Dec 8, 2022 - Technology

Meta faces showdown in court over VR acquisition

Illustration of Meta’s logo wrapped around a gavel.

Illustration: Shoshana Gordon/Axios

Federal regulators will press their case for stopping Meta from acquiring a VR studio beginning Thursday in a San Jose courtroom.

Why it matters: The trial will mark the first high-profile public test of the Federal Trade Commission's effort under chair Lina Khan to broaden the principles of antitrust law in ways that might bar Big Tech from getting bigger.

Driving the news: The federal court case centers on Meta's attempt to buy VR fitness company Within, which makes the popular Supernatural app.

  • A judge will hear arguments from either side, the FTC going first, and decide whether to grant the agency a preliminary injunction to keep the tech giant from closing on its proposed acquisition of Within.
  • The judge presiding is Edward Davila, who recently sentenced former Theranos executive Elizabeth Holmes to 11 years in prison for defrauding investors.

The intrigue: High-level Meta executives may take the stand in defense of the Within purchase, with CEO Mark Zuckerberg and CTO Andrew Bosworth on Meta's potential witness list.

  • Per court filings, virtual reality companies along with employees from Apple, Alphabet, Lululemon, ByteDance, Nike, Peloton and Equinox may also testify about the their products and the state of competition for augmented and virtual reality for fitness.

Catch up quick: The FTC first filed to block Meta's acquisition in July, arguing that Meta is "already a key player at each level of the virtual reality sector," per a release.

  • The FTC argues that Meta acquiring Within would reduce future competition in the nascent VR market. Instead, the commission suggests, Meta should be developing its own products to enter that market.
  • Meta argues that smaller companies like Within often need the resources of larger owners to achieve their potential and reach more potential customers.
  • Meta has also called the FTC's arguments "conclusory, speculative, and contradictory."

Flashback: Looming behind this case is what many critics see as the FTC's failure a decade ago to challenge Facebook's acquisitions of Instagram and WhatsApp.

  • Under Khan, who has made taking on Big Tech a key goal of her tenure, the FTC has said it wants to take more cases to court rather than negotiate settlements over deals.
  • "We're going to be focusing our resources on litigating, rather than on settling," Khan previously told Axios.

Between the lines: The FTC's case marks a break from the standards most federal regulators have applied since the 1970s, under which regulators only stepped in to block mergers if they felt they could prove a deal stifled existing competition.

  • A victory in the Within case would bolster the agency's efforts to challenge other Big Tech acquisitions and chill other big companies' purchases.
  • A loss for the FTC will make it that much harder for it to succeed at efforts to apply broader antitrust principles to other emerging markets.

What they're saying: "Congress created the FTC to stop unfair methods of competition affecting commerce," said Douglas Farrar, an FTC spokesperson. "When we bring cases we are following the laws on the books, and using the tools Congress gave us to protect Americans from illegal business practices."

  • The FTC has also called on Congress to pass laws that would give it more power to rein in digital giants.

Between the lines: Experts critical of the FTC's case previously told Axios they believe it will be extremely difficult to win. Supporters argue that the FTC can only advance its broader vision of antitrust law by taking cases to court — and even a loss could help by spurring legislators to act.

What to watch: Sources familiar with Meta's thinking tell Axios this preliminary injunction hearing is the most important part of regulatory approval for the Within acquisition.

  • If the FTC loses, Meta will be free to close its purchase of Within and will do so as soon as possible. The FTC could then later decide to challenge the consummated deal in its own administrative law court.
  • An administrative law judge would ultimately make a ruling on the FTC's in-house trial, the outcome of which Meta could appeal to a federal appeals court judge.
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