FTC Runs into the Judicial Wall

T he Federal Trade Commission’s (FTC) antitrust crusade has run into an obstacle: the judiciary. Indeed, the agency wants to expand its authority and broaden enforcement standards so it can win more cases against big businesses, but so far judges have kept its populist turn in check.

The latest rebuff came late on the night of January 31, when a district-court judge ruled that Meta, Facebook’s parent company, may go ahead with its purchase of Within Unlimited, a virtual-reality software maker. The FTC is still trying to stop the deal but has no plans to appeal the decision.

Your authors took at least as dim a view of the case as the judge did, as we wrote for National Review last September. In our view, the FTC’s complaint depended heavily on the relevant-market fallacy, which is when regulators define a company’s market so narrowly that it looks more dominant than it really is.

In this case, the FTC defined the relevant market as the “virtual reality dedicated fitness app market,” and shut down the deal. But in the big picture, such apps compete with other fitness options such as gym memberships, home gym equipment, free YouTube workout videos, and local sports leagues. In its decision last month, the court acknowledged this more holistic view of fitness options but nevertheless accepted the FTC’s market definition as an economically distinct sub-market.

More narrowly, dedicated fitness apps compete with incidental fitness apps such as dancing games and rhythm-based virtual-reality (VR) games that require similar levels of physical activity but aren’t explicitly about fitness. They also compete against dedicated fitness apps for mobile devices and tablets that can be paired with smart watches or TV screens.

While Meta currently enjoys 78 percent of new augmented-reality (AR) and virtual-reality headset sales, the devices are still far from ubiquitous. Sony and Apple are coming out with VR headsets and apps of their own as soon as this year. They have plenty of capital and software experience to compete with Meta, and some app developers might find their platforms more appealing.

There are other holes in the FTC’s case too. For starters, the virtual-reality dedicated-fitness-app market barely exists. Dominance by Meta, or any other company, is purely hypothetical at the moment, and judges tend not to look kindly on hypotheticals.

The FTC is trying to revive the incipiency doctrine, which takes antitrust action against such hypothetical markets that might be dominated by a big company at some point in the future — a weak enforcement standard for cases that can potentially affect billions of dollars of value for consumers and for investors.

Concurrently, the FTC is challenging Microsoft’s acquisition of the gaming developer Activision Blizzard. Similar to the Meta situation, this case also relies on a narrow relevant-market definition of “high-performance consoles.” This definition excludes the Nintendo Switch and personal computers. It also omits smartphones, which are the most popular devices for gaming in the U.S. and globally. According to the administrative complaint, Microsoft’s Xbox Series X|S and Sony’s PlayStation 5 are the only platforms in its relevant market.

The FTC’s case against Microsoft also excludes Meta’s VR headsets, though comments in October of 2022 from Microsoft Gaming CEO Phil Spencer about the Metaverse offering a “poorly built video game” seem to clearly indicate that Microsoft itself sees Meta’s emergence in the VR space as competition. Likewise, the two tech companies’ collaboration to bring Xbox Cloud Gaming to the Meta Quest Store also disproves FTC claims that Microsoft is incentivized to withhold content offerings from competitors.

The Meta/Within merger case may not be over yet, so it is still too early to say, “We told you so.” In fact, the FTC withdrawal of the case from adjudication on February 10 is hardly final. This incarnation of the case might be over, but since the court did not dismiss the case outright, the FTC can try again later if it wants. Moreover, it might continue the case in its in-house administrative-law-court system, in which the FTC chooses the judges, pays their salaries, and sets the procedural rules, giving the agency an advantage that it would not have in a regular court.

And even in the rare event that the FTC loses on its home field, its commissioners have the power to overturn the verdict after the fact, as it recently did in a case involving Altria and the vape manufacturer Juul. If the FTC goes this route with the Meta/Within merger, it can essentially guarantee victory for itself. While Meta and Within could then appeal to a standard court, the extra time and expense may not be worth it, given how quickly apps can fall into and out of fashion.

All that said, the fact that the district court accepted both the FTC’s market definition and its pre-crime incipiency reasoning is not necessarily a good omen for the agency. That’s because it means the judge rejected the case on the FTC’s own terms, not on a technicality. FTC leadership has a low batting average in court but seems to be okay with it. Over time, their novel legal theories won’t seem to strange to judges. And a larger quantity of challenges tells entrepreneurs they should avoid disapproved conduct in the first place.

Until courts stand up to the FTC, companies and consumers will continue to suffer as the agency’s narrow relevant-market definitions send a clear message to tech companies and manufacturers: If you create something new, you may create an entirely new market to monopolize, and you will be punished for it.

So, while the court’s recent ruling is a step in the right direction, there is still so much more to do. Current FTC leadership is highly ideological and willing to play the long game. And while most of their cases are legal long shots that attempt to revive discredited populist theories from the Progressive Era — from fallacious market definitions to the incipiency doctrine — if they throw enough spaghetti at the wall, eventually something might stick. It is up to the judiciary to ensure that it does not.

Ryan Young is a senior economist at the Competitive Enterprise Institute. Alex Reinauer is a research fellow at CEI.