Federal Trade Commission and State Attorneys General File Separate Antitrust Complaints Against Facebook

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Introduction

On December 9, 2020, the escalating conflict between the government and so-called "Big Tech" opened a new front as the Federal Trade Commission (FTC) and 48 attorneys general (AGs) filed separate complaints against Facebook, both alleging illegal monopoly maintenance and anticompetitive conduct. Over the past year, the government has been investigating technology companies—including Apple, Amazon, Google, and Facebook—to determine whether these platforms have engaged in anticompetitive conduct or abused their market power. Just weeks earlier, the U.S. Department of Justice (DOJ) filed a lawsuit against Google for alleged antitrust violations.1 This followed the House Subcommittee on Antitrust issuing its report on competition in digital markets in October, which included recommendations for restructuring (i.e., breaking up) technology companies.2

Now, antitrust enforcers have turned their attention to Facebook. The two complaints reflect a coordinated effort between the FTC and state AGs as led by New York AG Letitia James. Both complaints allege antitrust violations involving Facebook's acquisitions as well as exclusionary conduct designed to build a "moat" around Facebook and insulate it from competition.3 While the complaints differ somewhat in framing Facebook's alleged conduct and focus on different remedies, they are "aligned substantively"4 and reflect a consensus on one of the most important elements of antitrust analysis, market definition.

The Market for Personal Social Networking Services

Market definition is a critical element of antitrust cases, and often a subject of fervent debate among parties. Here, the FTC and states' complaints define the market almost identically. Agreeing that the geographic market is the United States,5 the complaints describe a product market of personal social networking services.6 This definition excludes certain "specialized" social networking services—such as LinkedIn and Strava—that focus on professional or interest-based connections, as well as online video or audio services, such as YouTube, Spotify, Netflix, and Hulu. The definition also excludes mobile messaging services that do not feature a shared social space, and the states' complaint specifies that platform-specific mobile messaging services, such as iMessage, are not within the product market. Market definition is likely to emerge as a key area in litigation, with Facebook likely to challenge aggressively this definition.

In addition to market definitions, the FTC and states' complaints are very similar in their allegations of Facebook's anticompetitive conduct.

The FTC's Complaint

The FTC's complaint claims that Facebook has amassed monopoly power since at least 2011 and maintains it through anticompetitive conduct, all in violation of Section 2 of the Sherman Act, and therefore also Section 5(a) of the FTC Act. The FTC alleges that Facebook undertook a series of acquisitions, namely of Instagram in 2012 and WhatsApp in 2014, to eliminate competitive threats to its monopoly position. The complaint also alleges that Facebook adopted policies requiring third-party application developers to adhere to conditions that were anticompetitive in order to interact with the Facebook platform.

The FTC characterizes the Instagram and WhatsApp acquisitions as unlawful attempts to eliminate potential competition. Instagram gained traction by building a photography-focused social media network at a time when the proliferation of smartphones threatened to disrupt the social media market. Facebook soon perceived Instagram as an "existential threat"7 and paid $1 billion to purchase it, a price so high that the FTC describes it as a "premium" reflecting the significant threat Instagram posed.8 Not mentioned in the complaint, however, is that the transaction was subject to review by the FTC and was ultimately cleared without conditions by the agency in 2012.9 The FTC alleges further that after the acquisition, Facebook scaled back promotion of Instagram to prevent it from drawing users away from Facebook. Similarly, the FTC claims Facebook purchased WhatsApp for $19 billion because it feared the rapidly growing mobile messaging service might expand into social networking. Since that acquisition, Facebook has limited WhatsApp's promotion in the United States, according to the FTC.

Apart from acquisitions, the FTC's complaint also alleges that Facebook suppressed competition from third-party application developers. To operate on Facebook's platform, developers must use Facebook's application programming interfaces (APIs). Between 2011 and 2018, Facebook implemented policies conditioning use of its APIs on developers agreeing not to provide the same core functions as Facebook and not to promote other social networks. The FTC alleges that these policies stifled competition, and while Facebook ended these restrictions in December 2018, the FTC claims that only occurred when Facebook came under antitrust scrutiny.

