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Yesterday, the FTC and most state AGs sued Facebook in two related antitrust cases. I read through both complaints and I have some thoughts. Caveat, these are my own thoughts and not the views of my firm or clients. 1/ https://twitter.com/JoshuaCHStokes/status/1336758994199711745
I’ll add that most of my antitrust litigation has been on private plaintiff cases, not government divestiture cases. Private cases usually focus on money damages, not divestiture, which is a more drastic remedy. So, grain of salt. 2/
There are two cases here, the FTC case and the State case, but they are substantially the same. Both cases center on basically three things: Facebook’s acquisition of Instagram, Facebook’s acquisition of WhatsApp, and Facebook’s API policies. 3/
Both the FTC and the States are seeking an order requiring Facebook divest both Instagram and WhatsApp. They also want the court to enjoin FB from withholding third-party app access to certain FB APIs (more on that below). 4/
First, the players. The Federal Trade Commission is a federal agency that is tasked with protecting consumers and promoting competition. More here. https://www.ftc.gov/about-ftc/what-we-do 5/
The FTC has enforcement powers to protect consumers and competition. The FTC usually conducts pre-merger reviews to prohibit acquisitions or mergers over a certain size to prevent any that may “substantially lessen competition.” 6/
The FTC can also seek divestiture (like in these cases) under Section 7 of the Clayton Act (15 USC § 18) or injunctions (orders requiring defendants to do something or refrain from doing something) to remedy consumer/competitive harm. 7/
The State case was brought by 46 states, DC, and Guam. The only states that aren’t plaintiffs are Alabama, Georgia, Nebraska, and South Carolina. 8/
First observation is that—as opposed to the Google lawsuit which was joined by only 11 states that all have GOP Attorneys General—the State case plaintiffs span the political spectrum. When NY and CA join up with KS, KY, and TX to bring a case, it seems less partisan. 9/
So while there was a lot of commentary that the suit against Google seemed to be more about Republicans’ claims of “censorship” by Google than the merits, this case is backed by the governments of nearly every state in the country. 10/
That doesn’t necessarily make the cases more meritorious, but it might blunt the idea that these cases are a political ploy rather than a legitimate enforcement action. Or it might mean that Zuck has ticked everyone off across the board. YMMV. 11/
Both cases allege that Facebook has monopolized the market for “Personal Social Networking Services” by acquiring competitive threats in order to prevent them from competing with Facebook or being acquired by a competitor. 12/
These services are defined as “online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space.” 13/
The FTC says FB has over 60% of the US personal social networking market. The States are squishier about it. They don’t really specify what percentage they claim FB has but just assert it has monopoly power and reference a few documents re: FB’s market share. 14/
But it is not clear how they are measuring market share here. The FTC case just says FB has 60% share. The States quote an internal document from FB saying “Facebook is now 95% of all social media in the US.” 15/
Alternatively, the States cite a survey saying that 78% of respondents visit FB at least once a month. As with any antitrust case, market definition and market shares will be critical aspects of the case and there will probably be some heated debates over methodology. 16/
Back to the allegations. Facebook saw Instagram as a competitive threat as social networking moved from computers to smartphones and phone cameras developed enough to take good pictures. FB was behind Instagram in developing its own picture sharing tech. 17/
So, the complaints allege that FB decided to acquire Instagram and integrate it rather than see it develop on its own or be acquired by a competitor like Google, and that this was an illegal act to further FB’s social networking monopoly. 18/
But, Josh, you say, there ought to be some review process before these acquisitions go through to prevent these kinds of anticompetitive effects. Good news, there is! It’s called premerger review under the Hart-Scott-Rodino Act (“HSR”).
