Judge Releases Decision Approving Meta’s Virtual-Reality Deal

The FTC had sought an injunction blocking Meta from buying Within, which makes a popular virtual-reality fitness app called Supernatural, arguing the transaction would undermine competition in the nascent virtual-reality industry.

U.S. District Judge

Edward Davila

in San Jose, Calif., ruled on the request last Tuesday but didn’t make his decision public at the time. People familiar with the ruling told The Wall Street Journal that the judge had denied the FTC’s request, handing an important victory to Meta and its chief executive,

Mark Zuckerberg.

The 65-page opinion sheds light on why the FTC lost the injunction bid, which was seen as a test of the agency’s aggressive approach to antitrust enforcement under Chair Lina Khan, a frequent critic of how big technology platforms like Meta wield their power.

A Meta spokesman said the company was pleased with the ruling and looks forward to closing the Within deal soon. An FTC spokesman declined to comment.

Meta has long been a dominant player in the virtual-reality space because of its Oculus-branded headsets. In late 2021, the Facebook parent announced it was acquiring Within and its Supernatural fitness product.

While Within is a relatively small company, the deal was seen as important to Mr. Zuckerberg’s strategy of focusing on metaverses, or virtual worlds, which led to Facebook’s rebranding as Meta in October 2021.

In July, when the FTC sued to block the Within deal, it accused Meta of trying to buy its way to the top of the virtual-reality fitness market, rather than competing on the merits.

With its vast resources, “Meta could have chosen to build a VR dedicated fitness app from scratch,” the agency said in its July complaint. If Meta had competed with Within on the merits, instead of buying the startup, there would be a healthier market and more choices for consumers, the FTC said.

Historically, the FTC and Justice Department have challenged mergers by two major players in established industries. So the FTC’s challenge to Meta buying a startup in a relatively new market was seen as an unusual approach and an important test case.

Judge Davila’s now-public ruling hinged on a finding that Meta would have found it challenging to compete with Within.

The judge said Meta “presently lacks the capability to create fitness content,” so launching a competitor to Within’s Supernatural would have meant joining with an established fitness brand.

“In addition to fitness content, the evidence also indicates that Meta lacked the necessary studio production capabilities to create and film VR workouts,” the judge said.

While the judge allowed the deal to go forward, he ruled in the FTC’s favor on some legal and factual points.

Judge Davila agreed with the FTC that virtual-reality fitness products are a distinct market. Meta’s lawyers had sought to define the relevant market more broadly.

While the judge disagreed with the FTC on its view of the facts of the case, he said it was premised on a valid legal theory—namely, that the transaction would lessen competition because the industry would benefit from Meta’s independent entry into the market.

Meta’s lawyers had argued that this theory, known as the “actual potential competition” doctrine and which has never been explicitly endorsed by the Supreme Court, is invalid.

That aspect of the judge’s ruling was an important victory for the FTC’s lawyers, said Rebecca Allensworth, a professor of antitrust law at Vanderbilt Law School.

“They’ve got to be thrilled with that,” said Ms. Allensworth, adding that the judge’s conclusion will help the FTC in future cases.

The FTC could still challenge the Meta-Within transaction by lodging an appeal with the Ninth Circuit Court of Appeals or through an administrative proceeding in an FTC in-house tribunal.

The appeals court is unlikely to reverse Judge Davila’s ruling, said Doug Melamed, a professor at Stanford Law School and a former Justice Department official.

“It’s a thoughtful opinion that’s going to be pretty impressive to a reviewing court,” said Mr. Melamed.

Typically, the FTC doesn’t pursue administrative proceedings after losing an injunction bid in federal court.

Ms. Allensworth said the FTC may opt to continue with this particular administrative proceeding, given some favorable conclusions from Judge Davila.

“It would be odd to give up now,” said Ms. Allensworth.

Write to Jan Wolfe at [email protected]