Compass Lexecon Clients Microsoft and Activision Prevail in Landmark Merger Case

Court Relies on Testimony of Compass Lexecon Expert Professor Dennis W. Carlton

Compass Lexecon was retained by Microsoft and Activision Blizzard to provide economic analysis and expert testimony regarding the competitive effects and procompetitive efficiencies arising from Microsoft’s proposed acquisition of Activision. The proposed vertical merger, the largest tech merger in history, is opposed by the U.S. Federal Trade Commission, which sought a preliminary injunction in federal court in the Northern District of California to halt consummation of the merger while the FTC’s administrative court process proceeded. Professor Dennis W. Carlton testified before the Northern California court that the FTC expert’s economic analysis was flawed, relied on unsupported assumptions, and did not provide a reliable basis on which one could conclude that the merger would lead to foreclosure of Activision content from Microsoft’s rivals. Professor Carlton also testified that the merger would lead to merger-specific benefits including that Activision’s gaming content would be distributed more widely post-merger than would be the case in the absence of the merger.

Judge Jacqueline Scott Corley denied the FTC’s request for a preliminary injunction, ruling that the FTC had failed to demonstrate that it would likely prevail in its claim that the proposed merger would substantially lessen competition and that, in contrast to the FTC’s claims, there would be more consumer access to Activision content following the merger. In her opinion, Judge Corley repeatedly cited to Professor Carlton’s testimony criticizing the FTC expert’s analysis and stated that his testimony was unchallenged by the FTC. “[W]hat does [the FTC’s expert] say about Dr. Carlton’s criticism? Nothing in his direct testimony. At the evidentiary hearing on re-direct? Nothing. And when the FTC cross-examined Dr. Carlton on his written direct testimony? Again, nothing. The FTC chose not to challenge, or even address, Dr. Carlton’s identification of material flaws in [their expert’s] share model. The criticism thus stands unscathed—and persuasive.”

Judge Corley also acknowledged several efficiencies described by Professor Carlton, including expanded access to Activision content, lower costs for gamers, and increased incentives to invest in game development. Interestingly, Judge Corley’s opinion relied on several recent challenges to vertical mergers where judges ruled for the defendants—United States of America v. AT&T Inc., DirecTV Group Holdings, LLC, and Time Warner Inc.; Federal Trade Commission v. Meta Platforms, Inc.; and the FTC ALJ opinion in In the Matter of Illumina, Inc. and Grail, Inc.—all of which are cases where Professor Carlton served as an economic expert for the merging parties.

Professor Carlton was supported by a Compass Lexecon team led by Yoad Shefi that included Joseph Goodman, Junyan Guan, Phil Haile, Ali Hortacsu, Genaro Marquez, Dan O’Brien, Michael Sabor, Theresa Sullivan, Jonnie Tompkins, Tal Wolfson, and Ali Yurukoglu.

Compass Lexecon worked closely with attorneys at Wilkinson Stekloff led by Beth Wilkinson and Rakesh Kilaru that included Anastasia Pastan, Sarah Neuman, Jenna Pavelec, and Emily Clarke; with attorneys at Skadden, Arps, Slate, Meagher & Flom led by Steven Sunshine that included Julia York, Michael Sheerin, and Evan Kreiner; and with attorneys at Weil, Gotshal & Manges led by Megan Granger and Michael Moiseyev.