U.S. Federal Government and States Ask Court To Break Up Facebook

Antitrust suits finally filed against Facebook. The U.S. and state governments want to spin off WhatsApp and Instagram.

As has been long rumored, the Federal Trade Commission (FTC) and state attorneys general have filed lawsuits against Facebook, claiming the social media giant has pursued anti-competitive practices in violation of federal and state laws. This is the second major lawsuit filed this fall against a tech giant and may not be the last. The lawsuits make the case that the appropriate way to rectify the pattern of abuse is to spin off WhatsApp and Instagram among other requested legal relief. Probably not by accident, but both suits were filed in the same federal court, and consequently the suits will likely be consolidated with the FTC and the states working together in litigating against Facebook. This case may not be resolved until well into the Biden Administration.

The FTC voted to proceed with the antitrust and anti-competition action on a 3-2 vote with Chair Joseph Simons siding with the two Democratic Commissioners. The other two Republicans voted no but did so without issuing a dissent or statement, explaining their views or arguing the majority’s approach is wrong or misguided.

In the suit filed in the District Court of the District of Columbia, the FTC claims that Facebook has violated Section 2 of the Sherman Antitrust Act and by extension Section 5 of the FTC Act through buying potential rivals WhatsApp and Instagram and forcing any companies that want to use Facebook’s application programming interfaces not to compete with Facebook or Facebook Messenger. As a result, the FCT claims, people have no functional options for social messaging and personal networking and the online advertising market hurts advertisers and ultimately consumers given Facebook’s dominance of the market.

The FTC asserted:

  • Facebook has maintained its monopoly position by buying up companies that present competitive threats and by imposing restrictive policies that unjustifiably hinder actual or potential rivals that Facebook does not or cannot acquire.
  • Facebook holds monopoly power in the market for personal social networking services (“personal social networking” or “personal social networking services”) in the United States, which it enjoys primarily through its control of the largest and most profitable social network in the world, known internally at Facebook as “Facebook Blue,” and to much of the world simply as “Facebook.”
  • Facebook’s unmatched position has provided it with staggering profits. Facebook monetizes its personal social networking monopoly principally by selling advertising, which exploits a rich set of data about users’ activities, interests, and affiliations to target advertisements to users. Last year alone, Facebook generated revenues of more than $70 billion and profits of more than $18.5 billion.
  • Since toppling early rival Myspace and achieving monopoly power, Facebook has turned to playing defense through anticompetitive means. After identifying two significant competitive threats to its dominant position—Instagram and WhatsApp—Facebook moved to squelch those threats by buying the companies, reflecting CEO Mark Zuckerberg’s view, expressed in a 2008 email, that “it is better to buy than compete.” To further entrench its position, Facebook has also imposed anticompetitive conditions that restricted access to its valuable platform—conditions that Facebook personnel recognized as “anti user[,]” “hypocritical” in light of Facebook’s purported mission of enabling sharing, and a signal that “we’re scared that we can’t compete on our own merits.”
  • As Facebook has long recognized, its personal social networking monopoly is protected by high barriers to entry, including strong network effects. In particular, because a personal social network is generally more valuable to a user when more of that user’s friends and family are already members, a new entrant faces significant difficulties in attracting a sufficient user base to compete with Facebook. Facebook’s internal documents confirm that it is very difficult to win users with a social networking product built around a particular social “mechanic” (i.e., a particular way to connect and interact with others, such as photo-sharing) that is already being used by an incumbent with dominant scale. Even an entrant with a “better” product often cannot succeed against the overwhelming network effects enjoyed by a dominant personal social network.
  • In an effort to preserve its monopoly in the provision of personal social networking, Facebook has, for many years, continued to engage in a course of anticompetitive conduct with the aim of suppressing, neutralizing, and deterring serious competitive threats to Facebook Blue. This course of conduct has had three main elements: acquiring Instagram, acquiring WhatsApp, and the anticompetitive conditioning of access to its platform to suppress competition.

The FTC detailed the harm to people and to competition:

  • Through at least the foregoing conduct, Facebook suppresses, deters, hinders, and eliminates personal social networking competition, and maintains its monopoly power in the U.S. personal social networking market, through means other than merits competition. In doing so, Facebook deprives users of personal social networking in the United States of the benefits of competition, including increased choice, quality, and innovation. Facebook cannot justify this substantial harm to competition with claimed efficiencies, procompetitive benefits, or business justifications that could not be achieved through other means.
  • By suppressing, neutralizing, and deterring the emergence and growth of personal social networking rivals, Facebook also suppresses meaningful competition for the sale of advertising. Personal social networking providers typically monetize through the sale of advertising; thus, more competition in personal social networking is also likely to mean more competition in the provision of advertising. By monopolizing personal social networking, Facebook thereby also deprives advertisers of the benefits of competition, such as lower advertising prices and increased choice, quality, and innovation related to advertising.

The FTC asked the court for a ruling that:

  1. that Facebook’s course of conduct, as alleged herein, violates Section 2 of the Sherman Act and thus constitutes an unfair method of competition in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a);
  2. divestiture of assets, divestiture or reconstruction of businesses (including, but not limited to, Instagram and/or WhatsApp), and such other relief sufficient to restore the competition that would exist absent the conduct alleged in the Complaint, including, to the extent reasonably necessary, the provision of ongoing support or services from Facebook to one or more viable and independent business(es);
  3. any other equitable relief necessary to restore competition and remedy the harm to competition caused by Facebook’s anticompetitive conduct described above;
  4. a prior notice and prior approval obligation for future mergers and acquisitions;
  5. that Facebook is permanently enjoined from imposing anticompetitive conditions on access to APIs and data;
  6. that Facebook is permanently enjoined from engaging in the unlawful conduct described herein;
  7. that Facebook is permanently enjoined from engaging in similar or related conduct in the future;
  8. a requirement to file periodic compliance reports with the FTC, and to submit to such reporting and monitoring obligations as may be reasonable and appropriate; and
  9. any other equitable relief, including, but not limited to, divestiture or restructuring, as the Court finds necessary to redress and prevent recurrence of Facebook’s violations of law, as alleged herein.

