Demartini v. Microsoft Corporation

Background

Video-game consumers sued Microsoft under Sections 7 and 16 of the Clayton Act to block Microsoft’s proposed acquisition of Activision Blizzard. The complaint alleged that the approximately $70 billion merger could reduce competition, consumer choice, and output and could raise prices. The plaintiffs also sought a preliminary injunction. Microsoft moved to dismiss based on lack of ripeness, lack of standing, and failure to state a claim.

Ripeness

The court rejected Microsoft’s argument that the case was premature because the merger was still under regulatory review. The merger agreement had been executed, and Microsoft did not dispute that the merger could occur on or after May 22, 2023. The possibility that the transaction’s terms might change or that it might not occur did not make the challenge unripe. The court explained that Section 16 permits private plaintiffs to seek an injunction against threatened conduct before a merger is completed.

Standing

The court rejected Microsoft’s argument that the plaintiffs lacked standing because the merger had not closed. The court also rejected Microsoft’s contention that the transaction could not close while European regulatory review continued, because Microsoft offered no evidence supporting that argument.

The court agreed, however, that the plaintiffs lacked standing to pursue a theory based on reduced competition in the labor market. The plaintiffs did not claim that labor-market effects would harm them personally. Because private plaintiffs must show threatened loss or damage to their own interests, the court dismissed that portion of the Section 7 claim without prejudice for lack of standing.

Failure to State a Claim

A Section 7 plaintiff must plausibly allege facts showing an appreciable danger or reasonable probability that a merger will have anticompetitive effects in a relevant market. The plaintiffs alleged ten product markets and the United States as the geographic market. Microsoft did not challenge the definition of those markets, but argued that the complaint lacked facts showing likely anticompetitive effects. The court agreed.

Under the plaintiffs’ horizontal-merger theory, Microsoft and Activision allegedly competed in game development, publishing, and distribution for console and personal-computer gaming. The court found that the complaint mainly asserted that eliminating a rival would substantially lessen competition, without alleging sufficient facts about market shares, other competitors, or the specific anticompetitive conduct likely to occur. General references to higher prices, less innovation, reduced choice, and decreased output were not enough.

Under the vertical-merger theory, the plaintiffs alleged that Microsoft could make Activision games, including Call of Duty, exclusive or partly exclusive to Microsoft platforms. The court found that the complaint did not provide enough facts to make it reasonably probable that Microsoft would do so. Allegations about Microsoft’s past decisions involving ZeniMax and other studios came closer to stating a claim, but did not adequately explain the relevant markets, the importance of exclusive titles, or why exclusivity would make economic sense for Call of Duty and other successful games.

The court also rejected the plaintiffs’ argument that alleging the elimination of a significant rival alone was sufficient. The court stated that Ninth Circuit precedent required facts plausibly showing a reasonable probability of anticompetitive effects in a relevant market. The court further concluded that the market-share allegations concerned a publishing market that was not among the ten markets identified in the complaint.

Disposition

The court granted Microsoft’s motion to dismiss with 20 days’ leave to amend. Separately, to the extent the Section 7 claim was based on reduced competition in the labor market, the court dismissed that theory without prejudice for lack of standing. The order also scheduled a later in-person status conference and disposed of Docket No. 42.