FOSS Patents

This is a quick follow-up to yesterday's report on the Karlsruhe Higher Regional Court's appellate hearing in Deutsche Telekom v. IPCom. Unsurprisingly, the regional appeals court threw out the appeal as a spokesman for the court told me this afternoon. This means the Mannheim Regional Court's dismissal of the complaint stands.

Deutsche Telekom can try to appeal this matter to the Federal Court of Justice. Presiding Judge Andreas Voss ("Voß" in German) mentioned yesterady that the case has the potential to reach the top court. Whether this means that his court will authorize a further appeal is another question. The reasons for the appellate decision are not known yet. I look forward to a public redacted version of the decision in case it becomes available.

Deutsche Telekom is essentially trying to upend the standard-essential patent (SEP) licensing system--of which license-based settlments are a significant part--and even non-SEP licensing could be affected by extension (though antitrust law rarely applies to non-SEPs).

There are two case-specific factors here that weaken Deutsche Telekom's case:

• They settled for convenience, not for hold-up. No injunction was being enforced. No injunction had been ordered. And no injunction was on the horizon. Now imagine what would happen if companies that took a license after an injunction came down, or on the eve of a likely injunction, sought refunds through antitrust litigation.

• The license agreement in question contains a clause 8.2 according to which IPCom was under no obligation to get other telecommunications network operators to take licenses on comparable terms. Deutsche Telekom argued that this merely meant they could not enforce an obligation on IPCom's part to enforce, but IPCom could have given Deutsche Telekom a refund regardless. Deutsche Telekom also argued that there was no waiver of potential damages claims. That attempt to vitiate an important clause (which had resulted from extensive negotiations, led by Dr. Roman Sedlmaier as outside counsel for IPCom) did not succeed in Mannheim, and I don't know yet whether it also proved dispositive in the appeals court. Be that as it may, if Deutsche Telekom could obtain a refund on antitrust grounds, numerous other licensees who never signed an agreement that contains such a clause--and/or licensees who took a license under the threat of injunctive relief--would bring such cases.

Judge Voss gave Deutsche Telekom's counsel from Clifford Chance every opportunity to make their case. In my recollection, Deutsche Telekom had at least about twice as much speaking time as IPCom, and easily three times as much time as a U.S. federal appeals court would have allotted to them. Frankly, their arguments were exceedingly repetitive.

Quinn Emanuel's Jérôme Kommer didn't want to waste a minute of the court's time. He largely just pointed to his opposition brief, and focused on providing a few clarifications. Less is more in certain situations, and this was one of them.

It would make a lot of sense for that non-case to go away now, but Deutsche Telekom's litigation budget may have room for yet another appeal...

In January, I reported on the partial dismissal of an antitrust class action against Qualcomm in the Northern District of California (a case that was brought in the wake of the FTC's ultimately unsuccessful enforcement action against the chipmaker), and at the time I already wrote that the ruins of that complaint "[would] hardly survive summary judgment." In February I agreed with Qualcomm's arguments for not reopening discovery, as did the court. After the SJ motion was filed in April, I "I guess[ed] Qualcomm's motion [would] succeed." And that is what has just happened.

On Tuesday, "[a]fter carefully considering the briefing and conducting oral argument on August 3, 2023," Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California granted Qualcomm's motion for summary judgment in its entirety:

In Re: Qualcomm Antitrust Litigation (case no. 17-md-02773-JSC, N.D. Cal.): Order re: Motion for Summary Judgment (Public Redacted Version)

[フレーム]

This here is a legal victory that should put all of that U.S. antitrust litigation from the late 2010s to rest (short of a successful appeal, but chances are so slim that I guess an appeal will not even be brought). In economic terms it is, however, pretty unimportant compared to the fact that Apple, due to its failure to make its own iPhone-grade baseband processor, had to extend the chipset purchasing agreement with Qualcomm by another three years (2024-2026), which presumably means that Apple exercised an option to extend its standard-essential patent royalty payments as well. In the alternative (if Apple had been able to replace Qualcomm's chips), Apple might have tried to renegotiate those SEP licensing terms.

Things are going well for Qualcomm, and ultimately I believe the company will be able to deal with whatever impact the proposed EU SEP Regulation--in whatever form it may or may not be passed into law--will have.

As for Judge Corley's reasoning, the key elements are that there was really not even the slightest substance to claims that an agreement with Samsung had any market foreclosure impact. And even with respect to Apple, there was no credible pass-through theory (of elevated costs). The final part ("Conclusion") of the order granting the motion to dismiss essentially says that the class-action lawyers made their strategic choices. The initial choices (very much about "No License, No Chips" and allegedly supra-FRAND SEP royalties) didn't work out when the Ninth Circuit reversed the FTC's trial win. Later on, they still tried to get something out of this by suing Qualcomm over exclusive dealing. They presented a new expert report "though the Court had expressly declined to reopen expert discovery." Judge Corley declined to "open the flood gates to prolonged do-over litigation" as opposed to the speedy, efficient, and just resolution that the Federal Rules of Civil Procedure seek to ensure.

This outcome makes sense to me. As I noted further above, I predicted that the shifting-sands case wouldn't make it to trial.

Class actions can serve useful purposes. They can raise issues and promote justice. However, the vast majority of class actions I see in the technology industry are just opportunistic attempts by lawyers to extract settlements from large corporations. Qualcomm probably could have "settled" that class action at a far lower cost than that of its world-class defense. But once you do that, others will come and sue you as well. Qualcomm made the right choice and has now (again, absent an unlikely reversal on appeal) defeated this class action (or, more precisely, consolidated set of class actions).

The order to dismiss the Qualcomm class action(s) came one day after Judge Corley also made a decision (in a class-action matter that does not involve Qualcomm but also followed an FTC action) relating in part to yours truly's communications with Microsoft:

DeMartini et al. v. Microsoft (case no. 22-cv-08991-JSC, N.D. Cal.): Order Re: Discovery Dispute Joint Letter

[フレーム]

Let me just refer you to an article about this odd sideshow of the Microsoft-ActivisionBlizzard merger case by Stephen Totilo of Axios Gaming.

On Tuesday (September 19), the Munich Local Division of the Unified Patent Court (UPC) intends to adjudge a preliminary injunction request in a life sciences case. I will do my best to share the news quickly. A preliminary injunction looms large according to what various observers (including specialized newsletters) say. We will see, but only one thing would really surprise me: if the antitrust-based affirmative defense in that case succeeded. While the UPC is a European court, defendant NanoString's lawyers argue that their client may prevail on a U.S. antitrust claim against patent holder 10x Genomics. Under U.S. law, those seeking to enforce antitrust law against patent holders exercising their monopoly rights face a very high hurdle to say the least.

From the West Coast (Qualcomm v. FTC, 9th Cir., 2020) to Texas (Continental v. Avanci et al., 5th Cir., 2022) to the East Coast (FTC v. Endo Pharmaceuticals, D.C. Cir., 2023), federal appeals courts have been rather clear in recent years that antitrust law does not trump patent law. Patents are monopolies, but there is a strong presumption that they are lawful monopolies. It is not 100% inconceivable that a patent holder may run afoul of U.S. competition rules. That, however, hasn't been the outcome in any recent case. It wasn't even a close call in any of those recent cases.

In this post I want to be nonjudgmental and simply analyze the state of affairs, which some may consider desirable while others may have different policy views. What some may deem judgmental (but is not intended as such) is my take that on the bottom line U.S. appeals courts effectively put patent law above antitrust law. They say things that suggest both are on equal footing. But in practice, if the monopoly rights conferred by patents on their holders are treated with enormous deference so that traditional anti-monopoly rules hardly ever apply, there isn't much of an opportunity for public or private antitrust enforcement. Whether for better or for worse is in the eye of the beholder.

Let's take a quick look at two very recent developments, both of which happen to involve the concept of Abbreviated New Drug Applications (ANDA), a fast-track approval process for generic drugs.

August 25, 2023 decision by the United States Court of Appeals for the District of Columbia Circuit in FTC v. Endo (appeal no. 22-5137)

The D.C. Circuit affirmed the D.C. District Court's dismissal of an FTC case over an exclusive license agreement between Endo Pharmaceuticals (represented by a Dechert team led by George Gordon) and Impax Laboratories (represented by a Kirkland & Ellis team led by Jay Lefkowitz).

