The cases against Facebook

Earlier this month, in a remarkable display of bipartisan consensus, the Federal Trade Commission and more than 40 state attorneys general filed parallel federal antitrust lawsuits against Facebook alleging that the large tech company had become too powerful. In both cases, Facebook is alleged to have engaged in anticompetitive acts designed to unlawfully maintain its monopoly in the market for personal social networking services. For those of us who believe that antitrust laws play an important role in safeguarding competition, the government’s return to active enforcement of Section 2 of the Sherman Act — the statute designed to combat unlawful monopolies — is a long overdue but welcome development. As a congressional report noted in October, it had been almost two decades since the Department of Justice had filed a major monopolization case under Section 2 of the Sherman Act. Now, on the heels of the DOJ’s recently filed case for monopolization against Google, the FTC and state AGs have launched an additional antitrust assault against Facebook — one that could result in the breakup of the company.

While the FTC and the state AGs filed separate complaints in the U.S. District Court for the District of Columbia, the core allegations in both cases are quite similar. Facebook is alleged to have started as an innovative startup in the emerging online personal social networking market of the early to mid-2000s. But after exponential (and presumably lawful) growth that saw Facebook achieve a monopoly share of the market, Facebook is alleged to have crossed the line into predatory acts designed to maintain its monopoly position and destroy any potential competition. Relying on internal Facebook documents, including a 2008 email from CEO Mark Zuckerberg purportedly setting out a philosophy that “it is better to buy than compete,” Facebook is alleged to have embarked on a multi-prong strategy to unlawfully maintain its monopoly power.

For example, both the FTC and the states’ complaints highlight Facebook’s acquisition of Instagram for $1 billion in 2012, and its purchase of WhatsApp for $19 billion in 2014, as designed to “neutralize” upstart companies that could threaten Facebook’s dominance in social networking. Zuckerberg is quoted in early 2012 as being concerned about the emergence of Instagram because Facebook was “very behind” “in both functionality and brand” for mobile applications. Because Instagram’s emergence was “really scary,” Zuckerberg is quoted as suggesting that Facebook “might want to consider paying a lot of money” for Instagram to “neutralize a potential competitor.”

Similarly, in 2012, Facebook apparently recognized that WhatsApp was building a messaging application platform that could become a “springboard to build more general mobile social networks,” and that WhatsApp “might be the biggest threat we’ve ever faced as a company.” Thus, rather than compete on the merits, both complaints assert that Facebook targeted WhatsApp for acquisition to, once again, take a potential competitive threat off the market. The states’ complaint notes that the $19 billion Facebook paid was significantly higher than analysts expected, and that “the only rationale for Facebook’s $19 billion purchase price was the elimination of a potential competitor poised to mount a major challenge to Facebook’s monopoly.”

In addition to targeted acquisitions, both the FTC and the state AG’s complaints allege that Facebook engaged in various additional acts designed to thwart potential competition. For example, the FTC complaint observes that third-party software applications can only access Facebook through application programming interfaces (“APIs”) provided by Facebook. Yet, for many years, Facebook would only make key APIs available to third-party applications “on the condition that they refrain from providing the same core functions that Facebook offers … and from connecting with or promoting other social networks.” The point, as noted by the FTC, was to deter new competitors “that could threaten Facebook’s personal social networking monopoly.”

In explaining the need to file suit, the FTC alleges that “Facebook’s monopolization is ongoing” and that allowing Facebook to operate Instagram and WhatsApp allows it to maintain a “protective ‘moat’ around its personal social networking monopoly.” Both complaints explain that due to “strong network effects” in personal social networking (significant numbers of users would be required to create a viable alternative and effectively compete) — Facebook’s dominance will remain entrenched without judicial intervention.

Both complaints assert that Facebook’s conduct has resulted in diminished competition due to a loss of meaningful market alternatives. As the state AG’s complaint asserts, this has meant less innovation and choice for consumers, including the potential loss of privacy protections that otherwise might have developed in a competitive market. Similarly, the state AG’s allege that advertisers are forced to do business with Facebook — notwithstanding the “proliferation of misinformation and violent or otherwise objectionable content on Facebook’s properties” that advertisers might otherwise avoid if they had meaningful alternatives in the personal social networking market.

It should be noted that Facebook has responded by denying wrongdoing, and has pointed to the fact that back in 2012 and 2014, the FTC allowed the acquisitions of Instagram and WhatsApp to go through. As Facebook’s vice president and general counsel recently stated, “The government now wants a do-over, sending a chilling warning to American business that no sale is ever final.”

Some observers have suggested that one reason the state AGs may have filed a separate lawsuit was to avoid being directly implicated by the FTC’s prior approval of the Instagram and WhatsApp acquisitions. But while the optics of the FTC’s prior clearance of the acquisitions may be problematic, antitrust law is quite clear that prior approval of the acquisitions does not preclude a subsequent lawsuit, including a challenge to unlawful monopolization. So, while a judge may take into consideration the FTC’s prior review, the fact of the prior approval alone will not allow Facebook to avoid liability.

It remains to be seen, of course, whether the FTC and the state AGs can prove their respective cases. And even if they succeed, it remains an open question whether Facebook will ultimately be forced to divest Instagram and WhatsApp.

What is certain, however, is that the recent case filed by the DOJ against Google, and now the FTC and state AGs lawsuits against Facebook, appear to signal that government antitrust enforcers no longer view Section 2 of the Sherman Act as a statutory scheme from a bygone era. That is good news for those of us who care about protecting competition. Given the economic concentration that exists in many of our leading industries, let us hope that this is just the beginning. 

The views expressed herein are their own.