Microsoft-Activision Ruling Shows Preemption Strategy Strength

Microsoft Corp.’s court victory in its $69 billion acquisition of Activision Blizzard Inc. over Federal Trade Commission opposition bolsters an increasingly popular litigation tactic by companies trying to head off government attempts to block deals.

Merging parties facing investigations and litigation from the FTC and the Justice Department’s antitrust division have increasingly attempted the tactic, known as litigating the fix. Companies propose partnerships or divestitures early in litigation, hoping to convince courts to approve a deal with possible conditions rather than face the possibility of having it rejected outright.

“This trend in court is deeply problematic if you believe in the concept of expert agencies,” Bloomberg Law legal analyst Eleanor Tyler said. “Increasingly, courts second-guess remedies that the agencies concluded wouldn’t ‘fix’ the anticipated competitive harm.”

Microsoft pledged to offer Activision’s blockbuster Call of Duty franchise on platforms and streaming services that compete with its Xbox system, like those owned by Nintendo Co. Ltd. and Nvidia Corp., for 10 years.

Judge Jacqueline Scott Corley of the US District Court for the District of Northern California gave significant weight to those commitments Tuesday in denying the FTC’s request for a preliminary injunction to pause the deal from proceeding.

“This argument is foreclosed by Microsoft’s post-FTC complaint agreements with five cloud-streaming providers,” Corley wrote. “Before the merger, there is no access to Activision’s content on cloud-streaming services. After the merger, several of Microsoft’s cloud-streaming competitors will—for the first time—have access to this content.”

“The merger will enhance, not lessen, competition in the cloud-streaming market,” Corley added.

Microsoft’s preemptive moves put the FTC on the defensive in arguing against the deal. Rather than the company being forced to defend its moves in order for the deal to go ahead, Corley said it was up to the FTC to show that Microsoft hadn’t done enough to ensure continued competition.

Winning Record

Other companies have also made such moves successfully.

Assa Abloy AB employed the move in May to force a settlement while facing DOJ litigation over its acquisition of a unit of Spectrum Brands. UnitedHealth Group Inc. beat a challenge to its merger with Change Healthcare last summer while promising to divest a unit to a private equity firm.

Illumina Inc. convinced an administrative law judge at the FTC in September that the company’s supply and pricing agreements would maintain competition after it moved to buy back cancer test developer Grail.

That Microsoft was able to convince Corley with its commitments to Nintendo, Sony and the cloud gaming providers illustrates how “muddied” the legal issue has become, said Diana Moss, president of the American Antitrust Institute.

Corley leaned heavily on previous rulings that greenlit “litigating the fix” tactics as “the appropriate or good case law” for analyzing the approach. As a result, she never directly confronted the complexities of the tactic, Moss said. That’s also an indication that the strategy is catching on in the courts, she said.

“It’s just almost a foregone conclusion by the judge that regardless of the mechanics of litigating the fix or not, Microsoft is going to live up to the terms of its promises to contract openly and freely with rivals,” Moss said. “This contract remedy is accepted as the gospel.”

Sony, one of the leading competitors offered Call of Duty access, has so far declined to take the deal. The company said it’s concerned Microsoft could degrade or block competitors’ access to the flagship game and others.

Antitrust enforcers have moved away from forcing similar behavioral remedies in recent years, concerned that they’re hard to oversee and easy to abuse. After signing on to a series of behavioral agreements as part of its merger with Live Nation in 2010, Ticketmaster was later subject to an extended consent decree after a federal judge agreed with the DOJ that the ticketing and venue provider violated the agreements.

Preemptive pacts—such as the ones Microsoft made—don’t ensure the level of competition that blocking mergers does, Moss said.

“They’re ineffective, for all obvious reasons,” Moss said. “They don’t change incentives such as market power. They are easily worked around, and they require a small market players to step up and complain. And none of that works.”

“But replacing competition with blanketing the industry with a contract to license games is not a substitute for competition, period,” she said.

The case is Federal Trade Commission v. Microsoft Corporation et al, N.D. Cal., No. 3:23-cv-02880, opinion 7/11/23.