The FTC had brought the case based on the observation that prices for a certain category of drugs (and I'm not going to take a position on opioids here as the focus is on the intersection of patent and antitrust law) increased after a patent holder (Endo) exited the market and granted someone (Impax) an exclusive patent license. Price hikes like that are often indicative of consumer harm. But in this case, both the district court and the appeals courts determined that a single patentee (as opposed to a research consortium) is free to grant an exclusive license to a licensee, even if it means that there will be only one market actor left.

There had been a patent infringement dispute between the two companies, provoked by an ANDA that disputed that the relevant Endo patents were valid and infringed. That one was settled in 2017 in the way that gave rise to the FTC's enforcement action.

The FTC tried to describe the Endo-Impax deal as very similar to an exclusive license agreement that the Supreme Court deemed an illegal noncompete contract in Palmer v. BRG of Georgia (1990). In footnote 1, the D.C. Circuit explains why the two cases are distinguishable:

"[In Palmer] an exclusive licensing agreement was a pretext for a noncompete agreement between two competitors, because the parties in Palmer did not require one another’s intellectual property to participate in the market for bar preparation courses. Here, by contrast, Impax’s ability to compete was completely contingent on the clarity of its license to use Endo’s patents, and the complaint itself alleges that Endo surrendered the right to press its suit against Impax through the 2017 Agreement."

Palmer was not about patents. The material in question was presumably protected by copyright, but copyright law is narrow and the Supreme Court took issue with the fact that the net effect was horizontal geographic market division.

Therefore, Palmer is of limited help if we want to find out where patent license agreements might run afoul of the antitrust laws. There could be a hypothetical case where company A licenses to company B a patent (or patent portfolio) P that it doesn't really need to license to make a certain product or offer a service, but the license agreement contains clauses that amount to geographic market division.

The FTC couldn't make that showing. The closest argument to the license being pretextual was that the settlement precluded the licensee from challenging the patents in question, which is, however, a standard term of patent license agreements as the licensing practitioners among you can confirm. Only because a party is contractually precluded from challenging certain patents doesn't mean such challenges would necessarily have succeeded. Even without such a contractual clause, someone who has taken a license often doesn't even want to challenge the licensed patents as the main (or only) beneficiaries would be unlicensed competitors. And it doesn't prevent any third party from challenging those patent rights in an effort to compete in the relevant market.

The D.C. Circuit provides some high-level guidance:

"In a future case, the Commission is free to plead that a licensing agreement results in unjustifiable competitive harms, so long as it explains how those harms exceed what the Patent Act and settled precedent permit, which it has failed to do here."

So the starting point of any U.S. antitrust analysis of an exclusive license agreement will be that "both the Supreme Court and the Patent Act have blessed [such contracts] as lawful," and there must be something more--in fact, something egregious--than exclusivity to establish an antitrust violation. A pretextual license such as in Palmer (where the relevant price, by the way, increased from 150ドル to 400ドル as a result of horizontal geographic market division) is presumably not the only such scenario, but for now there's no other example of an exclusive IP license being anticompetitive. It would take "allegations establishing that [an agreement] created anticompetitive effects greater than that authorized by settled law and precedent" that is favorable to exclusive IP licenses.

September 14 policy statement by the FTC on brand pharmaceutical manufacturers' improper listing of patents in the Food and Drug Administration's (FDA) 'Orange Book'

On Thursday, the FTC issued a policy statement (PDF), press release, and an additional statement by Chair Lina Khan (PDF) concerning "improper" patent listings in the FDA's Orange Book.

The idea of the fast-track approval process called ANDA is that generic drugs should be approved quickly, but not so quickly that a patent holder cannot enforce its rights. That's why there is an automatic 30-month stay of approval in the event of patent litigation by the manufacturer of the original product. I find the term "brand drug manufacturer" a bit misleading as there are generics companies with fairly well-known brands, too.

The FTC believes to have identified a rampant form of abuse in the form of drug makers including patents in the FDA's Orange Book that aren't really needed. This is somewhat comparable to an overdeclaration of allegedly essential patents in connection with industry standards, but with the effect that the approval of competing products can be delayed (while standard-essential patent owners can only sue after an implementer has released an unlicensed product).

What lends the FTC initiative significant credence is that the FDA supports the new statement, effectively making it an inter-agency initiative.

Unlike in FTC v. Endo, which involved Sherman Act Section 1 and 2 claims, the FTC intends to tackle such improper listings as unfair methods of competition under Section 5 of the FTC Act. In any event, the D.C. Circuit's FTC v. Endo decision does say that anticompetitive behavior that goes beyond what is lawful under patent law can be an antitrust violation.

Where I see a practical challenge for the FTC is that any overdeclarations would have to be shown to have been made in bad faith. However, patent law is sufficiently subjective (for example, a fairly high percentage of claim constructions are overturned on appeal) that drug makers will often be able to argue that even though their position on the inevitability of an infringement of a certain patent by a type of drug may have been wrong, it wasn't wholly unreasonable in the first place. That is, for example, what defendants sometimes argue in order to escape willfulness enhancements of damages verdicts. The FTC says that patents are sometimes listed in the FDA's Orange Book even though their claims just don't read on the drug in question--but what will the courts of law say in a given case?

The FTC's policy statement may now dissuade drug makers from adding patents to the FDA's Orange Book that they'd have listed before. In that case, the FTC may achieve a positive effect without having to litigate. But if it does have to go to court, those cases threaten to become rather difficult to decide--and possibly even more difficult to win.

Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California just denied in part--and in economic terms, almost completely--a U.S. antitrust class action brought on behalf of leading French publishers such as Le Figaro and L'Équipe (about that one, see my personal note toward the end).

Here's the decision, which I'll explain briefly:

https://www.documentcloud.org/documents/23977262-23-09-13-order-on-motion-to-dismiss-le-figaro-et-al-v-apple: Société du Figaro et al. v. Apple (case no. 4:22-cv-4437-YGR, N.D. Cal.): Order granting part and denying in part APple's motion to dismiss with partial leave to amend

[フレーム]

The court gives the French publishers three weeks (until October 4) to amend their complaint, but they can only amend limited parts that won't change anything about the fact that there's no more serious money left for them to be made even if they won. But in order to turn this into something that has significant economic potential, they need a successful appeal.

In this first reaction, I'm not going to take a position on whether I agree with Judge Gonzalez Rogers. I disagreed with key parts of her Epic Games v. Apple ruling (which is now going to be appealed to the Supreme Court), but her dismissal of Pistacchio v. Apple, a class action over Apple Arcade, was well-reasoned (at least the market definition part).

The introductory part of the decision indicates between the lines a bit of an annoyance with the fact that certain class-action lawyers brought this case shortly after setting a U.S. developer class action against Apple over largely the same issues. This here looked like a double-dipping (as far as the lawyers--not the parties--are concerned). But that does not, in and of itself, render the entire case meritless.

The economically biggest part is that Judge YGR does not allow the French publishers to sue in U.S. court for damages relating to foreign sales. Those publishers obviously have some U.S. revenues, as there are French expats and other people who read one or more of those publications. But obviously most of the money they make is generated in France, followed by other French-speaking parts of the world (such as Québec).

If they go ahead now and take this to trial, the maximum damages award they could ever realistically hope for would still not offset litigation costs. A victory would be somewhat symbolic. The only value they could get value out of a win related to their U.S. revenues would be that this might persuade a French court to rule against Apple in a similar way. But is that going to be worth it? I doubt it.

Earlier this year I highlighted the problem that Apple doesn'T want to be liable in any jurisdiction. Epic Games experienced the same. If app makers sue outside the U.S., Apple says only U.S. courts have jurisdiction, and in the U.S., Apple points to the Foreign Trade Antitrust Improvements Act (FTAIA), which is a law that was enacted to prevent extraterritorial overreach by U.S. courts.

Based on this U.S. decision, the French publishers and others will find it easier to convince foreign courts that they have jurisdiction over App Store abuse claims relating to those non-U.S. markets, despite a choice-of-jurisdiction clause in the contract Apple imposes on app developers. So there may be something positive here.

