Meta-Within deal challenge from US FTC failed on evidence, not theory

Meta and Within won their federal court case against the US Federal Trade Commission, but the agency can claim a partial victory because its rarely-used legal theory and its narrow market definition passed court muster, offering proof-of-concept for similar cases in future.

What sunk the FTC’s case was the lack of evidence that Meta was ever seriously considering building its own VR fitness app from scratch, or was perceived as a likely competitor by other companies in the space.

US District Judge Edward Davila ruled against the agency, which had sought to halt the merger. The decision casts doubt on the ability of the agency to prevail in a separate case in its own administrative court.

Meta is expected to close its acquisition of Within in the coming days, with the FTC opting not to appeal its federal court loss.

The outcome could certainly have been worse for the agency. Meta didn’t convince the judge that the FTC was using ‘dead-letter’ law, nor that VR fitness app market looks particularly competitive.

And while the judge had concerns with a survey relied upon by FTC expert witness Hal Singer, he didn’t strike Singer’s opinion on market definition outright, as requested by Meta. And he was unconvinced by Meta expert Dennis Carlton, who argued that the VR fitness app market is not concentrated.

Potential competition

FTC officials say the case vindicates the theory of harm to ‘potential competition’ – that mergers and acquisitions can harm horizontal competition, even where the companies don’t already compete in the same market.

Meta had hoped to convince Davila to issue a refutation of the ‘potential competition’ doctrine, arguing in its motion to dismiss that the theory has been rejected by courts for decades, and pointing to a 1974 Supreme Court ruling in United States v. Marine Bancorporation Inc., which it claimed set much stricter criteria for bringing such a case.

Here, Davila concluded that the doctrine is alive and well, if not very fresh, and rejected Meta's motion to dismiss.

“Given the actual potential competition doctrine’s consistent, albeit distant, history of judicial recognition, the Court declines to reject the theory outright and will apply the doctrine as developed,” Davila wrote in his order.

The Marine Bancorp case, Meta argued, showed that any potential competition case would need to show oligopolistic or interdependent and parallel behavior. But Meta’s “stilted and strained” reading of Marine Bancorp didn’t hold up, Davila concluded.

Market definition

Pages and pages of Davila’s order were dedicated to one question: Do VR fitness apps constitute a market, and does that market look competitive? Here, he fell back on the criteria set out in the 1962 Supreme Court ruling in Brown Shoe Co. vs US.

Meta argued at trial that VR fitness apps such as Supernatural compete with other non-VR fitness products such as Peloton’s exercise bikes, and that in any case, Within’s Supernatural is working in a rapidly-evolving environment with new entrants constantly challenging its market share.

But Davila ran through the various aspects that distinguish VR fitness from other fitness products, including its immersive nature, its pricing models, the specific audience it appeals to, the facilities required to generate a constant stream of fitness content, and the way companies including Meta categorize such apps. Taken together, he concluded it is clear such a submarket exists — meaning the FTC’s case cleared the next hurdle required to prove its case.

Moreover, the entry of new VR fitness apps in recent years didn’t appear to have shifted Supernatural’s market share, Davila observed. Concentration ratios presented by the FTC were solid, he said, suggesting an industry concentration “well above” what the merger guidelines consider ‘highly concentrated.’

“The Court certainly appreciates that a nascent market with an emerging technology may have some features and market incentives that are not captured by concentration ratios,” Davila wrote. “However, the evidence does not support a finding that the VR dedicated fitness app market exhibits the characteristics or desirable behaviors of a competitive market.”

The judge also paused in a footnote to take a swipe at the government's 2010 merger guidelines. Under the hypothetical monopolist test, Davila noted, firms are assumed to be profit-maximizing. But that may not be the case in fast-moving digital markets like VR, where the focus is on market penetration.

“Indeed, the many novel questions of law presented by this case may signal an ill fit between these long-standing antitrust doctrines and the structures of modern technology markets,” Davila said.

Missing evidence

Though the FTC had its theory and its market definition validated, the underlying case didn’t contain the evidence Davila needed to conclude that Meta was really planning to enter the VR fitness app space with its own product — known as ‘actual potential competition.'

The FTC made much of 'Operation Twinkie,' an idea pushed by Meta employee Rade Stojsavljevic to develop Meta’s Beat Saber app into a fitness product, possibly in partnership with Peloton. But Davila took a different view. While there was no question Meta has the size and resources to launch its own competing product, he said the FTC had failed to show there was a “reasonable probability” it would launch its own product absent the acquisition.

“The FTC claims that Meta scrapped this Beat Saber proposal once it learned that Within was at risk of being acquired by Apple,” Davila wrote. “However, this theory is neither supported by the contemporaneous remarks regarding the Beat Saber proposal nor the timing of the subsequent investigation into this proposal.”

Objective and subjective evidence presented at trial, he said, such as a spree of VR gaming acquisitions, suggested that Meta was always more interested in buying its way into the VR space than building its own apps from scratch. The Beat Saber concept had been briefly explored with an external consultant and then dropped by Meta, he said.

“Though Meta boasts considerable financial and VR engineering resources, it did not possess the capabilities unique to VR dedicated fitness apps, specifically fitness content creation and studio production facilities,” Davila said.

Apple’s reported interest in Within may have helped Meta’s case. “The evidence also suggests that this incentive was the primary animating factor that ultimately compelled Meta to pursue Within as an acquisition,” Davila wrote. Nor had the FTC suggested how Meta might have worked its way into the market through a ‘toehold’ acquisition, or a likely target for such a deal, he said

The same lack of evidence sunk the FTC’s theory that the deal would harm ‘perceived potential competition,’ which concerns how other companies view Meta as a potential entrant. The FTC had only been able to come up with one document (a Supernatural product strategy from June 2020) and some comments made by Within employees before Supernatural was even launched to point to the alleged fear of Meta entering the market.

“This finding, in addition to the overall absence of testimony from other in-market firms, would suggest that the FTC has failed to demonstrate that it was ‘reasonably probable’ that Meta was perceived as a potential competitor into the relevant market,” Davila concluded.

Taken together, none of this looks promising for the FTC’s administrative case. There are lower pleading standards for enforcers to secure a preliminary injunction in federal court. Plaintiffs need only show ‘reasonable probability’ that the transaction will harm competition, compared to the clear proof required at trial.

The agency expects to make a decision on the administrative proceeding soon, MLex understands. A trial is currently set to start on Feb. 13.