The FTC argues that all of this conduct harmed users and advertisers. By adopting these tactics to preserve its position as the dominant social network, Facebook avoided competition on quality of features and privacy protections for users. Additionally, Facebook avoided competition with other social media networks on price and quality in the advertising market, resulting in reduced innovation and a lack of consumer choice regarding ad preferences.

Perhaps most striking about the FTC's complaint is that it focuses on and seeks significant structural remedies—namely, divestiture of Instagram and WhatsApp. Divestitures of this magnitude are extraordinary remedies, and in this case would require unwinding mergers consummated in 2012 and 2014, respectively. The FTC also seeks to require that Facebook receive prior approval for all future mergers and acquisitions—not just those transactions meeting existing Hart-Scott-Rodino Act (HSR) reporting thresholds—and to file periodic compliance reports with the FTC. Finally, the FTC requests any other injunctive or equitable relief to address the anticompetitive conduct alleged in its complaint.

The States' Complaint

Filed by a bipartisan coalition of 46 state attorneys general as well as those of the District of Columbia and Guam, the states' complaint alleges conduct similar to that alleged by the FTC, although it frames it a bit differently and emphasizes different harms and remedies. The states also allege violations not only of Section 2 of the Sherman Act, but also of Section 7 of the Clayton Act, which makes unlawful acquisitions that tend to substantially lessen competition or tend to create a monopoly.

The states cast Facebook's conduct as reflecting an unlawful "buy-or-bury" strategy designed specifically to eliminate potential competition.10 Drawing from an email written by Facebook CEO Mark Zuckerberg, the states allege Facebook undertook a strategy of "buying" potential competitors, including Instagram and WhatsApp, and "burying" those it could not by blocking potential rivals from access to key inputs, such as APIs.11

The states' complaint focuses on alleged harm to Facebook's users, and in particular to user privacy. According to the complaint, while Facebook originally positioned itself as "best in class" on privacy, it rolled back privacy protections and later expanded the amount of data collected from users as it gained monopoly power.12 The complaint also alleges that Facebook weakened Instagram and WhatsApp's privacy policies after those acquisitions. Additionally, the states claim that the harm extended to advertisers because Facebook did not have to compete on price, quality, or transparency about Facebook's ad data reporting metrics.

The states seek injunctive relief to prevent anticompetitive conduct in the future, and also seek to impose their own notification requirement when Facebook moves to engage in an acquisition valued at $10 million or more, as well as any other acquisition that is HSR-reportable. The states also leave open the possibility of divestiture or restructuring as a remedy to restore competition.

Facebook's Response

Facebook issued a lengthy statement disputing the allegations in the complaints and arguing that the complaints amount to "revisionist history" of Facebook's growth and the evolution of social media.13 Facebook claims that it competes fiercely for users' time and attention against companies like Apple, Google, Twitter, Snap, Amazon, TikTok, and Microsoft—many of which fall outside the market defined by the complaints and foreshadowing how market definition will be a key area of dispute in the forthcoming litigation. Facebook also defended its acquisitions of Instagram and WhatsApp, emphasizing that the former received unanimous FTC approval and the latter was approved by the European Commission, which found no risk of competitive harm in any potential relevant market. Facebook portrays the complaints as efforts for a "do-over" of the merger review process and thus revisionist moves that threaten not just Facebook but also the validity of the entire merger review process. Facebook made clear to contrast the unanimous approval of its acquisition of Instagram with the split 3-2 vote authorizing the current FTC complaint.

Facebook identified product improvements and developments flowing from both acquisitions, from making Instagram more stable and creating new advertising options to eliminating WhatsApp's prior subscription fee and expanding its previously limited footprint in the United States. Facebook argues that such improvements reflect how both transactions were procompetitive. In addition, Facebook defended its API restrictions as standard in the industry. Rather than grounded in antitrust legal theory, the lawsuits, according to Facebook, are really part of a broader attack on technology companies for issues related to election interference, harmful content, privacy, and other issues that should properly be addressed by new legislation and regulation.