Another potential strategy for the French publishers would be to bring in additional plaintiffs on the occasion of the amendment, which could be publishers with very substantial U.S. revenues.

When I first commented on the French publishers' U.S. class action, I found one part of the complaint particularly intriguing: they raised the issue of App Tracking Transparency (ATT), a money and power grab by Apple under the pretext of privacy. Judge Gonzalez Rogers allows the plaintiffs to amend their ATT claim if they bring an amended complaint. That may now be another reason to widen the class definition and include publishers with substantial U.S. sales (an amendmend that Apple would presumably oppose, but the plaintiffs could try to get it approved by the court). For publishers, ATT is a huge problem. So maybe the focus will change a little bit. However, the alternative would be to drop this one and bring a new one with U.S. publishers (or UK and other publishers with substantial U.S. revenues) on board from the start, and with a focus on ATT.

I guess something will happen. I don't expect this complaint to just be dropped at this stage without an appeal, amendment, or a new complaint with an ATT focus (or even a combination of two or more measures of that kind).

Personal note: As I mentioned L'Équipe: while I currently have no paying subscription to any media outlet, simply because there are too many around the globe that are relevant to me at different times, L'Équipe is actually one of two publications I plan to subscribe to for the purpose of brushing up my French. I actually learned most of my Spanish from sports newspapers AS, Marca, and Sport. If I subscribed to it through their Android apps, Google would tax my subscription fees...

At 6 PM Pacific Time on Tuesday, Google, approximately three dozen state attorneys-general, and consumer class-action lawyers filed a "stipulation and [proposed] order re deadlines in consumers' and states' actions in light of tentative settlement" in connection with the Google Play (Android app store) antitrust litigation in the Northern District of California that resulted from the procedural consolidation of multiple parallel actions. The settlement was reached the same day and is subject to certain approvals (by the state attorneys-general, which should be a formality unless there was more political resistance than I can imagine, and Google parent Alphabet's board of directors, which should be even more of a formality), after which it needs to be blessed by the court, which is also unlikely to pose a major hurdle. The plan is for a long-form settlement agreement to be submitted to Judge James Donato in about a month.

The terms have not been announced yet, not even in broad lines.

The United States District Court for the Northern District of California will hold a trial starting November 6. With the states and the consumer plaintiffs out (and developer class actions--which achieved nothing of major value to the developer community at large--having settled long before), this means that there will be only two plaintiffs: Epic Games, which brought the complaint in August 2020 after Google ejected Fortnite from the Google Play Store, and Match Group (Tinder).

First, the notice of a tentative settlement (this post continues below the document):

In Re Google Play Store Antitrust Litigation: Stipulation and [Proposed] Order re Deadlines in Consumers' and States' Actions in Light of Tentative Settlement

[フレーム]

It is not surprising that the class-action lawyers would settle with Google: in the end they just want to get paid. The far bigger win for Google here is that the three dozen U.S. states are also prepared to drop the case. Governmental support would have been very useful for Epic and Match at the trial. A settlement with only the class-action lawyers would have been of little value to Google if the state AGs had continued to sue on behalf of their citizens. The consumer class might not even have been certified in the end.

Given the fundamental problems surrounding app distribution on Android, it is hard to imagine that the settlement will solve the most pressing problems. But we will know for sure only when the exact terms have been announced. It's unlikely but not impossible that the state AGs negotiated something of value.

The only advantage this development has for Epic and Match is that the trial will be streamlined. The trial structure was threatening to become very complex, and now the focus at the pretrial conference on Tuesday will be on how to proceed with an Epic & Match v. Google trial. I don't think a trial that will be interrupted by the Thanksgiving holiday is a good idea, but it probably won't be postponed in light of the impending settlement.

Epic and Match may still government support: the DOJ, which supported and may continue to support (at the certiorari stage) Epic's appeal of the decision in the parallel Apple case, could file amicus briefs later on.

On Tuesday morning by Pacific Time, all the parties filed a joint pretrial statement highlighting the differences between their positions. There was no mention of a settlement in that filing: it was totally adversarial. But a settlement was mentioned as a hypothetical possibility in footnote 4:

"Further, while all Plaintiff groups expect to be at trial with the experts they disclosed to Google, there are circumstances that, at least theoretically, could change these plans (e.g., a settlement, a pending Daubert motion, etc.).

Here's that document:

In Re Google Play Store Antitrust Litigation: Joint Statement Regarding September 7, 2023 Pretrial Conference

[フレーム]

In the paper I mentioned yesterday, Dr. Justus Baron flags a number of issues relating to the aggregate royalty setting part of the EU SEP Regulation. Besides many of his points being valid, what makes that paper significant is that he is an actual researcher as opposed to some corporate representatives that were also retained by the EC in the SEP Regulation context but have commercial interests such as selling services to licensors and licensees or getting paid by the EC later on to set up and run an EU SEP Register (in the latter scenario, the Court of Auditors should investigate).

I'd like to follow up on one thing that is not central to Dr. Baron's latest paper but worth commenting on in its own right. In connection with current practice he notes that maximum aggregate royalty rates are rarely announced by SEP holders despite "existing guidance from the EU Commission [which] makes it clear that joint announcements of maximum aggregate royalties by groups of SEP holders do not, in principle, violate EU competition law." A footnote then points to para. 474 of the EC's Horizontal Cooperation Guidance, which I'll quote now:

474. Standard development agreements providing for the ex ante disclosure of the most restrictive licensing terms for standard-essential patents by individual IPR holders or of a maximum accumulated royalty rate by all IPR holders [emphasis added] will not, in principle, restrict competition within the meaning of Article 101(1). In that regard, it is important that parties involved in the selection of a standard be fully informed, not only as to the available technical options and the associated IPR, but also as to the likely cost of that IPR. Therefore, should an SDO’s IPR policy choose to provide for IPR holders to disclose prior to the adoption of the standard their most restrictive licensing terms, including the maximum royalty rates or maximum accumulated royalty rate to be charged, this will generally not lead to a restriction of competition within the meaning of Article 101(1). Such ex ante unilateral disclosures of the most restrictive licensing terms or maximum accumulated royalty rate would be one way to enable the parties involved in the development of a standard to take an informed decision based on the disadvantages and advantages of various alternative technologies. [emphases added]

The above does not--and presumably was not deemed by Dr. Baron to--dispel cartel concerns over the aggregate royalty determination part of the proposed regulation:

• Art. 18 of the proposed EU SEP Regulation (unlike Art. 15-17, which are the other articles relating to aggregate royalty rates) opens the conciliation process for aggregate royalties to implementers. The paper raises various policy issues concerning the participation of licensees. The Horizontal Guidelines allow ex ante announcements of royalty rates (with the limitations I'll discuss in the next bullet points), but they do not allow licensee negotiation groups (by the way, the UK Competition &: Market Authority doesn't condone LNGs either). The following paragraph from Dr. Baron's paper, referencing Dr. Igor Nikolic, discusses what could go wrong from a cartel law point of view when licensees gang up on licensors during such a process:

  "Instead, net licensees have an incentive to use the process for problematic concerted action. They may for instance exchange competitively sensitive price information. More immediately, licensees may use the process for a concerted push to depress royalty levels. If major net licensees agree among themselves not to pay more than a certain amount, SEP licensors may find it difficult to build market acceptance for their FRAND licensing offers. Such negotiations among net licensees on maximum rates resemble a buyer[s'] cartel, and are clearly concerning from an antitrust perspective (Nikolic, 2023)."

• Even for licensors, there is no real safe harbor. The language of the Horizontal Guidelines has its limitations, but it's also just soft law. I struggled to decide with which of those two limitations to begin (that it's not binding on courts or that the wording isn't hard and fast). I'll start with the language:

  If something is "in principle" or "generally" acceptable, that is far from a safe harbor. One can have a debate over whether it is a presumption of legality or, possibly, just the negation of a presumption of liability ("it's not a per se violation"). Whatever it may be, it relates only to joint announcements of that kind, with participation being either voluntary or required by a standard-setting organization.

