Judge Said to Allow Meta’s Deal for Virtual Reality Start-Up to 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 Feb. 7, allowing the F.T.C. time to decide whether it wants to appeal the ruling, one of the people said.

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

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

The decision was also 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 multiple virtual reality content studios and Oculus, a company that makes the headsets people use to view that content.

Meta, which declined to comment, is scheduled to report quarterly earnings later on Wednesday. A spokesman for the F.T.C. said it 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. lawsuit to block the deal 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. This month, the Department of Justice accused Google of abusing a monopoly over the technology that places ads on websites.

The case was heard in federal court 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 December 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.”