By Steven Cernak, a partner with Bona Law PC in its Detroit, MI office who practiced antitrust law in-house with General Motors for over 20 years.
The FTC lost its preliminary injunction motion to prevent Meta from acquiring Within, a Virtual Reality (VR) app provider, on February 1, 2023. The Commission was concerned about a loss of competition in a market for VR-dedicated fitness apps. The FTC chose not to appeal the ruling and paused its in-house administrative hearing on the matter. The parties have now closed the transaction. The ruling, however, was not a complete loss for the FTC. The court accepted much of the FTC’s legal argument concerning “actual potential competition,” a clumsily worded theory of competitive effects in certain mergers involving parties that are not (yet) competitors that the U.S. Supreme Court has never officially accepted. Regulated entities must be aware that the FTC’s partial victory in FTC v. Meta/Within and on that particular legal theory could pay off for the FTC in later merger reviews.
Actual Potential Competition v. Perceived Potential Competition
In the Meta/Within merger, the FTC pursued, and eventually lost under, both a perceived and actual potential competition theory. Under the perceived potential competition theory, competitors in a concentrated market are constrained by the perceived threat of entry from some formidable competitor, here Meta. Eliminating that threat—such as by a merger of Meta with current competitor Within—reduces competitive pressure on the remaining competitors.
The FTC and the court focused more on the actual potential competition theory (as will this Legal Opinion Letter). Under that theory, the market would become more competitive through the impending entry of one of the parties, here Meta, but for the merger. So, the alleged injury to competition is the preemption of this entry into the market for VR-dedicated fitness apps by the proposed merger.
History of Actual Potential Competition Theory
The Supreme Court has twice extensively discussed — though not explicitly endorsed — the actual potential competition theory. In 1973’s U.S. v. Falstaff, the country’s fourth largest brewer (based in the Midwest) entered the New England beer market by purchasing New England’s largest brewer. The district court rejected the Justice Department’s actual potential competition theory challenge, accepting the theory but finding the facts did not support it. A fractured Supreme Court reversed and remanded for further proceedings based on a perceived potential competition theory (which, as the dissent pointed out, was never argued by DOJ). The Court, therefore, thought it could “leave for another day” the validity of the actual potential competition theory, though in dicta the majority did say that it found “traces” of the theory in some of its earlier opinions.
“Another day” came the next year in U.S. v. Marine Bancorporation where the Justice Department challenged the acquisition of a bank in one part of Washington state by a bank in another part of the state under an actual potential competition theory. Again, the district court accepted the theory but found the facts did not support it. A divided Court affirmed, agreeing that the Justice Department’s challenge did not sufficiently account for state law impediments to entering new markets in ways other than through this merger. Again, the Court chose to “express no view on the question reserved in Falstaff” because the facts did not support the theory.
Some subsequent lower courts have remained skeptical of the actual potential competition theory. For example, Seventh Circuit Judge Frank Easterbrook, in dicta in South Austin Coalition Community Council v. SBC Communications, Inc., described the theory as “difficult for the best economists and . . . nearly impossible as a subject for trial.” Many more courts, however, have applied the theory and developed its elements. The district court in Meta/Within reached back to old opinions like the Fourth Circuit’s 1977 opinion in FTC v. At’l Richfield Co. It also could have supported its finding of the theory’s continued validity with citations to newer cases like the Eighth Circuit’s 2010 opinion in Ginsburg v. InBev NV/SA (“Nearly forty years ago, the Supreme Court identified these as plausible theories of §7 liability . . . we then upheld the . . . application of the theories five years later.”).
Elements of Actual Potential Competition Theory and Application in Meta/Within
The Supreme Court and lower courts have developed some consensus on the elements of theory. First, whether for actual or perceived potential competition, the relevant market must be concentrated and there must be few other potential entrants. With those preconditions, the hypothetical entry of the acquiring firm really would make a competitive difference. For actual potential competition, courts also have required proof that the firm entering the market had feasible means of entry other than the merger and that these other means would have significant procompetitive effects. Again, if the acquiring company could not, or would not, effectively enter the market and increase competition in any way other than the merger, the theory fails.
The Meta/Within court applied these elements but focused on two questions about the theory where courts have not reached consensus: First, what is the standard of proof that the plaintiff, FTC here, must meet and, second, what are the roles of subjective and objective evidence in meeting that standard?
To what standard must the FTC prove that Meta would have entered the VR-dedicated fitness app market but for the merger? The court saw no precedent from its own circuit, the Ninth, and so looked to others for guidance. The Fourth Circuit requires “clear proof” that the acquiring firm would have entered the market. The Second Circuit requires evidence that the firm “would likely” have entered. The Fifth and, probably, the Eighth have adopted a “reasonable probability” standard, explained by the Fifth Circuit as “greater than fifty percent chance of occurring.” The court here weighed what it saw as the Clayton Act requirement for something more than “ephemeral possibilities” but less than “certainties” and adopted the Fifth Circuit standard.
In meeting that standard, can the FTC rely solely on “objective” evidence of Meta’s capabilities and incentives to enter the market? Or must it also consider “subjective” evidence of what Meta says it was likely to do? Here, the court nearly sided with the earlier courts that had found objective evidence could be sufficient. The court decided to look at the objective evidence and then, if it was “weak, inconclusive, or conflicting,” also at subjective evidence “to illuminate the ambiguities” but not contradict any objective evidence.
The court found the objective evidence did not support the FTC’s theory. While Meta certainly had sufficient financial and engineering resources to enter the market, it did not have the specific fitness resources to make it “reasonably probable” that it would enter the market.
The court then turned to the subjective evidence to see if it offered more support for the FTC’s theory. The court accorded “little weight” to statements made by Meta witnesses during the litigation because of potential bias. Focusing only on contemporaneous documents, the court found strong evidence that Meta wanted a presence in the market in order to improve its VR hardware and ensure the existence of a high-quality VR fitness app available to Meta hardware customers; however, the court found that this subjective evidence was consistent with Meta entering the market either de novo or through a merger like the Within transaction. Therefore, the court concluded that Meta’s entry into the market other than through the merger was not “reasonably probable” and so the merger was not anticompetitive.
While the FTC did not stop the Meta/Within transaction from closing, the court’s opinion was far from a complete loss. The FTC convinced yet another court to accept the validity of the actual potential competition theory. That court then chose the easiest standard of proof that any prior court had applied to the theory. The court then nearly adopted the FTC’s recommendation that objective evidence alone could be used to show that Meta would have entered the market on its own absent the merger. While the court disagreed with the FTC on the facts, expect the FTC to use this opinion as precedent for a future actual potential competition case where its thinks it has evidence that the buyer would have entered the market on its own absent the merger.