A Cautionary Note

While these cases might be the most aggressive action by antitrust enforcers against a technology company to date, they are unlikely to be the last. The bipartisan nature of both cases signals that enforcers across the political spectrum are carefully scrutinizing the conduct of technology companies and are increasingly willing to take bold and aggressive steps. By seeking structural remedies, the enforcers all but ensure that the cases will go to trial, and possibly to appeal.

In addition, these cases demonstrate that even unanimous approval of a past transaction does not amount to a license to subsequently take steps or implement policies that might be viewed as anticompetitive.

Under the Horizontal Merger Guidelines, the FTC or DOJ analyzes the possible competitive effects of a merger looking to a two-year time horizon; though it is indeed unusual for an agency to reverse course, there is nothing in the guidelines or the antitrust laws barring it from doing so where it can subsequently prove an antitrust violation.

Regarding its policies related to its platform and API access, Facebook argues that its restrictions are standard in the industry. Even if true, the fact that a restriction might be commonplace does not insulate it from challenge by an antitrust enforcer or even private plaintiffs as anticompetitive, particularly if a party has significant market power. Technology companies should take care to continually evaluate their own policies to ensure they are not ripe for challenge on antitrust grounds.


For more information on the complaints against Facebook or on other antitrust enforcement actions affecting technology companies, please contact any member of Wilson Sonsini's antitrust and competition practice.

[1] Complaint, United States v. Google (filed Oct. 20, 2020), available at https://www.justice.gov/opa/press-release/file/1328941/download.

[2] Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary, Investigation of Competition in Digital Markets, p. 379–81 (Oct. 6, 2020), available at https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf.

[3] Complaint, State of New York, et al. v. Facebook, Inc, ¶ 99 (filed Dec. 9, 2020), available at https://ag.ny.gov/sites/default/files/facebook_complaint_12.9.2020.pdf; Complaint, Federal Trade Commission v. Facebook, Inc., ¶ 29 (filed Dec. 9, 2020), available at https://www.ftc.gov/system/files/documents/cases/1910134fbcomplaint.pdf.   

[4] The Hill, New York Attorney General Announces Lawsuit Against Facebook, beginning at 11:02, available at https://www.youtube.com/watch?v=ZMv22JEerQ4.

[5] Complaint, Federal Trade Commission v. Facebook, Inc., ¶ 29 (filed Dec. 9, 2020), available at https://www.ftc.gov/system/files/documents/cases/1910134fbcomplaint.pdf; Complaint, State of New York, et al. v. Facebook, Inc, ¶ 99 (filed Dec. 9, 2020), available at https://ag.ny.gov/sites/default/files/facebook_complaint_12.9.2020.pdf.

[6] Complaint, Federal Trade Commission v. Facebook, Inc., ¶ 52 (filed Dec. 9, 2020), available at https://www.ftc.gov/system/files/documents/cases/1910134fbcomplaint.pdf; Complaint, State of New York, et al. v. Facebook, Inc, ¶ 28 (filed Dec. 9, 2020), available at https://ag.ny.gov/sites/default/files/facebook_complaint_12.9.2020.pdf.

[7] Complaint, Federal Trade Commission v. Facebook, Inc., ¶ 11 (filed Dec. 9, 2020), available at https://www.ftc.gov/system/files/documents/cases/1910134fbcomplaint.pdf.

[8] Id. at ¶ 95.

[9] Press Release, Federal Trade Commission, "FTC Closes Its Investigation into Facebook’s Proposed Acquisition of Instagram Photo Sharing Program" (Aug. 22, 2012), available at https://www.ftc.gov/news-events/press-releases/2012/08/ftc-closes-its-investigation-facebooks-proposed-acquisition.

[10] Complaint, State of New York, et al .v. Facebook, Inc, ¶ 104 (filed Dec. 9, 2020), available at https://ag.ny.gov/sites/default/files/facebook_complaint_12.9.2020.pdf.

[11] Id. at ¶ 121.

[12] Id. at ¶ 75, 236, 248.

[13] Press Release, Facebook, "Lawsuits Filed by the FTC and the State Attorneys General Are Revisionist History" (Dec. 9, 2020), available at https://about.fb.com/news/2020/12/lawsuits-filed-by-the-ftc-and-state-attorneys-general-are-revisionist-history/.

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