Demartini v. Microsoft Corporation

Background

The plaintiffs are recreational video game players who sought to block Microsoft’s acquisition of Activision, the publisher and developer of Call of Duty and Candy Crush. After the court dismissed their original complaint with permission to amend, the plaintiffs filed a First Amended Complaint. They brought one claim under Section 7 of the Clayton Act, which generally prohibits acquisitions that may substantially reduce competition or tend to create a monopoly.

The amended complaint alleged that the acquisition would reduce competition in five markets: Triple-A video games, high-performance consoles, multi-game content-library subscription services, cloud-gaming subscription services, and computer operating systems. Microsoft moved to dismiss for lack of Article III standing, lack of irreparable harm, and failure to state a claim.

Standing and threatened harm

Article III standing requires a plaintiff to plausibly allege a concrete and particularized injury, a connection between that injury and the challenged conduct, and a likelihood that a favorable decision would remedy the injury. The court agreed that the amended complaint’s allegations by themselves were too general to show that the plaintiffs would actually buy a new Xbox or pay more for a future version of Call of Duty.

But the court considered declarations submitted with the plaintiffs’ request for a preliminary injunction. Those declarations plausibly supported an inference that at least some plaintiffs would continue buying Call of Duty games because the games were important to their social lives, and that they would buy a new platform or subscribe to Microsoft’s service if necessary to play future versions. The court therefore found the allegations sufficient to support Article III standing.

The court also rejected Microsoft’s argument that the alleged future injuries could only be remedied through money damages. The plaintiffs alleged an appreciable danger that Microsoft would make Call of Duty exclusive to its platforms or services, causing ongoing harm such as higher prices, less innovation, or the need for some players to purchase Microsoft platforms. The court held that the plaintiffs had adequately alleged threatened harm that could support injunctive relief.

Horizontal merger theory

The plaintiffs alleged that Microsoft and Activision competed in a market for Triple-A video games. They claimed that the combined companies would control approximately 30 percent or more of that market.

The court held that the plaintiffs had not plausibly supported that market-share allegation. The alleged market excluded Fortnite because it was free to play, but the complaint did not explain why that exclusion was reasonable. The complaint also did not explain why the market was limited to six publishers. In addition, the 30-percent figure was based on copies sold for all games published by those companies, rather than copies sold for Triple-A games specifically. The court concluded that the horizontal merger theory did not satisfy the plausibility requirement for pleading a Section 7 claim.

Vertical merger theory

The plaintiffs’ vertical theory alleged that Microsoft would make Call of Duty exclusive, or partly exclusive, to Microsoft platforms and subscription services. Microsoft argued that the plaintiffs had not plausibly alleged that Microsoft could or would do that, and that Call of Duty was not a critical input in the relevant subscription-service markets because it was not currently available in those markets.

The court rejected those arguments at the motion-to-dismiss stage. The plaintiffs alleged that Microsoft had previously acquired video game developers and made their content exclusive to Microsoft platforms, and that Microsoft had not always followed promises made to antitrust regulators. The plaintiffs also plausibly alleged that regular Call of Duty players would choose Microsoft’s subscription service over a competing service if Call of Duty were available on Microsoft’s service but not the competing service. The court held that the vertical Section 7 claim survived review under Rule 12(b)(6), which tests whether a complaint adequately states a legal claim.

Disposition

Judge Corley’s order granted in part and denied in part Microsoft’s motion to dismiss. The court found sufficient allegations of standing and threatened harm, allowed the vertical merger Section 7 claim to proceed, and found the horizontal merger theory inadequately pleaded. The order stated that any amended complaint had to be filed within 20 days.