  Through limiting words like "generally", the guideline explicitly leaves room for potential misconduct surrounding such announcements. The simplest and clearest example would be that the relevant parties might agree not only on a maximum but also on a minimum rate (potentially both being the same). While it is easy to say that it's generally unharmful if some companies they say they're not going to ask for more than a specified amount, it's a rather different analysis when they say it's not going to be less than a certain number. Another example is that there might be patent holders with partly congruent and partly incongruent interests. They might engage in horse trades like "we'll support low royalties with respect to a particular codec if you guys support higher royalties for 5G." In the EU Council that happens all the time, but that's politics and not a potential cartel.

• The Horizontal Guidelines are just a Commission communication. That's soft law. It means DG COMP itself will investigate the conduct surrounding such maximum aggregate rate announcements only under the most egregious of circumstances. But even without para. 474 of the Horizontal Guidelines, the Commission will find it hard to go after anyone abiding by a regulation it proposed (though lawmakers have the final say). That is, in fact, another reason for which the EU's legislative bodies must be careful because the Commission has already limited, for political reasons, its ability to curb abuse in that context (should the proposal be adopted in that form or a materially consistent one).

• The EU courts are not bound by it, but very often side with the Commission.

• The national courts of EU member states won't necessarily be impressed with a non-legislative document from Brussels, and even less so in cases where there is a reasonable (though not necessarily a very strong) argument that the challenged conduct is related--but not inherent--to the announcement of the maximum aggregate rate.

• And like in some other contexts, the EU SEP Regulation is not well-thought-out with a view to what will happen in other jurisdictions. If the combination of the Horizontal Guidelines and the EU SEP Regulation matters in the EU, why should a court outside the EU care? There could be investigations by regulators or private enforcement actions against the participants in a rate-setting cartel in some non-EU countries where no EU law, hard or soft, will serve as an excuse if those markets are impacted (and they will be, as the EU wants those rates to be global).

All I wanted to do with this post is explain why the idea of aggregate royalty determinations based on potential agreements between SEP holders could get companies into trouble. In a world in which at least one automotive supplier sued a patent pool that does not preclude its licensors from entering into bilateral agreements (with that supplier still litigating against one such licensor in Delaware state court), there is always the risk of someone arguing that even an announcement of a maximum rate (hypothetical worst case for implemeneters) was unlawful, maybe not per se but in light of case-specific facts or circumstances. And implementers, too, would have to be careful so they don't end up forming a buyers' cartel.

Yesterday the UK Competition & Markets Authority closed the original Microsoft-ActivisionBlizzard merger decision by issuing a final order based on its April 26 blocking decision, but simultaneously opened a new investigation of a modified version of the deal with a Phase 1 deadline on October 18 (which is also--and not coincidentally--the last day of the extended term of the merger agreement). The title of the new investigation is Microsoft / Activision Blizzard (ex-cloud streaming rights) merger inquiry. The long form of the parenthesis is "excluding Activision Blizzard, Inc.’s non-EEA cloud streaming rights."

The stock market views that announcement, taken together with public statements by the CMA's CEO, as a sign that the deal is now very likely to close. The spread is at its lowest. And Bloomberg is already describing this merger as (potentially) "one of the biggest comeback stories in the history of mergers" (which is an underestimated as it will indisputably be the biggest merger story ever).

This post--which may in fact be the last one on that merger before (all going well) some final comments on the closing of the deal--has three parts. In the first two parts, I want to talk about who and what is not getting enough credit so far for having--if Wall Street is right--very likely resolved an incredibly delicate situation. The third part serves the purpose of explaining more specifically what is known about the modified transaction and why I believe it should put the matter to rest, though I believe there is no legal basis for any regulator to request any behavioral or structural remedies given that this deal doesn't even get close to what a court of law--as opposed to political institutions overleveraging their hold-up powers--would consider to raise competition concerns. There are only fake concerns. Made-up stuff that is a miscarriage of justice. Most competition authorities cleared the deal unconditionally. Those regulators got it right because they faithfully and honorably applied the law, which is too much to ask for in the U.S., the EU, and the UK when a Big Tech company makes an acquisition these days...

If you wish to go straight to the part that explains the modified deal, click here.

1. Underappreciated: the Competition Appeal Tribunal's decisive action and guidance

It really annoys me to see the CATribunal (or just CAT) underestimated every step of the way. When the CMA issued its Apri 26 merger blocking decision, so-called experts described the appeal (which Microsoft announced immediately after the decision) as futile. They said that the Judicial Review standard--the applicable standard of appellate review in the UK for government agency decisions--presented an insurmountable hurdle. They said the CMA would ultimately avoid an "irrationality" holding if it just throws all sorts of "there could be an issue there" conclusions into a decision, with the CAT then supposedly being unable to find that if the CMA identified smoke in all sorts of places, it was irrational to see a 50% likelihood of fire. They said the CAT would--and allegedly (which is at least debatable) even had to--remand any decision to the CMA for further consideration, causing not only major delay but also leading to the same outcome anyway.

In this particular case here, I believe the CAT would likely have thrown out the CMA decision in such a way that it could either have found that a remand was pointless or, if it had remanded anyway, there would have been no wiggle room left for the CMA. That would have proven those "experts" wrong. They were lucky to avoid this because it appears that a solution has been found that will obviate the need for further litigation over this merger in the UK.

The CMA engaged in stalling because it wanted to avoid not only a CAT ruling but also a multi-day hearing, which I believe would have been a nightmare for the agency.

Some people wrongly believed that the CMA became interested in a constructive solution because the FTC lost its bid for a preliminary injunction. In reality, that was the expected outcome. In the other event, the merger would have been abandoned in all likelihood, and then there wouldn't have been a point in a new UK investigation of a modified deal. But if there was one thing in connection with this whole merger that definitely won't have shocked the CMA, it was the FTC's defeat in court.

The CAT clearly made its presence felt. And when the CMA and Microsoft agreed to stay the appeal of the April decision (shortly before a hearing was going to take place), the CAT's president, Mr Justice Marcus Smith, summoned both sides' counsel to his courtroom to discuss at a case management conference whether there was a good-faith basis for putting the UK appeal on hold. The day before that hearing, Microsoft announced a 10-year Call of Duty deal with Sony (obviously subject to the condition precedent of this acquisition being consummated), which Mr Justice Smith read about and suggested as a basis for clearing the merger now on the basis of a major change of circumstance (MCC).

I was live-tweeting about that hearing, and instantly supported the court's proposal. I was disappointed that counsel (on both sides) was unreceptive to that idea. But then, toward the end of July, Microsoft actually did make a filing that formally asked the CMA to clear the original deal (without a divestiture of streaming rights) in light of the Sony agreement and other key facts and developments. In my opinion, the CMA's April 26 decision was wrong, and yesterday's rejection of that MCC argument was also wrong. But I can see the CMA's institutional interests here:

They faced a dilemma. They may have realized that their April decision was completely wrong, and they must know how isolated they are on the world stage (with the greatest respect for Australia and Canada, those jurisdictions would not be able to prevent the deal from closing, especially not at this stage). There was and still is a debate over whether the UK's regulatory environment is hostile to business and a turn-off for foreign direct investment. So it would have been good in some ways for the CMA to just clear the deal yesterday.

But they also had another consideration here: their sacrosanct procedures. It is an oddity that the final report (which in this case was rendered in April) is the final "decision" (and can be appealed), but is followed by an interim order and, subsequently to that one, a final order, which is like a regulatory injunction. The final order is meant to be consistent with the final report except under the most egregious of circumstances. They just didn't want to act in a way that might encourage the parties to future merger reviews to take certain measures (such as restructuring a deal) only between the final decision and the final report. I have no doubt that this was the decisive consideration, as the CMA's CEO said in one of her interviews yesterday that what's happening here shows to merging parties that they should propose certain solutions early in the process.

If the CMA clears the deal on its modified basis, there may still be some discussion over whether the CMA is a liability for the prosperity of the UK, but it won't be too bad. Timing is also a consideration. The UK's prime minister gave the CMA a strategic steer that stressed, among other things, the need to make swift decisions so as not to hold up business. There must be due process, but they should be able to wrap up that Phase 1 investigation of the modified deal way ahead of schedule. In some other major jurisdictions, the Phase 1 timeline is closer to one month while in the UK it's closer to two.

