize the complaints thought that challenging the transactions was the right policy regardless of the law or the strength of the evidence. It is important to remember that the FTC enforces laws as they are and not as individual commissioners wish them to be. There are significant negative consequences in pursuing cases based on weak evidence and misapplication of the law. Pursuing such enforcement actions wastes taxpayer-funded resources and undermines the credibility of the FTC as a law enforcement agency.

The FTC’s Meta/Within and Microsoft/Activision Blizzard losses are a reality check on its enforcement strategy. There are several lessons for the FTC from the two losses.

Good Management Matters: Good management means making the best possible use of available resources. Pursuing enforcement actions based on weak evidence when the enforcement actions do not advance the interests of consumers makes poor use of the agency’s resources. Good management also means listening to staff and others who can offer independent advice. The FTC staff has many veterans who can give sage advice about when to pursue an enforcement action. It is especially important to listen to opposing points of view as this may persuade the FTC not to make bad decisions.

Risk Assessment is Critical: It is important for the FTC to have a full risk assessment before proceeding with litigation in support of an enforcement case. The risk assessment should consider the strength of the evidence in support of a complaint, the likelihood of winning in court, and the costs and benefits of proceeding with litigation as opposed to a potential settlement. There may be a benefit to proceeding with litigation to enjoin an anticompetitive action if there is no feasible settlement that would adequately remedy the competitive harm or if the defendants are unwilling to settle. There is also a potential benefit in obtaining a ruling on the law that would give the FTC more options for future enforcement. In addition, it may be important for the FTC to demonstrate to potential defendants that it is willing to litigate to stop anticompetitive actions. The benefits of litigation need to be balanced against the costs, which include the opportunity costs of using available resources as well as the costs of outside experts and consultants needed for litigating an enforcement action in court. If the FTC loses in court, there would be further costs from the damage to the FTC’s reputation, loss of staff morale, and potentially a ruling on the law that impedes future enforcement. There is also the potential loss of efficiency and harm to consumers if the FTC attempts to block a pro-competitive merger.

Sometimes Firms Engage in Pro-Competitive Mergers: Just because the FTC views certain firms as having a history of anticompetitive acquisitions does not mean that these firms cannot have pro-competitive acquisitions. Evidence suggests that Meta’s acquisitions of Within and Microsoft’s acquisition of Activision Blizzard were pro-competitive deals with compelling efficiency theories. An important takeaway for the FTC from these two cases is that the agency should review transactions based on the evidence related to the transactions and not based on perceived effects of prior acquisitions by the parties. 

Enforcement Requires Strong Evidence: The FTC is a law enforcement agency that derives its power from winning cases in court. Winning cases in court requires strong evidence. Supporting complaints with credible economic and factual evidence is the best way to persuade courts of the merit of the FTC’s case. Such evidence is also important for the FTC to be sure that its competition enforcement is advancing the interests of consumers and is on the right side of antitrust law. 

Public reporting suggests that the FTC is considering bringing a major antitrust case against Amazon. Before pursuing this case, the FTC should carefully consider the strength of the evidence, as bringing another bad enforcement action would be a waste of resources and would further damage the FTC’s credibility.

Author Disclosure: I am currently consulting for parties on matters relating to antitrust, among others.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.