FTC Revises and Refiles Facebook Antitrust Suit

The Federal Trade Commission split along party lines in voting to file an amended complaint against Facebook in its federal antitrust case and rejected the company’s complaint that Chair Lina Khan recuse herself. In late June, a federal court granted Facebook’s motion to dismiss against the FTC because it failure to makes its case under Section 2 of the Sherman Antitrust Act that Facebook “has monopoly power in the market for Personal Social Networking (PSN) Services.” The court stated the FTC may refile its case and laid out a map for doing so:

• To guide the parties in the event amendment occurs, this Opinion also explains two further conclusions of law.
• First, even if the FTC had sufficiently pleaded market power, its challenge to Facebook’s policy of refusing interoperability permissions with competing apps fails to state a claim for injunctive relief. As explained herein (and in the Court’s separate Opinion in the States’ case), there is nothing unlawful about having such a policy in general. While it is possible that Facebook’s implementation of that policy as to certain specific competitor apps may have violated Section 2, such finding would not change the outcome here: all such revocations of access occurred in 2013, seven years before this suit was filed, and the FTC lacks statutory authority to seek an injunction “based on [such] long-past conduct.” FTC v. Shire ViroPharma, Inc., 917 F.3d 147, 156 (3d Cir. 2019). Regardless of whether the FTC can amend its Complaint to plausibly allege market power and advance this litigation, then, the conduct it has alleged regarding Facebook’s interoperability policies cannot form the basis for Section 2 liability.
• Second, the agency is on firmer ground in scrutinizing the acquisitions of Instagram and WhatsApp, as the Court rejects Facebook’s argument that the FTC lacks authority to seek injunctive relief against those purchases. Whether other issues arise in a subsequent phase of litigation is dependent on how the Government wishes to proceed.

The FTC listened and modified its complaint. The revised complaint provides more color and more detail and is sharper than the last complaint. For example, on the first page, the FTC opted to quote CEO Mark Zuckerberg in beginning to make its case the company saw buying rivals as better path than out-competing them: as Zuckerberg wrote or said in 2008, “it is better to buy than compete.” The FTC liberally used Zuckerberg’s email and statements along with COO Sheryl Sandberg and other Facebook officials to make their extensive case that Facebook knew it could not compete with Instagram and WhatsApp and instead had to buy them to avoid being displaced. The revised complaint spends much more time developing the argument that Facebook muscled out and aside perceived and real competitors through “anticompetitive conditional dealing policies.” Likewise, there are many statements in which Facebook employees are quoted as saying that API developers would see their access to Facebook users and data terminated if they developed capabilities that threatened Facebook’s core business or looked poised to start a rival firm. And, in response to the court’s admonition, there is nothing in the revised complaint arguing that Facebook’s refusal to allow interoperability permissions with competing apps.

What’s more, the FTC stressed the view of Zuckerberg and others that Facebook needed to stay ahead in maintaining its network effects or risk being pushed aside. The company lived in terror that Google would buy Instagram or WhatsApp before they did. Moreover, the company also articulated its vantage that stronger network effects tended to lock in users, making it harder for them to switch to rivals or upstarts.

The revised complaint is replete with statements and email that Facebook could not develop products that could compete with Instagram and WhatsApp. In both cases, there were frenzied pushes inside the company to develop, test, and roll out new capabilities for Facebook that would neutralize what both of these companies were doing better than Facebook. In both cases, the company failed and chose to merely buy these nascent competitors, at a premium it must be noted.

In the previous complaint, the FTC did not define the relevant market Facebook allegedly dominated in violation of U.S. law in the same way. The FTC chose to define the relevant market as “personal social networking services” in the first complaint and changed this to “personal social networking providers” in the new complaint. The revised market definition better fits Facebook’s alleged anti-competitive conduct, for the company’s actions aimed to overtake or neutralize other companies that were providers of personal social networking services. Facebook’s actions were predicated much less on the services and more on the threat the company providing the services posed. For, it was argued, again and again, in quotes from Facebook communications that should another social media provider pull even or surpass Facebook, its network effects would be endangered and more crucially so would its advertising dominance and revenues. Moreover, the FTC made the case that networking effects also entailed high barriers to entry into the market, which further protected the company.

To wit, the FTC argued:

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 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. Oftentimes, even an entrant with a superior product cannot succeed against the overwhelming network effects enjoyed by an incumbent personal social network.

And then the FTC sharpened its knives and accused Facebook of lacking the “business talent” necessary to compete in a changing marketplace:

Strong network effects can insulate a dominant personal social networking provider from competitive threats until a disruptive or innovative technology emerges to open up new ways for users to connect. In a competitive environment, Facebook’s success would depend on its ability to anticipate and adapt to periods of technological transition by developing innovative tools that create value for the company’s social network. But in navigating its own transition from small startup to business behemoth, Facebook’s leadership came to the realization—after several expensive failures—that it lacked the business talent required to maintain its dominance amid changing conditions. Unable to maintain its monopoly by fairly competing, the company’s executives addressed the existential threat by buying up new innovators that were succeeding where Facebook failed. The company supplemented this anticompetitive spending spree with an opened-first-closed-later scheme that helped cement its monopoly by further thwarting nascent rivals.

