August 18, 2022
Much buzz surrounded the Federal Trade Commission’s (FTC’s) filing of a district court case against Facebook (now known as Meta) in 2020, seeking divestiture of Instagram and WhatsApp, companies that were acquired and integrated into Meta long ago. The buzz was revived again after a district judge dismissed the FTC’s suit for failure to adequately plead an antitrust claim, and interest was stoked again when Facebook argued that the FTC’s authorization to file an amended complaint against it was invalid due to the failure of FTC Chair Lina Khan to recuse herself from the vote (for more information please see “FTC under attack as parties challenge its structure and participation of chairperson“). But since that challenge, important holdings by the district court have changed the course of the case itself while also potentially emboldening the FTC and private plaintiffs in bringing other challenges. The key lessons are as follows:
- The court held that the FTC overcame the deficiencies in pleading market share in its initial complaint. In particular, the judge emphasized the FTC’s inclusion of metrics for measuring market share that are also used by Facebook itself in assessing its own performance. The affirmation of these particular metrics for pleading market share will be a useful guide for other plaintiffs seeking to recover against the social media giant.
- The district court has allowed the FTC’s repleaded complaint to proceed, blessing theories of harm to competition outside of the typical, relatively narrow analysis of costs to consumers. The harms alleged relate to quality of services, including decreased quality of privacy protections, excessive advertising, and decreased innovation.
- Facebook’s argument that the vote to file an amended complaint against it was invalid due to the necessary vote of Khan was rejected. Notably, the court’s reasoning left open the possibility that the outcome could have been different had the action been an administrative one ultimately heard by the FTC as an adjudicator.
In December of 2020, the FTC voted to authorize the filing of a lawsuit against Facebook for its alleged monopolization of the personal social networking (PSN) market (for more information please see “FTC changes to merger review process: lifeboat or policy shift?“). The complaint focused on Facebook’s long-ago acquisitions of Instagram (in 2012) and WhatsApp (in 2014), acquisitions that had previously been reviewed, investigated and permitted to proceed by the FTC. Despite the many years that had elapsed since the acquisitions, the FTC’s complaint sought divestiture of Instagram and WhatsApp (for more information please see “Do three rights make a wrong? Private party challenging consummated merger can obtain divestiture years later“), along with other injunctive relief. It also included allegations about Facebook’s policies related to interoperability of other applications that caused Facebook to revoke application programming interface permissions for competing applications in 2013.
The district court held that the FTC had failed to meet its pleading burden because it failed to provide meaningful allegations about Facebook’s monopoly power in the market for PSN services. The court held that the FTC’s conclusory allegation that Facebook had more than 60% of the market was not enough, particularly given that PSN services, which are generally free, do not have a well-defined product market with easily understandable methods of measurement. The court also forecasted that for any future amended complaint the FTC’s claims about Facebook policies that impacted the interoperability of other applications would not be valid bases for injunctive relief. Injunctive relief would be available as a remedy for Facebook’s acquisitions of Instagram and WhatsApp, assuming the FTC otherwise stated a valid claim based on those acquisitions.
In response to the dismissal, the FTC opted to replead its suit, filing an amended complaint in August 2021.
Following Facebook’s filing of its amended complaint, it was subjected to another round of dismissal arguments. First, Facebook continued to make its previous arguments – that the FTC had not and could not adequately allege monopoly power, and that it was improper for the FTC to attack its acquisition that had previously been reviewed by the FTC under the Hart-Scott-Rodino Act. In a new lateral attack, Facebook argued that the FTC commissioners’ 3-2 vote to authorize the filing of the FTC’s amended complaint was invalid due to the participation of the FTC’s new chair, Lina Khan. Khan had previously done academic and political work related to antitrust and big tech, including work that considered some of Facebook’s conduct, including its acquisitions of Instagram and WhatsApp, anticompetitive. Based on this work, Facebook argued that Khan had already prejudged Facebook and should not have been permitted to participate in the vote for filing the amended complaint.
In its decision, the district court judge did not take any of Facebook’s bait. It concluded that the FTC’s amendments to its complaint had cured the pleading defects in the complaint and that Facebook’s additional arguments were toothless. Importantly for other entities attempting to bring antitrust claims in the social media space, the judge determined that the FTC had come up with metrics for measuring market power in its new complaint that were sufficient to allow it to plead that Facebook has a monopoly in the market for PSNs. Would-be litigants against Facebook or other social media now know that these particular metrics have been approved for use in measuring market share and are, as the judge emphasized, used by a social media giant like Facebook itself to gauge its own competitive standing.
In a move that may also impact other tech-related antitrust suits, the district judge concluded that, while consumers do not pay more for its free social media products based on Facebook’s anticompetitive conduct, the FTC had still alleged competitive harm. The judge concluded that the FTC’s focus on the quality of the services, including fewer data and privacy protections, less ad choice, and more ads than there would have been absent the acquisitions, was sufficient to allege competitive harm. This approach provides a roadmap for those who may challenge anticompetitive practices of tech companies where the traditional method of showing competitive harm, higher prices, is off the table.
Regarding Facebook’s new argument about Khan’s participation, the judge was quick to point out that in this case, which was filed in district court, the FTC was acting in a prosecutorial capacity rather than an adjudicatory capacity. The standards for recusal due to impartiality for prosecutors is, for good reason, much higher than it is for judges. However, the judge’s reasoning left open the possibility that Khan may need to recuse herself in administrative actions where the FTC commissioners act as appellate judges. This point may be key for future FTC challenges to conduct of big tech companies about whom Khan has opined in the past.
For now, the FTC and Facebook have moved into the discovery phase of litigation – potential motions for summary judgment are anticipated. In the meantime, however, the FTC has filed another suit against Facebook, this time challenging a currently planned acquisition of a virtual reality fitness app creator, Within Unlimited. The FTC alleges that Facebook’s acquisition would lessen competition in the market for virtual reality fitness apps, alleging that Facebook already has an app (Beat Saber) that, as a rhythm app with incidental fitness benefits, competes with Within’s “Supernatural” app. Moreover, because Facebook is the largest provider of virtual reality devices, a leading provider of apps in the United States, and a leading app platform, Facebook is a strong potential competitor in the narrower area of dedicated fitness apps, and its “independent entry would increase consumer choice, increase innovation, spur additional competition to attract the best employees, and yield other competitive benefits”. The FTC has filed its complaint in federal court seeking a preliminary injunction, and the parties have agreed to a stipulated temporary restraining order in the meantime. The FTC has not yet indicated whether it will seek a permanent injunction in federal court or pursue FTC administrative litigation. Perhaps with the district court’s limited holding regarding Khan’s participation in mind, the FTC will opt to pursue the matter in federal court rather than pursuing an administrative remedy or will hope that the transaction is abandoned if the FTC is able to secure the preliminary injunction.
This content was originally published on August 18, 2022, via the International Law Office (ILO) newsletter. It can be found here: FTC v Facebook – where are they now?
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