Fed. Trade Comm'n v. Meta Platforms Inc.

654 F.Supp.3d 892

FEDERAL TRADE COMMISSION, Plaintiff, v. META PLATFORMS INC., et al., Defendants.

Case No. 5:22-cv-04325-EJD

United States District Court, N.D. California, San Jose Division

Filed February 3, 2023

Signed January 31, 2023

Adam Michael Pergament, Andrew Lowdon, Anthony Saunders, Erika Meyers, Ernest Eric Elmore, James Harris Weingarten, Joshua M. Goodman, Justin Epner, Kristian Rogers, Lincoln Mayer, Michael Barnett, Peggy Femenella, Sean Hughto, Susan Musser, Timothy Patrick Singer, Abby Lauren Dennis, Federal Trade Commission, Washington, DC, Bradley Dax Grossman, Federal Trade Commission Office of the General Counsel, Washington, DC, Frances Anne Johnson, U.S. Federal Trade Commission Bureau of Competition, Washington, DC, Jeanine Balbach, Federal Trade Commission District of Columbia, Washington, DC, Erika Ruth Wodinsky, Federal Trade Commission, San Francisco, CA, for Plaintiff.

Aaron M. Panner, Pro Hac Vice, Alex Atticus Parkinson, Pro Hac Vice, Ana Nikolic Paul, Pro Hac Vice, Collin R. White, Pro Hac Vice, Daniel G. Bird, Pro Hac Vice, Evan Todd Leo, Pro Hac Vice, Jacob Edwin Hartman, Pro Hac Vice, James M. Webster, III, Pro Hac Vice, Julius Taranto, Pro Hac Vice, Kimberly Varadi Hamlett, Pro Hac Vice, Li Wei Vivian Dong, Pro Hac Vice, Mark C. Hansen, Hannah Carlin, Pro Hac Vice, Samuel A. Martin, Pro Hac Vice, Jared Beim, Pro Hac Vice, Kellogg, Hansen, Todd, Figel and Frederick, P.L.L.C., Washington, DC, Chantale Fiebig, Pro Hac Vice, Jeffrey H. Perry, Pro Hac Vice, Michael Moiseyev, Pro Hac Vice, Weil, Gotshal & Manges LLP, Washington, DC, Geoffrey M. Klineberg, Washington, DC, Molly Maureen Jennings, Pro Hac Vice, Wilmer Cutler Pickering Hale & Dorr LLP, Washington, DC, Bambo Obaro, Pro Hac Vice, Weil, Gotshal and Manges, Redwood Shores, CA, Diane P. Sullivan, Pro Hac Vice, Weil, Gotshal and Manges LLP, Princeton, NJ, Elizabeth Y. Ryan, Pro Hac Vice, Weil, Gotshal & Manges LLP, Dallas, TX, Eric S. Hochstadt, Pro Hac Vice, Weil Gotshal & Manges LLP, New York, NY, Sonal N. Mehta, Wilmer Cutler Pickering Hale and Dorr LLP, Palo Alto, CA, for Defendant Meta Platforms Inc.

Christopher J. Cox, Joseph Taylor Spoerl, Hogan Lovells U.S. LLP, Menlo Park, CA, Benjamin Frederick Holt, Pro Hac Vice, Charles A. Loughlin, Pro Hac Vice, Christopher Fitzpatrick, Pro Hac Vice, Daniel Tyler Mader, Pro Hac Vice, Jonathan Elsasser, Pro Hac Vice, Lauren Battaglia, Pro Hac Vice, Liam Phibbs, Pro Hac Vice, Logan Michael Breed, Pro Hac Vice, Eric Richard Sega, Pro Hac Vice, Hogan Lovells U.S. LLP, Washington, DC, Jamie Lee, Pro Hac Vice, Columbia Square, Washington, DC, for Defendant Within Unlimited, Inc.

Adam R. Fox, Squire Patton Boggs (US) LLP, Los Angeles, CA, for Defendant Lululemon Athletica, Inc.

Henry Bluestone Smith, NYS Office of the Attorney General, New York, NY, for Amici State of New York, State of Alaska, State of California, State of Connecticut, State of Delaware, State of Hawaii, State of Idaho, State of Maryland, Commonwealth of Massachusetts, State of Minnesota, State of Mississippi, State of Montana, State of Nebraska, State of Nevada, State of New Jersey, State of New Mexico, State of North Carolina, State of North Dakota, State of Oregon, State of Rhode Island, State of Utah, State of Washington, District of Columbia, Territory of Guam, State of Illinois.

ORDER DENYING PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

Re: ECF Nos. 108, 164, 470

EDWARD J. DAVILA, United States District Judge

This action was brought by Plaintiff Federal Trade Commission ("FTC") to block the merger between a virtual reality ("VR") device provider and a VR software developer. Defendant Meta Platforms Inc. ("Meta") has agreed to acquire all shares of Within Unlimited, Inc. ("Within," collectively with Meta, "Defendants"). The FTC has come before the Court to seek preliminary injunctive relief pursuant to Section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b), to enjoin Defendants from consummating their proposed merger (the "Acquisition") pending the outcome of ongoing administrative proceedings before the FTC. ECF Nos. 101, 164.

In addition to the FTC's motion for preliminary injunction, Defendants have filed a motion to dismiss the Amended Complaint ("FAC") and a motion to strike the opinion of the FTC's expert, Dr. Hal J. Singer, regarding the relevant product market definition. ECF Nos. 108, 470.