The agency is basically arguing that as conditions changed (mostly people moving their personal online interaction from desktops and laptops to smartphones) Facebook could not protect its dominant position by buying rivals and then starting an API developer system that was open and beneficial for developers that later morphed into a system of benefit mainly to Facebook.

The FTC summarized its case with respect to the anti-competitive practices on its own platform:

Facebook buttressed its acquisition strategy by implementing and enforcing a series of anticompetitive conditional dealing policies that pulled the rug out from under firms perceived as competitive threats. Facebook included these policies in agreements with third-party developers of software apps that ran on or connected to Facebook’s platform. Beginning in 2007, Facebook actively invited app developers onto its platform, granting them open access to critical application programming interfaces (“APIs”) and tools needed to interconnect with Facebook. This open access policy drove developer and user engagement with Facebook, which in turn helped to fuel Facebook’s massive advertising profits.

And it was all good for developers at first until Facebook started turning the screws, at least in the FTC’s rendition of events:

But as developers expanded popular offerings, Facebook came to view them as a threat, recognizing that some could aid emerging rivals or even challenge Facebook directly. In response, Facebook retooled its API policies into an anticompetitive weapon: developers could only access Facebook’s platform if they agreed (i) not to compete with Facebook’s core services and (ii) not to facilitate the growth of potential rivals to Facebook. App developers or websites that stayed loyal to Facebook by adhering to these conditions were given access to valuable Facebook platform interconnections. In contrast, app developers that worked with or themselves emerged as potential competitive threats to Facebook lost access to those interconnections, forcing some out of business.

The FTC then construes the effect of these API policy changes on competition more broadly:

But for the restrictions imposed by Facebook’s anticompetitive conditional dealing policies, developers could promote competitive threats to Facebook or become threats themselves. By preventing them from doing so, Facebook reduced the opportunities available to nascent threats. In other words, Facebook beat competitors not by improving its own product, but instead by imposing anticompetitive restrictions on developers. This conduct is no less anticompetitive than if Facebook had paid off these nascent competitive threats to cease competing.

And so, the agency likens Facebook’s restrictions and retaliations against threatening applications (e.g. Path and Circle) to buying off rivals not to compete, a classically anti-competitive behavior.

The FTC then broadened its argument to the effect of Facebook’s conduct on innovation, competition, and the users of personal social networking providers:

Through these actions, Facebook implemented an anticompetitive scheme that prevented differentiated and innovative firms from gaining scale, thus enabling Facebook to maintain its dominance. Facebook’s course of conduct has eliminated nascent rivals and extinguished the possibility that such rivals’ independent existence might allow other internet platforms to overcome the substantial barriers to entry that protect Facebook’s monopoly position. In doing so, Facebook deprives personal social networking users in the United States of the benefits of competition, including increased choice, quality, and innovation.

The FTC turned to the effects Facebook’s actions had on the advertising market:

By interfering with the emergence and growth of personal social networking rivals, Facebook also suppresses meaningful competition for the sale of advertising. Many personal social networking providers monetize their platforms 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 is still asking the U.S. federal court to split up Facebook through spinning off WhatsApp and Instagram and placing conditions on Facebook to make it harder to buy potential rivals in the future:

Facebook’s unlawful course of conduct to maintain its monopoly continues today and must be enjoined. Facebook continues to hold and operate the assets it acquired unlawfully and continues to keep them positioned to provide a protective “moat” around its personal social networking monopoly. Moreover, Facebook continues to monitor competitive threats and will seek to acquire or kneecap them unless enjoined.

Undoubtedly, Facebook will make the case that the FTC has defined the market too narrowly and that it faces more competition that the agency makes it seem. For example, Facebook will likely claim TikTok is a direct competitor, mainly because it is seeking to take on the company through its Reels product soon coming to the U.S.

The FTCs complaint is weak in arguing users are dissatisfied with Facebook, another expected place the company’s lawyers will ataack. While this may be true (I know I have given up Facebook), it adduces no evidence of this fact. To be fair to the agency, there is a redacted block directly following its mention of the Cambridge Analytica scandal that may have some information about user discontent. And yet, the FTC makes the bare assertion Facebook’s users are not happy and its product has gotten worse but without losing users:

More generally, Facebook has also engaged in other activities that have degraded the user experience, including the misusing or mishandling of user data. For example, the FTC charged Facebook with engaging in a range of serious user privacy and related abuses in 2012 and 2019, and both times Facebook agreed to Consent Orders (and, in 2019, to pay a $5 billion penalty). Facebook’s ability to harm users by decreasing product quality, without losing significant user engagement, indicates that Facebook has market power.

Data privacy and protection, in my view, are realms where people say they do not like certain widespread practices but rarely change their behavior or interaction with tech companies. Of course, there are many valid reasons for this, but it is not altogether clear that just because people have misgivings about Facebook’s data practices, they are unhappy with the platform.

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