Tweet Alerts Meta to FTC’s Surprise Suit to Block VR Deal

Meta Platforms Inc. learned that the U.S. Federal Trade Commission was suing the company over one of its smaller acquisitions via a Twitter post.

The Facebook parent company had provided hundreds of pages of documents, data and other details to the FTC as part of a routine disclosure before its acquisition of Within Unlimited, a virtual reality fitness app maker, could be approved, according to people familiar with the matter. But the regulator made no indications it was about to challenge the deal, and didn’t send its legal complaint to the company, the people said.

After noticing the tweet, Meta confirmed the news by looking at the court docket, the people added. The FTC typically gives companies a chance to meet with the commissioners and argue their case before filing a suit and subsequently alerts companies with a phone call and a copy of the complaint minutes before it’s filed.

The challenge, and the lack of forewarning, indicates the FTC Chair Lina Khan’s more adversarial stance. Khan is a progressive antitrust advocate appointed by President Joe Biden to shake up the agency amid criticism that it stood by as the tech giants such as Meta scooped up promising rivals, limiting competition in the market.

In the weeks before the July 27 legal challenge, the agency never sought sworn testimony from executives at Meta or Within about the deal, a common step if a lawsuit is in the works. The deal was big enough that Meta needed to inform the regulator and undergo an antitrust review. But communications between Meta and the FTC were similar to those for past acquisitions that resulted in no objections, the people said.

Meta reiterated that it will “vigorously defend” the deal in court. Meta and the FTC didn’t have any additional comment on how the suit was disclosed.

The FTC’s challenge is unique in other ways: It’s the first preemptive move to block a takeover by Meta, makes a little-used argument against a deal in a new and growing industry, and came after Khan made the unusual move of overruling her staff in the decision to bring the case.

The FTC alleges that Meta, which makes the most widely used virtual reality headset, Oculus, would eliminate future competition in a new market, often referred to as “nascent competition.” The agency rarely sues using that legal theory given the difficulty in proving a deal would tamp down the potential of a young industry. The last time the FTC brought such a case, in a 2015 instance involving sterilization technology, the agency lost.

The Within challenge seems more focused “on creating an initial splash and a narrative around what the FTC is doing than resulting in lasting legal authority,” said Neil Chilson, the FTC’s chief technologist during the Trump administration, who now works for Stand Together, a philanthropic organization associated with billionaire Charles Koch. “If they wanted to push the boundaries, there are much better cases to do that.”

The FTC staff assigned to review the deal recommended against filing a suit, as Bloomberg earlier reported based on people familiar with the agency’s deliberations. Khan’s own staffers took the lead on the complaint, contacting Meta with additional questions ahead of the July 31 date the companies had set to close the transaction.

The FTC’s newest commissioner, Democrat Alvaro Bedoya, who joined in May, had multiple meetings with Khan’s office and FTC staff about the deal, according to the Bloomberg report. Before Bedoya’s arrival, the agency was deadlocked at 2-2, allowing the FTC’s two Republican commissioners to stymie several of Khan’s more aggressive antitrust ideas. Bedoya’s vote, his first on a major FTC case, would be the key to the challenge against Meta.

Thanks to Bedoya, Khan won the first battle. After passing on more than 100 deals by the company over a decade, according a 2020 House report on tech company acquisitions, the agency is seeking to block the Within deal.

The transaction is part of Meta’s strategic push beyond social media into the metaverse, a more immersive version of the internet, where people can populate an alternative virtual world to go shopping, go to work and see friends.

The FTC alleged that Within’s Supernatural app competes with Meta’s own Beat Saber, a VR rhythm game where users hit targets in time to music, and the acquisition would discourage Meta from using its existing resources to develop its own virtual fitness offering. Therefore, the FTC argued, the deal decreases potential competition by giving Meta control over the market and eliminating the incentive for others to participate.

The agency will need to persuade a California federal judge in December that it would likely win an antitrust suit against Meta before the FTC’s in-house court.

Some don’t think that’s likely. Consumer Technology Association President Gary Shapiro called the FTC’s case “laughable.” The group represents 1,500 consumer tech companies, including Meta. Shapiro, a lawyer and registered lobbyist, said the FTC’s legal theory was weak and likely to chill investment in emerging startups.

“This lawsuit is such a break in policy, so unfair, and so damaging to new investment that I feel compelled to speak,” Shapiro said, noting that he had never commented on an ongoing FTC lawsuit before.

Alex Barinka, Leah Nylen and Sarah Frier report for Bloomberg News.

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