46 states, the District of Columbia, and the territory of Guam filed suit the same day against Facebook, alleging violations of Sections 16 and 7 of the Clayton Act and Section 2 of the Sherman Act. The suit was also filed in the District Court of the District of Columbia. The state attorneys general who filed suit against Facebook represent the following jurisdictions: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, the territory of Guam, Hawaii, Idaho, Illinois, Iowa, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

The states made their case that Facebook has violated federal antitrust and anti-competition laws:

  • Every day, more than half of the United States population over the age of 13 turns to a Facebook service to keep them in touch with the people, organizations, and interests that matter most to them. For them, Facebook provides an important forum for sharing personal milestones and other intimate details about their lives to friends and family: for example, announcing the birth of a child or grieving the loss of a close relative; sharing photos and videos of children and grandchildren; and debating politics and public events.
  • Users do not pay a cash price to use Facebook. Instead, users exchange their time, attention, and personal data for access to Facebook’s services.
  • Facebook makes its money by selling ads. Facebook sells advertising to firms that attach immense value to the user engagement and highly targeted advertising that Facebook can uniquely deliver due to its massive network of users and the vast trove of data it has collected on users, their friends, and their interests. The more data Facebook accumulates by surveilling the activities of its users and the more time the company convinces users to spend engaging on Facebook services, the more money the company makes through its advertising business.
  • For almost a decade, Facebook has had monopoly power in the personal social networking market in the United States. As set forth in detail below, Facebook illegally maintains that monopoly power by deploying a buy-or-bury strategy that thwarts competition and harms both users and advertisers.
  • Facebook’s illegal course of conduct has been driven, in part, by fear that the company has fallen behind in important new segments and that emerging firms were “building networks that were competitive with” Facebook’s and could be “very disruptive to” the company’s dominance. As Facebook’s founder and CEO, Mark Zuckerberg observed, “[o]ne thing about startups . . . is you can often acquire them,” indicating at other times that such acquisitions would enable Facebook to “build a competitive moat” or “neutralize a competitor.”
  • Zuckerberg recognized early that even when these companies were not inclined to sell, if Facebook offered a “high enough price . . . they’d have to consider it.” Facebook has coupled its acquisition strategy with exclusionary tactics that snuffed out competitive threats and sent the message to technology firms that, in the words of one participant, if you stepped into Facebook’s turf or resisted pressure to sell, Zuckerberg would go into “destroy mode” subjecting your business to the “wrath of Mark.” As a result, Facebook has chilled innovation, deterred investment, and forestalled competition in the markets in which it operates, and it continues to do so.
  • Facebook’s unlawfully maintained monopoly power gives it wide latitude to set the terms for how its users’ private information is collected, used, and protected. In addition, because Facebook decides how and whether the content shared by users is displayed to other users, Facebook’s monopoly gives it significant control over how users engage with their closest connections and what content users see when they do. Because Facebook users have nowhere else to go for this important service, the company is able to make decisions about how and whether to display content on the platform and can use the personal information it collects from users solely to further its business interests, free from competitive constraints, even where those choices conflict with the interests and preferences of Facebook users.
  • choice in personal social networks, suppressed innovation, and reduced investment in potentially competing services. Facebook’s conduct deprives users of product improvements and, as a result, users have suffered, and continue to suffer, reductions in the quality and variety of privacy options and content available to them.
  • By eliminating, suppressing, and deterring the emergence and growth of personal social networking rivals, Facebook also harms advertisers in a number of ways, including less transparency to assess the value they receive from advertisements, and harm to their brand due to offensive content on Facebook services.
  • Facebook’s anticompetitive campaign to forestall competing services that might threaten its dominance in personal social networking services includes a variety of tactics.

The states are asking the court for the following relief:

  1. That Facebook be adjudged to have violated Section 2 of the Sherman Act, 15 U.S.C. § 2;
  2. That Facebook be enjoined and restrained from continuing to engage in any anticompetitive conduct and from adopting in the future any practice, plan, program, or device having a similar purpose or effect to the anticompetitive actions set forth above;
  3. That Facebook be enjoined and restrained from making further acquisitions valued at or in excess of $10 million without advance notification to Plaintiff States;
  4. That Facebook be enjoined and restrained from making further acquisitions without such disclosures to Plaintiff States as would be required to the federal government under the Hart-Scott-Rodino Act for transactions falling within the scope of such Act;
  5. That Facebook’s acquisition of Instagram be adjudged to be in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18;
  6. That Facebook’s acquisition of WhatsApp be adjudged to be in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18;
  7. That each Plaintiff State be awarded its costs, including reasonable attorneys’ fees pursuant to 15 U.S.C. § 15(c); and
  8. That the Court order such other and further equitable relief as this Court may deem appropriate to restore competitive conditions and lost competition and to prevent future violations, including divestiture or reconstruction of illegally acquired businesses and/or divestiture of Facebook assets or business lines.

© Michael Kans, Michael Kans Blog and michaelkans.blog, 2019-2020. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Michael Kans, Michael Kans Blog, and michaelkans.blog with appropriate and specific direction to the original content.

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