The UK merger reform situation should be reformed in any event. There are issues. It's an opaque process, which makes it particularly unfair. The CMA should not always get a second bite at the apple when the CAT overrules it. And even though I believe the CMA's errors in this case could have been corrected even under the UK's exacting Judicial Review standard, that one should change. Even in connection with the DMCC Bill, which is the UK's equivalent of the Digital Markets Act, I believe the CMA's decisions should be subject to a full appellate review (as opposed to just "legal error" and "irrationality"). And I'm saying that even though I'm an outspoken critic of Apple and Google's app store duopoly.

If Microsoft's acquisition of Activision Blizzard is consummated in the end, the CAT will have played a key role, though in a world of two-second attention spans and "experts" who don't know what they're talking about, it would have taken a more binary outcome (such as a CAT ruling that would have quashed the CMA decision on multiple grounds) for more people to realize it. I look not only at binary outcomes but also at the first or second derivative, and that's why I think the CAT has been great here, even though it may never have to rule on the case.

2. Undervalued but (hopefully) ultimately rewarded: Microsoft's tireless dealmaking

Besides the important role that the CAT played, there is another factor here that is often overlooked. Even when many people (also including most merger arbitrageurs) deemed the deal dead, Microsoft never stopped trying to work out solutions with other market actors, including the only vocal merger opponent, Sony. And now the Ubisoft deal that creates a new merger situation.

Many other companies would have had a "fight or flight" instinct. They'd either have decided to bet on litigation ("fight"), or they'd have given up ("flight"). Microsoft was appealing the UK decision, but never stopped trying to find constructive solutions. They held on to their vision of bringing more games to more gamers through more channels.

I don't know if any acquirer has ever made such a Herculean effort on the dealmaking front to get a deal cleared--and in this case, we're talking about a deal that was legally above board regardless of any remedial agreements or other concessions.

In such dealmaking processes, there are unsung heroes. Those negotiations do not take place in public. The results speak for themselves.

A Microsoft-internal email has been leaked to the press. Microsoft Gaming CEO Phil Spencer reportedly credited Xbox VP Sarah Bond for her "exceptional leadership throughout this process." I saw her testimony at the San Francisco federal courthouse (very convincing), and I follow her on X (Twitter). We'll never know what exactly Mr. Spencer was referring to, but chances are that Mrs. Bond achieved major breakthroughs on the dealmaking front that paved the way for regulatory clearance.

3. New deal: Ubisoft acquires Activision Blizzard streaming rights

What the CMA and Microsoft announced yesterday was just a high-level summary of what makes the new merger situation different from the original one. What we know is that Ubisoft will acquire the streaming rights to all existing Activision Blizzard PC and console games as well as all the ones to be released during a period of 15 years following the closing of the deal. Whatever falls under that capture clause is then perpetually available to Ubisoft, though customer demand will obviously shift to newer games, such as new sequels.

This will not limit Microsoft's ability to offer Activision Blizzard titles as part of its Game Pass subscription service, and Microsoft will be able to stream those games on its xCloud service. However, Ubisoft will also have all of those games, and it will apparently be able to sublicense them as well. So there is simply no such thing as a foreclosure risk then.

It is an academic question of semantics whether this is a structural or behavioral remedy. There are strong arguments for it being structural as it is an acquisition: Ubisoft buys something and is then in charge. And while there is a time limit, a 15-year capture clause and perpetual rights to whatever falls under the capture clause should satisfy even the most demanding regulator.

Ubisoft is a well-resourced, sophisticated market actor. And the company has been independence for decades (it belongs to its founders, the Guillemot family).

One of the problems the CMA would have faced in the CAT is the question of comity (respecting other jurisdictions). It is unfortunate that the Microsoft-Ubisoft deal is global as opposed to UK-specific. I don't think UK politicians want the CMA to act as the world's policeman for mergers. It doesn't reflect favorably on the UK from a foreign investment point of view. It suggests that serious reform is needed. But if it allows the merger to be consummated, then so be it.

The Microsoft-Ubisoft agreement has a carve-out for the European Economic Area (which is the UK plus Norway, Iceland, and Liechtenstein). That's because Microsoft had made a remedy commitment to the European Commission. While I disagree with the bogus concerns the European Commission raised in its (meanwhile published) decision, those royalty-free streaming rights were appreciated by gamers worldwide. The Microsoft-Ubisoft deal, according to what was announced, keeps that type of remedy intact for the European Economic Area. That benefits such companies as Nvidia and Boosteroid.

The EC now has to think about whether this requires a formal new merger notification. And if the conclusion was that a new review was formally necessary, I still don't anticipate major problems. In the end, all that matters is that there will be more choice and competition than otherwise. Ubisoft is not going to monopolize cloud gaming, and it is a French company, which the European Commission couldn't officially consider a reason for clearance but politically it will play a role.

All of this is unnecessarily complex, and I hope it will be over soon--with a positive outcome. The CMA's concern was all about Microsoft leveraging Activision Blizzard's games to dominate cloud gaming. The mere fact that Microsoft is now prepared to enter this deal shows that there were and are indeed other priorities (above all, mobile gaming).

The Competition & Markets Authority (CMA) of the United Kingdom has recently been in the news primarily for its stance on mergers, particularly Microsoft's acquisition of Activision Blizzard (the final order deadline is only eight days away). Horizontal cooperation agreements are actually closer to merger control than any other field of competition law. Major jurisdictions now have more specific rules governing merger reviews (such as the HSR Act in the U.S., certaion sections of the UK Enterprise Act, and the EU Merger Regulation). But a merger is just the ultimate form of cooperation.

It would have been somewhat inconsistent for the CMA to hold merging parties to a high standard while condoning cartels, though Apple--which effectively made three submissions to the CMA on its draft horizontal guidance, one of which amounts to deceptive lobbying--and its allies, such as certain automotive industry players, would have liked it to happen. Market forces are not a bad thing only because some companies believe they could otherwise save money (on patent license fees).

What Apple (along with its allies and astroturfers) wanted would also have created a potential conflict between the CMA and UK Intellectual Property Office (IPO). The UK IPO, which is the country's patent and trademark office, correctly notes that SEP licensing is a field in which any potential intervention must be approached with caution, which contrasts nicely with the regulatory activism exhibited by the European Commission's Directorate-General for the Internal Market (DG GROW).

In late January, the CMA published its draft guidance on horizontal agreements and launched a public consultation. In the section on purchasing agreements, there was the following passage that became a bone of contention and has, fortunately, been deleted (final version):

"Groups of potential licensees may seek to jointly negotiate licensing agreements for standard essential patents with licensors in view of incorporating that technology in their products (sometimes referred to as licensing negotiation groups)."

LNGs are a bad idea. I agree with the Qualcomm executive who said that everyone involved with LNGs should go to jail. About two years ago I posted a series of articles (1, 2, and 3) on the subject, which I was happy to see referenced by Acer in a U.S. patent infringement complaint against Volkswagen.

Yet there are some who continue to lobby for the permission to form LNGs regardless of market share. I wouldn't have a problem with a couple of startups cooperating within reason. But an alliance of, say, Volkswagen-Stellantis-Toyota would go too far. Way too far. The risk of group boycott clearly outweighs any purported efficiency gains.

Apple basically made three submissions to the CMA on its draft horizontal guidelines: one in its own name, one through the Fair Standards Alliance (which is at least reasonably transparent), and one through its astroturfing operation named ACT | The App(le) Association. When I reached out to the UK IPO about ACT's lobbying, they acknowledged the ACT-Apple link. The CMA is presumably aware of it as well. Not only is it obvious that (small) app developers have no SEP licensing issues but the CMA also understands the problems app makers have with Apple and Google's mobile app store duopoly. ACT consistently supports Apple against--but falsely claims to defend the interests of--app developers.

Just last month, a Politico Europe newsletter reported on a partial victory scored by watchdog NGOs Corporate Europe Observatory (CEO) and LobbyControl.

While the EU Transparency Register's secretariat deemed a complaint over ACT inadmissible, it nevertheless got ACT to adjust its register entry. And the following statement by ACT's head of communications, Karen Groppe, is hilarious:

"We do receive approximately half of our support from Apple in the EU. By accepting sponsorship from companies and organizations, we can keep membership from our small business members cost-free."