19/ https://www.ftc.gov/enforcement/premerger-notification-program
19/ https://www.ftc.gov/enforcement/premerger-notification-program
If a partial or complete acquisition is over a certain amount of value, or if the companies are over a certain value, the parties must file with the FTC and DOJ before the merger can be concluded. The current threshold is $94 million. 20/
And if the acquisition is subject to HSR review, the companies have to produce documents, meet with the agencies, etc. There are experts involved, interviews with competitors, depositions, etc. It’s a whole thing. 21/
And if the DOJ or FTC concludes that the merger has the potential to substantially lessen competition or create a monopoly, they can require conditions (divestiture of subsidiaries or licensing of technology) to ameliorate those concerns. 22/
And sometimes the government sues in federal court to prevent the merger. For example, the DOJ sued to prevent AT&T from acquiring T-Mobile a few years ago. 23/
So what happened when the FTC reviewed the FB acquisition of Instagram? The FTC allowed it to go through with no conditions. 24/
Similar story with WhatsApp. According to the government, FB was concerned that WhatsApp could build out a full social networking site based on its mobile messenger app. So, FB acquired WhatsApp instead. And the FTC cleared it. 25/ https://www.reuters.com/article/us-facebook-whatsapp/facebook-says-whatsapp-deal-cleared-by-ftc-idUSBREA391VA20140410
But, the FTC reminded FB and WhatsApp that they said publicly that they would not change the privacy protections for WhatsApp. If they did change those privacy protections, they might run afoul of the FTC Act’s prohibition on deceptive practices. 26/
https://www.ftc.gov/system/files/documents/public_statements/297701/140410facebookwhatappltr.pdf
https://www.ftc.gov/system/files/documents/public_statements/297701/140410facebookwhatappltr.pdf
And now the States allege that FB did in fact change those privacy protections. Specifically, they allege that FB and WhatsApp said that FB would not combine user data or use WhatsApp data for ad targeting. 27/
But the State case says that FB did just that in 2016, linking WhatsApp numbers to FB profiles. So, lawsuit! (Interestingly, the FTC doesn’t explicitly include this in its allegations.) 28/
The State case also goes through alleges that FB tried to acquire other competitive threats as part of its attempts to monopolize. Portions of the State complaint are redacted but it looks like TikTok is one competitive threat that wouldn’t sell to FB. 29/
Finally, the cases allege that FB changed its practices in allowing third party apps to use FB’s APIs. The APIs are the software that allows third party apps access to FB’s user data. FB originally made these widely accessible to help it grow. 30/
But, the cases allege, FB stopped allowing third party apps to use those APIs in connection with a service that “replicates a core Facebook product or service.” Basically, FB said that third party apps couldn’t use FB’s user data to build their own competing sites. 31/
The complaints allege that FB isn’t restricting the APIs anymore, but they warn that FB might restart it so they need the court to issue an injunction against doing it. The government will have to prove that FB is likely to start that practice up again to get an injunction. 32/
Will FB have to divest Instagram and WhatsApp? Maybe. The antitrust laws do not authorize courts to impose punitive relief, but the DOJ and the FTC contend that divestiture is the best remedy for an illegal acquisition. 33/
To get those divestitures, the FTC and the States will first have to prove that FB has illegally monopolized the market using those acquisitions. Then they’ll have to prove that other, less drastic remedies are inadequate to remedy the harm. 34/
For example, if the primary concern about WhatsApp is the privacy settings, a much less drastic remedy would be to order FB to go back to the pre-2016 privacy settings for WhatsApp accounts. 35/
It may also be impossible to order divestiture depending on the degree to which Instagram and WhatsApp have been integrated into FB’s code, and the States and the FTC may have to take a lesser conduct based injunction or settlement. 36/
What will FB do? Well, the relevant market and market shares will be a big fight. FB will probably point to the growth of Twitter, TikTok, Parler, Signal, and a host of other apps to show that competition hasn’t been harmed. 37/
If FB has monopolized the market and stifled competition, why is that there are many, many more social networking sites today than there were prior to the Instagram and WhatsApp acquisitions? They’ll argue that’s not the mark of a foreclosed market. 38/
They’ll try to point to procompetitive justifications for the acquisitions, show that both FB and the acquired companies have improved through the acquisition, how they’ve responded to competitive offerings, etc. 39/
They’ll probably also point to the seeming inconsistency in the government’s position. If the government alleges that FB had a monopoly prior to the acquisition of Instagram, and the government allowed the transaction to go through, how is that acquisition illegal now? 40/
Those are some quick thoughts on the complaints. Divestiture seems like a longshot to me, but some other, lesser injunction seems like a more plausible outcome if the government wins the case. 41/41
