Facebook suits could mean 1st forced breakup in 100 years

Courts have typically balked at forcing companies to split, but antitrust lawsuits from state and federal officials filed Wednesday against Facebook might lead to the first order to breakup an entity in more than 100 years.

While Facebook has long maintained its acquisitions of Instagram and WhatsApp were not anticompetitive, a coalition of 48 state attorneys general, including Xavier Becerra of California, and the Federal Trade Commission alleged that the tech giant stifled competition by illegally collecting consumer data to identify and purchase emerging rivals.

Courts will weigh the competing narratives in a rare case that has met with bipartisan support in which the FTC is seeking to undo acquisitions it approved years ago. Some legal experts predict the litigation will result in a restructuring of Facebook.

“While court-ordered breakups may be rare, it’s also rare that almost every state and the FTC asks for the same remedy,” Quinn Emanuel Urquhart & Sullivan LLP partner Stephen Swedlow said.

The lawsuits filed in the District of Columbia federal court have been expected for months in response to public calls to reign in big tech. Lawmakers grilled Facebook chief executive Mark Zuckerberg during an antitrust hearing in July over the company’s practice of copying competing services and purchasing them before they become major competitors.

Facebook did not respond to requests for comment.

The complaints from the state attorneys general and FTC are identical, alleging Facebook engaged in a systemic strategy to eliminate threats to its monopoly by acquiring up-and-coming rivals and imposing anticompetitive conditions on software developers to access data critical to their survival. The complaints seek a permanent injunction that could require divestiture of assets and approval for future mergers and acquisitions.

Leading the coalition of states, New York State Attorney General Letitia James emphasized in a press conference that such relief is “necessary to restore competition.”

“Looking at previous actions taken by the DOJ and our office with respect to Microsoft and AT&T, it’s critically important we have the power to seek these remedies, including but not limited to divestiture,” she said.

The FTC director of the Bureau of Competition said in a statement, “Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition.”

“Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive,” the statement read.

The complaints advanced new evidence unknown to the FTC when it reviewed Facebook’s acquisitions of Instagram in 2012 and WhatsApp in 2014. The evidence aimed at bolstering allegations Facebook purchased the companies primarily to squash competition.

In an email by Zuckerberg to Chief Financial Officer David Ebersman cited in the lawsuit, the chief executive detailed his motivation to buy Instagram.

“Even if some new competitors spring up, buying Instagram, Path, Foursquare, etc now will give us a year or more to integrate their dynamics before anyone can get close to their scale again,” he wrote in the message. “Within that time, if we incorporate the social mechanics they were using, those new products won’t get much traction since we’ll already have their mechanics deployed at scale.”

Responding to a possible defense from Facebook that it’s unfair to undo an acquisition approved in 2012 since it was critical to Instagram’s success, Kesselman Brantly Stockinger LLP partner David Kesselman countered that there’s no limitation barring such a reversal if there’s a finding the company abused its monopoly power.

Taking it a step further, Swedlow said that reversing an acquisition made by a company is easier for courts to impose than an order forcing a company to split operations that were always under the same entity, because there are fewer unintended consequences to consider.

“The market already knows what this company was before it was a part of Facebook,” he said. “For the breakup of a company that grew organically, there would be more uncertainty.”

Kesselman said he’s bullish on a court-ordered breakup of the company since “there’s a sense out there that Facebook has gotten too big and powerful.”

“You have such strong evidence presented in the complaints that there are no competitors in the social media marketplace,” he said.

President-elect Joe Biden’s allegedly cozy relationship with big tech has prompted concerns he will not prioritize calls to rein in the industry. He’s named several executives from technology companies to his transition team, including high-ranking employees of Amazon, Alphabet and Microsoft.

Biden’s nominations to the FTC will better inform how he will handle antitrust scrutiny of big tech during his administration.