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Lina Khan, who wants to block Microsoft’s Activision deal, faces a challenge

    Lina Khan, the chair of the Federal Trade Commission, has pledged to usher in a new era of trust among US corporate giants, recently saying the agency intends to “enforce antitrust laws to ensure maximum effectiveness.”

    Now Ms. Khan has deployed that ambitious agenda on a case that could be very challenging for the agency to win.

    The FTC filed a lawsuit Thursday to block Microsoft’s $69 billion acquisition of video game publisher Activision, the largest consumer technology deal in two decades. The move underlined Ms Khan’s statements about curbing corporate power and was the boldest of a recent series of lawsuits by the agency to prevent other smaller deals in the name of competition.

    But Ms. Khan and the FTC face hurdles in stopping the Microsoft-Activision deal, experts said. That’s because courts are skeptical of challenges to so-called vertical mergers, where the two companies don’t compete directly. In this case, in gaming, Microsoft is best known as the creator of the Xbox console, while Activision is a major publisher of blockbuster titles such as Call of Duty.

    In addition, Microsoft has made a number of concessions to ease regulatory concerns about buying Activision – such as the commitment that Call of Duty would be available on Sony’s PlayStation and Nintendo platforms, not just Xbox – which some judges might find find convincing.

    “It’s undeniably a challenging litigation for the commission because vertical challenges are generally an uphill battle,” said Bill Baer, ​​who led the Justice Department’s antitrust division during the Obama administration and represented Sony in private practice. .

    The case tests Ms. Khan’s belief that the FTC needs to become more aggressive in scrutinizing the power of corporate giants in the modern economy, including the biggest tech companies. Appointed by President Biden to lead the agency, she has indicated she wants to pursue more lawsuits — rather than settle with companies — to push the boundaries of antitrust law and return to the kind of breach of trust that has been prevalent since the last century has not been seen.

    Since Ms. Khan took over the FTC last June, the agency has used new or little-used arguments to challenge deals. It sued to block the merger between chipmakers Nvidia and Arm, another deal in which the companies were not direct competitors. In July, the agency filed a lawsuit to prevent Facebook’s parent company Meta from buying virtual reality start-up Within, in a case that hinges on an unusual argument that the deal would harm competition in a market that is has not yet developed.

    Microsoft has vowed to fight the FTC’s lawsuit against the purchase of Activision. On Thursday, Brad Smith, Microsoft’s president, said the company “has full confidence in our case and is pleased with the opportunity to take it to court.” On Friday, Microsoft pointed to previous statements that it believes the deal would increase competition and create more opportunities for gamers and game developers.

    An FTC spokesperson declined to comment on the matter.

    Regulators have traditionally focused on challenging mergers that combine two direct competitors. When they have filed lawsuits against vertical mergers, their track record is mixed.

    The biggest and most painful recent battle over a vertical merger was in 2017, when the Justice Department tried to block AT&T’s $85.4 billion purchase of Time Warner. A federal judge eventually allowed the deal to go through because he was not convinced the combination would harm competition in telecommunications and media.

    This year, a judge ruled against the FTC’s attempt to stop a gene sequencing company from buying the maker of a cancer blood test because the evidence had failed to prove that the gene sequencing company would provide an incentive after the acquisition. to harm competitors. of the blood test product.

    But Ms Khan, along with her Justice Department counterpart, has spearheaded an effort to rewrite the guidelines for judging such deals.

    The FTC has primarily based its case against Microsoft’s Activision deal on the idea that the Xbox and PlayStation consoles compete in a class of their own, not other video game devices like the Nintendo Switch. Barry Nigro, who worked in the Justice Department’s antitrust division during the Obama administration, said the courts would heavily consider whether that definition was correct when deciding the case.

    In its complaint, the FTC argued that the games Activision made were “extremely important” to the success of video game consoles, so Microsoft would have the ability and incentive to use its control over those titles to keep them away from competitors or to to reduce its quality. .

    No game is more important to the cause than Call of Duty, a first-person shooter game, which the agency called “one of the most successful console game franchises ever.” Sony has said that if Microsoft got its hands on Call of Duty, it could keep the game off PlayStation and push players to Xbox.

    Microsoft has repeatedly said it wouldn’t make sense to pull Call of Duty off PlayStation, where most gamers play the game. This week, Microsoft signed a 10-year deal to bring the game to Nintendo’s Switch, and has said it has offered Sony a similar arrangement.

    But the FTC rejected Microsoft’s promises. It pointed to a $7.5 billion deal Microsoft made last year to buy ZeniMax, the parent company of eight game studios that create hit franchises like The Elder Scrolls, Doom, and Fallout.

    The agency wrote in its complaint that Microsoft had “assured” regulators in Europe reviewing the ZeniMax deal that it would have no reason to withhold ZeniMax titles from rival consoles. But Microsoft later announced that major new games from ZeniMax’s studios would only be released on the Xbox and Windows computers.

    That should “raise more suspicion” about Microsoft’s statements about keeping Call of Duty available on PlayStation, the agency said in its lawsuit.

    Microsoft has said that those new ZeniMax games cannot be compared to an existing franchise like Call of Duty. It has indicated that the FTC is misrepresenting what happened because the company made no commitments to the European Commission, pointing to European filings in which it said it would decide how games would be released on a case-by-case basis.

    In meetings with the agency and commissioners on Wednesday, Microsoft offered to make enforceable, bound commitments to keep Call of Duty on PlayStation, a person with direct knowledge of the talks said. But the commissioners didn’t seem interested in accepting a settlement, the person said.

    The FTC declined to comment on conversations it had with Microsoft before the lawsuit.

    Such agreements have fallen out of favor with regulators such as Ms Khan. She has said that promises companies make to regulators are rarely kept and do not address the core problems of companies growing larger and using their power to harm competition.

    Judges in some recent antitrust cases have cited settlement offers as a reason to allow mergers to proceed despite regulators’ objections. “Courts are surprisingly concerned about the kinds of things Microsoft has offered here,” said Daniel Francis, an assistant professor of law at New York University and a former FTC official.

    The FTC complaint said the first hearing on the case would be in August.

    Kelly Browning reporting contributed.