Over the course of a seven-day evidentiary hearing, the Court heard the parties' arguments and evidence. The Court has also received briefing on all pending motions, as well as pre-hearing and post-hearing submissions of the parties' proposed findings of fact. Having considered the parties' submissions and evidence, the Court DENIES Defendants' motion to dismiss, DENIES the Defendants' motion to strike, and DENIES the FTC's motion for preliminary injunction.

I. FACTUAL FINDINGS

A. Defendant Meta Platforms, Inc.

1. Defendant Meta Platforms, Inc. is a publicly traded corporation organized under Delaware law and headquartered in Menlo Park, California. DX1237, at 11. Meta operates a collection of social networking platforms referred to as its "Family of Apps," which includes Facebook, Instagram, Messenger, and WhatsApp. PX0937, at 51. Meta also manufactures VR devices, such as the Quest 2 and the Quest Pro headsets, through its Reality Labs division. Stojsavljevic Hr'g Tr. 71:2-13; 74:10-19.

2. VR technology enables users to experience and interact with a digitally generated three-dimensional environment by wearing a headset with stereoscopic displays in front of each eye. Stojsavljevic Hr'g Tr. 72:25-74:9. Users can download a wide variety of VR software applications ("apps") from digital marketplaces, or app stores, for use on their personal VR devices. Pruett Hr'g Tr. 219:19-25. Quest headsets are designed so that a user's geolocation determines what content is available and at what price. Stojsavljevic Hr'g Tr. 79:23-80:6.

3. In 2020, 2021, and 2022, Meta spent several billion dollars each year on its VR Reality Labs division. Zuckerberg Hr'g Tr. 1280:9-1282:15.

4. Meta operates an app store called the Quest Store, previously known as the Oculus Store. Third-party app developers can request to have their app distributed in the Quest Store, and Meta also actively seeks out and invites developers to bring apps to the Quest Store. Stojsavljevic Hr'g Tr. 79:16-22; Pruett Hr'g Tr. 220:8-13. Apps must meet several content, technical, and asset requirements before they may be considered for listing on the Quest Store; however, Meta may still reject an app that meets all the requirements pursuant to the Quest Store's curation policy. Pruett Hr'g Tr. 220:25-223:16. Apart from the Quest Store, Meta also operates App Lab, an app distribution service for VR applications that meet basic technical and content requirements but is otherwise free from any editorial curating by Meta. Pruett Hr'g Tr. 260:16-22. Quest users can also download VR apps from other app stores on VR platforms that Meta does not own, such as SideQuest and Steam VR Store. Pruett Hr'g Tr. 274:8-21.

5. The content and apps that are available for a particular VR system plays an important role in the widespread adoption of that system, and many users may purchase a VR system for specific content they want to experience. Zuckerberg Hr'g Tr. 1294:16-125:2; Stojsavljevic Hr'g Tr. 101:6-13, 101:21-27. As a result, high quality and popular VR apps—dubbed as "system sellers"—can drive adoption and sales of the specific headsets for which they are available. Stojsavljevic Hr'g Tr. 107:23-108:5. Broad adoption of a specific VR system, in turn, will attract third-party app developers to create more VR content for that system, a phenomenon referred to as a "flywheel" effect. PX0100, at 2-3; Bosworth Hr'g Tr. 1048:21-1049:3.

6. When a VR app is developed wholly by a developer unaffiliated with Meta, Meta refers to that as third-party ("3P") development. When Meta funds all or most of a VR app's development, Meta refers to that as second-party ("2P") development. When a VR app is developed in-house at Meta, either by acquired VR studios or Meta employees themselves, Meta refers to that as first-party ("1P") development. Stojsavljevic Hr'g Tr. 72:12-16; 106:16-21.

7. Meta encourages third-party VR app developers to build apps for the Quest platform by providing funding and technical VR engineering assistance to those developers. Stojsavljevic Hr'g Tr. 106:5-15. Specifically, Meta provides grants that are designed to improve existing VR software or incentivize the development of software on Quest that may only exist on another platform. Meta also maintains a developer relations engineering team consisting of veteran engineers who work directly with developers to improve software quality, fix bugs, or polish the experience they are building. Pruett Hr'g Tr. 285:19-286:12. Meta's VR content organization spends approximately [Redacted]. PX0066 ("Rubin Dep.") 24:5-25:8.

8. In addition to providing funding or engineering support to third-party VR app developers, Meta has also sought to increase the VR app content available on its platform by acquiring third-party app developers and developing its own apps internally. PX0055 ("Verdu Dep.") 117:5-118:12.

9. Although decisions may be made on a case-by-case basis, Meta typically will seek to acquire or build its own VR app if: [Redacted] PX0127, at 4-5.

10. Similarly, Meta is more inclined to build its own VR app instead of acquiring an existing third-party developer [Redacted] PX0127, at 5.

11. In the past three years, Meta has acquired at least nine VR app studios: Beat Games, Sanzaru Games, Ready at Dawn Studios, Downpour Interactive, BigBox VR, Unit 2 Games, Twisted Pixel, Armature Studio, and Camouflaj. Stojsavljevic Hr'g Tr. 87:5-88:2.

12. The VR apps that Meta has independently developed and released include Horizon Worlds (world building), Horizon Workrooms (productivity), Horizon Venues (live events), and...