Judge Is Said to Let Meta’s Virtual Reality Deal Move Forward

A federal judge has rejected the Federal Trade Commission’s request to stop Meta, Facebook’s parent company, from buying a small virtual reality start-up, two people with knowledge of the matter said, signaling that efforts to rein in the tech giants may struggle in courts.

In a sealed order issued late Tuesday, Judge Edward J. Davila of U.S. District Court for the Northern District of California declined the F.T.C.’s demand for a preliminary injunction to block Meta from buying Within, which makes a virtual reality fitness game called Supernatural, said the people, who spoke on the condition of anonymity because the orders are sealed.

Judge Davila also issued a restraining order blocking the $400 million deal from closing through Tuesday, allowing the F.T.C. time to decide whether it wants to appeal the ruling, one of the people said.

The loss is a stinging defeat for the F.T.C.’s chair, Lina Khan, and her broader efforts to expand the boundaries of antitrust law to better regulate the tech giants. The case was aimed at testing that line with a rarely used legal argument that Meta’s deal would hinder future competition in an undeveloped market, as opposed to a more traditional case that would focus on a mature economic area.

Ms. Khan has argued that the F.T.C. should file more novel cases if it wants to properly nurture competition in the modern economy. She has acknowledged that the agency must be willing to lose in some of them.

The ruling is “a blow to the administration’s and the F.T.C.’s interest in being stronger in merger enforcement,” said Rebecca Haw Allensworth, a professor at Vanderbilt Law School. She added that the agency clearly saw benefits to bringing risky cases to draw attention to what it considered the poor state of antitrust law.

The decision was a vindication for Meta, which had argued in court that it was trying to create a platform that would be welcoming for all virtual reality apps, including those developed independently. The company has invested billions of dollars in becoming a powerhouse of the so-called metaverse, where users work, play and consume content through virtual and augmented reality. It has acquired virtual reality content studios and Oculus, a company that makes the headsets people use to view that content.

Meta, which reported a $4.2 billion restructuring charge in its quarterly earnings on Wednesday, declined to comment. A spokesman for the F.T.C. said the agency was “not able to comment at this time” to respect the court’s seal order.

Bloomberg earlier reported Judge Davila’s decision.

The F.T.C. sued Meta in July in federal court to temporarily halt the deal, and then asked its in-house court in August to fully block the acquisition. The F.T.C. will have to decide whether to proceed with its in-house challenge despite the ruling.

The lawsuit was the first of the cases developed entirely under Ms. Khan, a legal scholar who rose to prominence after she wrote a critique of Amazon that went viral, to be filed in court. Looking to prevent more “vertical” deals, in which the two companies don’t compete directly, the F.T.C. also challenged Microsoft’s $69 billion purchase of the video game publisher Activision Blizzard in December. Last month, the Department of Justice accused Google of abusing a monopoly over the technology that places ads on websites.

William E. Kovacic, a former F.T.C. chairman, said the sealed ruling in the Meta case would be more problematic for the agency if the judge panned the legal theories underpinning the challenge. But if Judge Davila saw the F.T.C.’s more novel approach as plausible — even if the agency’s factual assertions were weak in this case — “that’s a low-impact defeat” less likely to hurt its future efforts, Mr. Kovacic said.

The case was heard in San Jose, Calif., in December. During the seven-day hearing, Meta’s chief executive, Mark Zuckerberg, and its chief technology officer, Andrew Bosworth, testified. The F.T.C. argued that if Meta did not buy Supernatural, it would develop its own virtual reality fitness game.

Meta’s case rested on proving that developing or acquiring a fitness app was just a small part of a strategy that would eventually push virtual reality, and by extension the metaverse, into wide popularity.

During the hearing, an F.T.C. lawyer asked Mr. Zuckerberg if it was true that acquiring or developing a fitness app kept him up at night. Fitness apps, Mr. Zuckerberg said, were just one type of app that the company was interested in.

“Fitness was probably the fourth or fifth use case that I thought would be important,” he said, ranking apps that focused on gaming, productivity and social interactions as higher priorities. Developing a fitness app, he told the lawyer, did not cost him any sleep.

Mr. Zuckerberg also told Judge Davila that if he blocked the deal, it would “have a chilling effect.”

“Maybe Meta gets banned from everything going forward,” Mr. Zuckerberg said. “That would make it so investors are less excited for investing in this space.”