Again, the CMA is aware of the fundamental conflict between virtually all app developers (case in point, not a single app developer testified for Apple at the Epic Games trial two years ago) and Apple. It's an insult to human intelligence to suggest that a largely Apple-funded organization (and "approximately half" is most likely a gross understatement) would actually represent app makers against the heavyhanded and highly abusive monopolist.

Cleary Gottlieb, a firm with Google and Sony ties, also supported the idea of endorsing LNGs. However, Cleary would have preferred for the CMA to consider LNGs an intellectual property-specific topic as opposed to a joint purchasing agreement. Cleary's argument is that joint purchasing agreements are about physical goods, not non-material property rights. However, that doesn't convince me, given that joint purchasing of IP (such as copyrighted works) is common. The CMA made the best choice anyway by dropping LNGs from its guidelines altogether.

Even if the CMA had indicated that SEP LNGs might be acceptable, the proponents of that collective hold-out vehicle would still have been far from ready to proceed with their plan: it just takes one major jurisdiction to keep such licensing cartels illegal. And right now there isn't a single major jurisdiction, at least in the Western hemisphere, that is prepared to allow LNGs.

But the lobbying effort will continue. Deceptive lobbying included.

At this stage the question does not appear to be whether but when--Monday, Tuesday, or in August--Microsoft will consummate the acquisition of Activision Blizzard King. There were signs of ABK being delisted from NASDAQ or at least removed from the NASDAQ-100 index as early as tomorrow.

Even a commercial agreement between Sony and Microsoft to keep Call of Duty on the former's PlayStation has fallen into place. Sony was the only vocal deal critic, though Google was lobbying against the transaction as well.

The contractual target date for closing is Tuesday, July 18. There have been media reports of a potential extension since the UK Competition & Markets Authority (CMA) opened a new investigation in light of a new proposed deal structure, with a late-August deadline and the plan to wrap up ahead of schedule (PDF). The Financial Times wrote:

"[A]fter this week’s legal victory in the US courts and a potential lifeline in the UK, people close to the companies say they are likely to agree an extension to the deal early next week.

"'Things are moving quite quickly,' said one person close to the negotiations."

There's been a flurry of news recently. On Tuesday, Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California denied (PDF) a motion by the Federal Trade Commission (FTC) for a preliminary injunction that would have blocked the transaction. That was the outcome I predicted in my previous post on that topic. Just as I already observed when I attended the five-day PI hearing in person, the FTC failed to meet multiple requirements for a merger PI.

Between that decision and the Ninth Circuit's denial of an emergency motion by the FTC, various gamers reported that my name became a trending topic on Twitter for that community. But I'd rather talk now about the actual decision makers and the key institutions, and what the current situation means for them and their regulatory philosophies:

DG COMP showed the way

In the wake of the U.S. court rulings, a very thoughtful gamer and developer active on social media as EverbornSaga--who made various great contributions to my recent Twitter Spaces (basically, talk shows via Twitter)--declared the European Commission's Executive Vice President Margrethe Vestager "[t]he True Hero of this Story":

The True Hero of this Story… pic.twitter.com/DlHuwRqsIx

— Everborn Saga (@EverbornSaga) July 15, 2023

Everborn has a point.

Judge Corley started the final part of her PI denial order ("Conclusion") with the following observation:

"Microsoft’s acquisition of Activision has been described as the largest in tech history. It deserves scrutiny. That scrutiny has paid off: Microsoft has committed in writing, in public, and in court to keep Call of Duty on PlayStation for 10 years on parity with Xbox. It made an agreement with Nintendo to bring Call of Duty to Switch. And it entered several agreements to for the first time bring Activision’s content to several cloud gaming services."

That paragraph was just a more formal version of something she said at the PI hearing about those commitments and agreements:

"In many ways you [the regulators] won."

The FTC's trial counsel rejected that notion. They just wanted to block the merger. They wanted both the district court and the appeals court to turn a blind eye to the remedies that were already in place and constituted market realities. But Judge Corley was right--and is even more right now that Sony--albeit at long last--accepted an offer by Microsoft.

In a speech I called "historic" on Twitter and in various interviews, EVP Vestager stressed the need to focus on how regulators can bring about results that benefit the competitive process and consumers. She opposed the idea of--in my words--a hawkishness contest between regulators.

I still believe that actually the regulators who cleared the transaction unconditionally--most recently the Turkish competition authority--got it right. In fact, the Brazilian and Chilean decisions were my favorite ones, and in Chile they even conducted a survey among gamers to get an idea of whether vertical input foreclosure would work. But as Judge Corley wrote, the size of the deal warranted scrutiny, and that's why I don't blame regulators for launching a Phase II investigation. Still, I think that the most that a regulator could reasonably have expected here--given that the deal raises no competition concerns if analyzed competently and viewed rationally--would have been some public statements prior to clearance. Enforceable remedies with an independent monitor just seem unnecessary to me. Be that as it may, the European Commission received extremely positive feedback from gamers for clearing the deal on the basis of consumer-oriented formal remedies.

The U.S. judiciary has, by extension, endorsed EVP Vestager's regulatory philosophy.

FTC should drop its "case" now

As someone who spent far more time in court supporting (in 2019) than criticizing (in 2023) the FTC, I'm disappointed. The FTC's emergency motion with the Ninth Circuit was disingenuous in various ways. And it failed miserably.

The FTC's in-house trial is scheduled to start on August 2, and as per the Ninth Circuit's normal schedule (which can always be extended) for PI appeals, it has until August 9 to file an opening brief. The only logical thing now would be to seek an extension from the Ninth Circuit (easy, especially as I'm sure it would be unopposed) and to postpone that trial to conserve resources. And to drop the "case" after the deal has closed, as the FTC has historically always done.

Will this FTC make a rational decision? Maybe today's annoncement of an agreement between Microsoft and Sony makes it easier.

UK CMA still an outlier, but now a solution-oriented one

I stand by my harsh criticism of the UK CMA's April 26 decision and last year's issues statement. The blocking decision was all the more disappointing as I actually thought they were on the right track when they dropped their console market theory of harm in late March. Now I see that a lot of gamers are not really trusting the CMA anymore, though I encourage them to appreciate the fact that the CMA is willing to evaluate a new deal structure.

According to rumors in the media, that new deal structure would involve the divestiture of Microsoft's UK cloud gaming business to British Telecom subsidiary EE, which already had a 10-year agreement in place with Microsoft for Activision's titles.

If the CMA now approves the deal, it will have maintained the integrity of its processes, avoided a decision by the UK Competition Appeal Tribunal (which will hold a case management conference tomorrow in light of the parties' motion to stay the proceedings), and remained consistent with its position that non-divestiture remedies are disfavored even for vertical mergers.

That makes the CMA a winner, too. The question is now whether a solution can be found that enables the closing of the deal in the days ahead while also allowing the new merger review to go forward. My personal opinion is that if the CMA is philosophically inclined to clear the deal based on a UK-specific divestiture remedy, they could make an exception here and let the deal close for the time being. This merger review process is unlike any other, and therefore not really precedent-setting. Today's announcement of the agreement between Microsoft and Sony could make a major difference now.

There are serious issues in the tech industry, and arguably some even bigger problems that the world is facing in other respects. I've always said I want those regulators to emerge stronger. The FTC under its current chair has lost all four of its merger challenges. And the way they lose does not really suggest that they contribute to the evolution of U.S. merger case law or build an argument for legislative intervention, though I personally would actually consider it a good idea to make U.S. antitrust enforcement stronger if some problems (such as the FTC's in-house adjudicative proceedings, where the commissioners can ultimately just vote in favor of their own complaints) are addressed.

In the UK, the DMCC Bill will give the CMA's Digital Markets Unit more powers, and as an app maker I like that, too, though after this experience with the Microsoft-Activision case I believe a robust judicial review by the Competition Appeal Tribunal is key. Is the current framework good enough? Clearly, the CATribunal (or just CAT) is a winner here. It recognized the importance of this case, went out of its way to enable swift adjudication, and is clearly force to be reckoned with while a lot of "experts" suggested the CMA could basically do whatever it wants as the CAT would have to rubberstamp its decisions (not true) and always remand the cases anyway (not certain as the CAT itself interprets the relevant statute, which is not strictly limiting, and if the CAT effectively resolves a substantive question, a remand can be reduced to a mere notarization of a CAT decision).

