Policing Virtual Reality: FTC v. Meta Platforms, Inc.

JARED SCHIFMAN—Antitrust regulators continue to pile up the losses in a new era of antitrust enforcement. Attempting to revitalize old antitrust doctrines from the first half of the 20th century, the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) have lost high profile merger challenges in a variety of industries. But the agencies and lawmakers are placing a significant emphasis on “big tech,” as Lina Khan, Chairwomen of the FTC, gained recognition after publishing Amazon’s Antitrust Paradox. The agencies along with a bipartisan group of state attorneys general have filed lawsuits against Apple, Alphabet, Amazon, Meta, and Microsoft, and the two agencies are collectively reforming their merger guidelines. Congress also has introduced multiple pieces of antitrust legislation targeting big tech dominance, and in 2021, President Biden signed a landmark antitrust executive order. 

But regulators recently lost another notable decision. In July of 2022, the FTC filed a complaint in the U.S. District Court for the Northern District of California seeking a preliminary injunction to block Meta from acquiring Within Unlimited, the creator of the popular virtual reality fitness app Supernatural. The FTC focused its complaint on the “potential competition doctrine,” a theory that predicates “certain mergers, if allowed, will have such an inhibiting effect on potential market entrants that the market will eventually be devoid of all competition.” Specifically, the FTC alleged that Meta’s acquisition of Within Unlimited would eliminate its incentive to develop a similar VR fitness service in-house and “dampen…future innovation and competitive policy.” 

Meta responded to the allegations and claimed “there [was] almost no chance” it would start its own similar project today, likely canceling any program “if it didn’t have any traction.” Meta asserted the transaction is beneficial to both itself and consumers, and remained confident the court would ultimately rule in its favor. 

And on February 1, 2023, Meta’s wishes were granted when Judge Edward Davila denied the FTC’s request seeking a preliminary injunction to block the proposed transaction. Judge Davila acknowledged Meta’s “considerable financial and VR engineering resources,” but reasoned that Meta did not possess “the capabilities unique to VR dedicated fitness apps.” Meta therefore could not “enter the relevant market other than by acquisition,” and Judge Davila held that the FTC failed to prove the acquisition will negatively impact market competition. The FTC did not appeal the ruling, and voluntarily dismissed its complaint after the decision. The FTC also abandoned its separate administrative proceedings related to the transaction, and the two companies completed the transaction on February 8, 2023. 

Despite the ruling for Meta, the impacts of this case could still be significant because regulators do not need to win cases for lawsuits to be consequential. Experts believe this case could have a chilling effect on Silicon Valley business dealings since “it shows the commission is aiming to prevent powerful corporations from buying up the technologies of the future.” To avoid costly and lengthy litigation, some companies will be reluctant to engage in mergers and acquisition even if they remain confident the legality of a potential transaction ultimately would be upheld at trial. 

Additionally, the eventual goal of many start-ups is to be acquired by a large company like Meta. Innovators could be dissuaded from gambling on new start-ups if they believe a large acquisition likely would be challenged by regulators. Other industry experts are concerned that increased regulation will hurt the “startup and the venture capitalists who are developing technology that suddenly can no longer sell that to its natural acquirer.”

Although the future for antitrust enforcement remains unclear, these developments will be a trend to watch as the FTC litigates Microsoft’s acquisition of Activision Blizzard and other future lawsuits in the technology sector.