FTC v. Facebook: The FTC Faces a Steep Challenge, But It Could Win

On January 13, 2021, the FTC sued FaceBook alleging that it unlawfully maintained a monopoly in a market for personal social networking. The complaint is based on the 2012 acquisition of Instagram, the 2014 acquisition of WhatsApp, and conditions on third-party access to FaceBook proprietary APIs that were in place from 2011 to 2018. FaceBook made its APIs available to independent app developers only if they did not compete with FaceBook.

As a remedy the FTC requests divestiture of assets and reconstruction of Instagram, WhatsApp, and the original FaceBook as separate companies plus other unspecified equitable relief.

The FTC might succeed. Compliance with the HSR premerger process does not prevent the Commission from challenging a deal post-closing. This is rare but it does happen. As to the API’s, conditioning access to a necessary service by requiring a customer to refrain from competing might state a claim under some case law precedents.

But in my view the FTC faces steep challenges:

First, causation: The acts complained of – acquisitions in 2012 and 2014 and the denial of access to APIs during 2011 to 2018 – occurred 3, 7, and 9 years ago. It will be difficult to prove that these acts caused the market circumstances now complained of. (i) Business acumen, capital investment, and human expertise within the company, (ii) activities by other companies, (iii) changing consumer tastes and demographics, (iv) new technologies, and (v) domestic and foreign political forces have all intervened over the past decade. 

Second, remedy: It is hard to see how the remedy requested – divestitures of WhatsApp and Instagram and reconstruction of them as separate businesses – would benefit consumers and customers, or lead to greater privacy protections, higher quality posts, or the creation of more and new functions. Courts are hesitant to issue mandatory injunctions of the sort sought here, which would involve the court in supervising the reconstruction of a huge global industry. The remedy requested is based on speculation that FaceBook might re-implement the API policy it abandoned 3 years ago or might try to acquire more companies. If it does seek more acquisitions, the transactions would likely be notifiable to the FTC and DOJ and one of them could seek an injunction then.

Third, ongoing market developments: The market has not been static since 2012, 2014 and 2018, and it will not be static between now and the end of a trial. New apps such as Snapchat and TikTok have entered that appeal to different or younger demographics. People use photo sharing apps. Voice technology may be an incipient way to allow social groups to communicate. Apple is changing the privacy settings on iPhones. Congress might revise the section 230 liability protection or impose new disclosure requirements on political or foreign actors. The EU has proposed regulations on AI. These things, and others now unforeseeable, may affect whether a remedy is needed or what a remedy should be.

Fourth, the challenge of proving liability based on unilateral conduct: The scope of liability for single firm conduct in U.S. antitrust law is extremely limited. The complaint does not allege any agreement between any competitors to restrain competition. It is a Sherman Act Section 2 claim (willful, single firm maintenance of monopoly) not a Sherman Act Section 1 claim (agreement between competitors to restrain trade). The complaint alleges unilateral announcements of policies by FaceBook, not coerced or voluntary agreements with any actual or potential competitors.

Fifth, if there is a monopoly, the challenge of proving that it was unlawfully acquired: Market power achieved by superior skill, foresight, industry, talent, and intellectual property rights is lawful and under U.S. antitrust law to be lauded. Success and large profits incentivize the next round of innovators to invent something better. When a business has succeeded, U.S. antitrust law does not then step in, turn the company into a public good, regulate its terms of business, and dismantle it. If that were the end point, it would depress innovation. The incentive to invent and reap the rewards of one’s work would be gone. FaceBook will probably put in evidence the work it has done to grow Instagram and WhatsApp into services that are far greater than what they were when acquired. Increasing functions, reaching more customers, and extending geographic reach are generally viewed as output enhancing and procompetitive. 

Sixth, the challenge to find the line between aggressive competition on the one hand versus unlawful maintaining of monopoly on the other: Examples of unlawful conduct by a monopolist include (i) using market power to force customers or suppliers not to deal with competitors; (ii) long term exclusive dealing agreements which foreclose a distribution outlet or a necessary input to competitors; (iii) tying, i.e., selling a popular product only on the condition that the buyer also purchase an undesired product; (iv) loyalty discounts paid at the end of a year on condition that a customer not deal with a competitor; (v) predatory pricing, i.e., selling below marginal or average variable cost so as to drive a competing supplier out of business and then reap high prices; (vi) a course of anticompetitive acquisitions, buying up competitors to eliminate their threats to your market power. The FTC complaint alleges (i) and (vi).

With respect to (i) it will have to meet the very strict requirements to show that unilateral denial of access violated the antitrust law.  Denials of access have been actionable only where there has been an ongoing course of dealing between a monopolist and a smaller competitor, the smaller company needed access to the monopolist’s facility in order to survive, and no reason for the denial of access can be found other than to eliminate the smaller company as a competitor. FaceBook was not required to allow competitors to free ride on its investments. 

With respect to (vi) the FTC will have to overcome arguments that in 2012 and 2014 that these were product extension mergers and that the offerings Facebook was working on were not likely to succeed by themselves, tech markets were changing rapidly, and that by giving Instagram and WhatsApp access to Facebook’s resources and global reach, the acquired products could be vastly improved.

All of this assumes that the relevant market for these purposes is personal social networking. FaceBook is challenging this as a threshold matter. The FTC will have to contend with arguments that consumers use other ways to share photos and personal information, and advertisers use targeted digital advertising as only one way to reach consumers. FaceBook will have to deal with the statements in emails of its executives about the market in which they operate. These emails are not random thoughts; they are statements by people who are in the best position to know the market in which they work.

Admittedly, the case is in its early stage. A motion to dismiss is not yet fully briefed or argued, and we have no way of knowing what evidence the agency might possess or what the Federal Court discovery process might unearth. The reactions I describe are based only on my reading of the complaint and my knowledge of antitrust law acquired over 45 years of practice. My views could later be proven wrong.