I have great respect for the CMA's willingness to reevaluate the transaction in light of a new proposed deal structure, and I am hopeful that solutions will be found. Ideally also a provisional one that enables the closing of the deal in the days ahead.

As of now, prior to a new CMA decision and a New Zealand ruling that may come down in a matter of hours, the transaction can be closed with respect to 41 countries with 2.8 billion inhabitants and representing about two thirds of the global economy. With more to come.

Yesterday's closing argument in Federal Trade Commission v. Microsoft & Activision Blizzard was lively, and that is primarily so because Judge Jacqueline Scott Corley of the United States District Court for the Northern District of California had interesting and challenging questions for both parties--plus a great sense of humor. However, a litigation is not a talk show. In a talk show, there can be multiple winners, and here the outcome will be binary: the merger won't be blocked (that's what I expect to happen) or it would be. While Judge Corley could hardly have done more to ensure a level playing field in her courtroom, the legal framework is highly unfavorable to the FTC: it has multiple hurdles to overcome, any single one of which can be dispositive (i.e., single-handedly trigger the denial of the motion).

By 5 PM local time (Pacific Time) today, the two sides will have to file the updated versions of their proposed findings of fact and conclusions of law. Throughout the hearing they were probably already keeping track of the extent to which any of the factual allegations were proven. This is about a likelihood assessment and an equitable balancing, and it is about predictions (of what will happen in the future in a world where the merger happens versus one in which it is abandoned). It's not a criminal trial with a "beyond reasonable doubt" standard. But the FTC's problem is that once the court determines that the FTC is not--or at least not realistically--going to prove an essential point in the main proceedings, it's game over--and the same applies if the court has very significant doubts about a couple of indispensable elements of the FTC's case. At that point, too, there is no reasonable likelihood of success, and even if the court went beyond that and balanced the equities, the FTC could still lose at that stage of the analysis.

The parties will make another filing on Monday (about the admission of exhibits). I believe July 5 and 6 are the most likely days for a decision by Judge Corley. She is free to rule at any time of day, any day of the week, but it would make sense for her to enter an order very late by her local time, just to be safely outside trading hours. Her initial order will be sealed (as it will take time to sort out redactions), but the result will show up on the docket, and it's going to be a denial of the merger block that the FTC is seeking.

In a way, the FTC theoretically had multiple bites at the apple: all in all, the FTC proposed five different antitrust markets, and if its theory of harm (vertical foreclosure) succeeded with respect to any one of them, the deal would be blocked. So, practically, there are five theories of harm in the case. But we can simplify that part based on how things went at the hearing:

As I explained in my Twitter commentary, the FTC's console market theory of harm is dead in the water. Those are theoretically two theories of harm, one for a narrow high-performance videogame console market and one for a slightly broader one that includes Nintendo. It would take the inclusion of gaming PCs--and I agree with Judge Corley that in a foreclosure context the fact that many people already have a PC on which to run most of the relevant games cannot be ignored--to defeat those console theories at the market definition stage, but there are plenty of other problems anyway.

The FTC claimed yesterday that it was about protecting consumers, not Sony but that is just lip service to its mission of protecting American consumers. On several occasions, the FTC's incompetence (with respect to how the gaming business works) was on full display. Yesterday, the FTC discredited itself particularly when one of its lawyers talked about a hypothetical scenario of partial foreclosure in which there would be a unqiue game element, such as a character, that would be available only in the Xbox version of Call of Duty post-acquisition. That shows the FTC knows nothing about current market realities. At the moment, there are multiple PlayStation-exclusive goodies in CoD, and the PlayStation is the market leader. So if the FTC was concerned about any of that, it would have to look into Sony's dealings with game makers.

The FTC's view that it's better to have an independent Activision Blizzard negotiate such deals with platform makers is ignorant of basic commercial realities. As I explained a few days ago, the dominant market leader (which is Sony, particularly on a global scale) can strike such exclusive deals more cost-effectively than any challenger, cementing its leadership and avoiding competition on the merits.

The other three markets are services markets: multi-game library subscriptions, cloud-gaming subscriptions, and a market in which one would find services that offer one or both of those types of services.

The closing argument basically had two parts: console and cloud. Or arguably three, but the balance of the equities won't be reached with respect to consoles anyway.

Multi-game library subscription services can hardly be deemed a relevant antitrust market here. A different judge of the same court threw out a class action over Apple Arcade (Pistacchio v. Apple) for that reason, and the plaintiffs did not even appeal the decision. That may be the reason why there wasn't much debate yesterday over whether multi-game library subscriptions are a distinct product or just a price structure. So the discussion was generally about "cloud" during the second part.

The FTC would have us believe that it just has to raise an interesting question so it gets to kill a merger. Not so:

• All that makes a question interesting in this context is a reasonable likelihood of success. The fact that "cloud" is a buzzword doesn't count. The fact that companies including Microsoft invest in cloud services doesn't suffice either.

• For a given theory of harm--here, foreclosure of cloud-gaming services--the FTC must satisfy multiple requirements to prevail. So on the bottom line an FTC theory is only interesting enough to warrant an injunction if the court sees a reasonably strong indication of the FTC being able to satisfy all of the requirements.

The short version is that "cloud" is interesting, but by far not interesting enough (in the above sense) to order an injunction.

Market definition

I don't see that the FTC's cloud-gaming services market (or any derivative thereof) is supported by the facts. But if the closing argument is any indication, Judge Corley--no matter what her conclusion regarding that proposed market may be--is not going to stop there even though she could if she wanted to.

Google's testimony that cloud-gaming services compete with console games and PC games could be held against the FTC's market definition. In the hypothetical (though unimaginable) scenario in which Judge Corley were to block the merger, Google's testimony and other reasons for which cloud-gaming services are not a relevant antitrust market would likely be emphasized in an emergency motion asking the appeals court to lift such an injunction.

It would appear erroneous to me if the FTC was deemed to have established a relevant antitrust market for cloud gaming. The same pragmatic approach that Judge Corley has to the console market definition (where she focuses on what consumers would do if prices went up or content became unavailable on a given platform) is antithetical to the assumption of there being a relevant antitrust market for cloud gaming. The President of the UK Competition Appeal Tribunal, Mr Justice Marcus Smith, explained at the initial case management conference that after reading the decision more than once he couldn't see a technical reason for which gamers could not simply install some games locally. It would not at all surprise me, however, if Judge Corley left that question open (such as by expressing some and possibly even serious doubt without disposing of the cloud theory at that point), as there is no shortage of other issues.

Essential input

It strikes me as crystal clear that the FTC has failed to make a credible showing that Activision's content is a critical ("must have") input. As Judge Corley rightly noted yesterday, it is very much about CoD (even though the FTC would now also like to place some more emphasis on the Diablo franchise).

Let's get real:

The games market is highly fragmented and will be even after this transaction. I'm not deying that if Microsoft wanted to buy Tencent after acquiring Activision Blizzard, the question of market concentration would become interesting to say the least. But not now.

The FTC's expert totally failed to show that CoD is an essential input for the console business. Microsoft's economic expert Dr. Elizabeth Bailey clearly impressed Judge Corley with her data-driven analysis, particularly focusing also on how committed gamers actually are to CoD. Most gamers don't really spend a huge numer of hours playing that game over the course of a year.

All that the FTC's expert Professor Robin Lee attempted to show was that complete foreclosure with respect to CoD would have competitive implications (in my view, even his own results are actually procompetitive) for the console business. He did not analyze partial foreclosure, and in particular he did not analyze (whether for full or partial foreclosure) potential switching rates with respect to cloud-gaming services.

So the FTC really has nothing of substance to offer in support of its claim that Activision content (basically meaning CoD) is a critical input for cloud-gaming services, while services like Nvidia's GeForce Now and Microsoft's xCloud don't have and apparently don't need CoD (or any other Activision games).

Let that sink in: the FTC wants the court to kill the merger without any credible indication (I'm not even talking about hard evidence) that CoD has the potential to tip the cloud-gaming market.

This, too, is the kind of reason for which I believe the appeals court would likely lift an injunction (which, again, I don't see happening) in no time.

Incentive to foreclose

The FTC can't even show an incentive to foreclose with respect to consoles. There is no specific argument concerning cloud services. No verifiable numbers. Nothing.

That may not be Judge Corley's style, but some other judges would probably tell the FTC in this context that it is now paying the price for the fact that cloud gaming was only an afterthought in its original complaint. The CMA altered course and refocused on cloud after dropping its console theory in late March. The FTC is, for procedural reasons, stuck with its December complaint, but also with the decisions it made in its in-house adjudicative proceeding. So the FTC is basically standing on the wrong foot: most of what it has relates to the laughable console theory, and while I don't consider the cloud theory strong, it is now the one that appears at least a little more interesting and the FTC has almost nothing to show to support it.

It does not reflect favorably on the judgment of the decision makers involved that the FTC placed its primary bet on the proposterous console market theory (protecting a market leader). But the FTC made its bed and must now lie in it.

I don't think the court would even have to reach this question here, but if it does (as it very well may), I can't see how evidence that is anecdotal at best could serve to justify a finding that Microsoft has an incentive to foreclose cloud-gaming services (and I'm not even referring to Microsoft's agreement with cloud-gaming providers yet, but to the fact that during the hearing no calculation was discussed that the court could rely on).

Impact of foreclosure on competition

As the FTC can't show that CoD is a critical input for cloud gaming, it's impossible to argue that the competitive process would be seriously jeopardized by hypothetical foreclosure. But that is what Judge Corley told the FTC yesterday it had to show: she wanted to know how consumers would be harmed.

Competitive response

The FTC can't deny that other cloud-gaming providers have various ways of responding and adjusting to this merger (even more so since they've known for almost 1.5 years about the possibility of this merger closing). Just like in the console market, where Sony can improve its product and/or lower prices and/or offer other attractive content, there are plenty of options in the cloud-gaming business. The assumption that without CoD they will all be unable to compete is, frankly, absurd.

Remedies already in place

The FTC has from the beginning--this even goes back to the pre-hearing status conference--urged Judge Corley to ignore Microsoft's 10-year agreements with the likes of Nvidia. But the amount of time spent discussing the subject yesterday suggests strongly that those contracts will be considered. Maybe Judge Corley will decline to resolve the legal question of whether such remedial contracts and commitments should be considered when the FTC is seeking a preliminary injunction under Sec. 13(b) of the FTC Act. But she appeared inclined to take such market realities into consideration.

At least the effect of existing agreements and other enforceable commitments cannot be reasonably ignored. If Nvidia and some others can stream CoD, then exclusivity is no longer achievable by withholding it from others.

The pragmatic perspective is that there is no evidence of a merger having survived such a preliminary injunction, and that anything that determines the likelihood of success on the merits should be considered. At the very least those remedial agreements, the commitments to the European Commission, the offer to Sony etc. should be factored in at the final stage, which is the equitable analysis. If the FTC wants to block a merger, it has to convince the court that remedies would not be acceptable.

If Judge Corley finds against the FTC on multiple grounds (as I believe she could, though I don't know what she plans to do), the FTC may realize that an appeal is futile. If the decision was or appeared narrow, the FTC would probably raise this legal argument again.

The policy problem that I have with the FTC's anti-remedy attitude is that the regulatory process is actually meant to bring about such solutions. Judge Corley also told the FTC yesterday that the regulators have arguably already won if there are remedies in place as a result of their review processes.

What the FTC and also the CMA in the parallel proceedings in the UK are trying to do is a radical departure from long-standing practice, which is that regulators normally welcome an amicable resolution (such as a consent decree in the U.S.). While the current FTC and the current CMA may have a strong preference (first choice) for blocking major deals, that is the last resort under the law--and that is one major reason for which both those agencies are not on the winning track in court.

Balance of the equities

Toward the end of yesterday's closing argument, Judge Corley also indicated to the FTC that apart from all other considerations there could be a problem with the balance of the equities. Judge Corley explained that harm to the merging parties (private equities) cannot be dispositive, but when a deal has procompetitive effects, blocking the deal does raise questions with a view to the public equities.

Given the myriad issues that the FTC's push for an injunction has, I don't know if the part about balancing the equities will be very elaborate. If she wanted, Judge Corley could definitely address some interesting points in that context. Here, the FTC wants to block a vertical merger, which in and of itself is a long shot to say the least, and it wants to do so on the basic of a speculative theory involving a nascent market (if it even is a market). It would take years for that "market" to become really large, and Microsoft will hold Activision Blizzard separate, so a future divestiture is a possibility. I frankly can't see a clearer case for telling a regulator that there is no reason not to let the parties close the deal at this point.

It could also be held against the FTC that it has been unreceptive to access remedies that could solve the problem. Like the CMA, the FTC just argues that a merger means one independent economic operator less, but that can't be the standard. The question is how much less competition there is if the merger goes through.

Given all the agreements and commitments that are in place here, this really is an interesting case also from an equitable point of view. The alleged harm would not materialize, and the "market" would not reach a tipping point, anytime soon. While it's obviously not the law that the government has to show immediate irreparable harm (a substantial lessening of competition is enough), a preliminary injunction that effectively kills a merger (and deprives consumers of the procompetitive benefits that it would bring) does not appear equitable where there is no urgency not only in a traditional preliminary injunction sense (meaning that something bad would have to happen in the weeks or at least months ahead) but even for years to come.

The FTC is asking the court for too much given how speculative its theory is.

No smoking gun

It's safe to say after five hearing days that the FTC has not found a smoking gun among millions of documents. An email in which a mid-level manager talks about a mere possibility ("spend Sony out of business") is not impressive. It is actually way less meaningful than Sony's internal reaction, which initially was that they'd be just fine.

The absence of internal calculations for the profitability of those 10-year access agreements with the likes of Nvidia doesn't mean much either. Especially in the case of companies like Nvidia and Nintendo, which are large and sophisticated, I believe there must be a strong presumption of those commercial agreements being meaningful just based on who entered into them.

Recent developments in UK and Canada

During the hearing yesterday, I tweeted about a decision by the Competition Appeal Tribunal of the UK to deny a stalling motion by the CMA as well as about a letter by the Canadian Competition Bureau to Microsoft's counsel in the FTC case, requesting that the letter be (as it indeed was) filed with the district court.

The UK decision shows that the CATribunal is doing its best to keep the UK open for business, while the CMA is seeking to avoid a decision on the merits and apparently realized that the FTC was going to lose the U.S. case (the timing of the CMA's motion is hardly a coincidence). Time is not on the side of the UK. Activision's announcement that the center of gravity of its European operations is going to be in Barcelona is an example of how the CMA's regulatory excess harms UK interests in the post-Brexit situation. I always believed and still believe that Brexit also creates opportunities for the UK, but the fact that the CMA can make crazy decisions like the one of April 26 is definitely part of the downside of Brexit.

I personally--and I have no idea whether any of the decision makers share that view in the slightest--believe that the CMA's renewed attempt to stall, which is contrary to clear directions ("strategic steer") from the UK Prime Minister that regulatory processes should not hold up business, weighs in favor of "closing over" the UK regulator after the FTC has been defeated in court. But as I also said in a Twitter Space today, the great work that the CATribunal is doing would weigh in favor of a short extension of the deal in order to let the UK appellate hearing go forward (it starts on July 28) and await the decision, which the court said would come before October.

As for the Canadian letter, it is just an expression of solidarity by one regulator with another, especially between regulators of neighbor countries and also probably in light of the historic ties between Canada and the UK. The letter says there is "likely" a competition issue in the eyes of the CCB, but they did not block the merger while the window of opportunity was open. The letter is not going to make an impact, not even psychologically.

Now let's wait for Judge Corley's decision. The FTC has failed to surmount any of the relevant hurdles. The cloud-gaming part of the decision will not be as damning for the FTC as the console part may be (given how absurd that one is), but I just can't see how it would entitle the FTC to a preliminary injunction. In the private lawsuit over this deal, Judge Corley did not just ask questions for the purpose of enabling a party's counsel to make the strongest arguments. She tends to be very transparent, and given that she indicated problems with several parts of the FTC's theory of harm while a single failure would doom the motion, I'm convinced that the FTC has failed to make a showing of a reasonable likelihood of success on the merits.