FTC Defeats Facebook Motion to Dismiss Amended Complaint

Wilson Sonsini Goodrich & Rosati

Introduction

The FTC's case against Facebook will be allowed to proceed now that the district court has held its Amended Complaint plausibly alleged violations of Section 2 of the Sherman Act related to Facebook's acquisition of Instagram in 2012 and WhatsApp in 2014.

The FTC filed an initial Complaint in 2020, seeking to unwind these two acquisitions and to enjoin Facebook's former policy of cutting off access to its platform for any companies that competed with Facebook's core functionalities.1 Judge James E. Boasberg dismissed that Complaint without prejudice in June 2021,2 based primarily on his holding that the FTC's allegations about Facebook's monopoly power were too conclusory to state a plausible claim for relief. He also held the FTC did not have statutory authority to seek an injunction against past conduct, such as Facebook's former platform access policy, unless it was "ongoing or likely to recur."

The FTC amended its Complaint in August 2021 in an effort to address these deficiencies,3 and Facebook once again moved to dismiss.4 Facebook argued that the FTC had once again failed to allege monopoly power with sufficient plausibility, and that the FTC had still not plausibly alleged the platform access policy was "ongoing or likely to recur." Facebook also sought to throw out the Amended Complaint as procedurally improper; in Facebook's view, FTC Chair Lina Khan should have recused herself from voting to authorize the Amended Complaint. The district court agreed with Facebook's arguments regarding the platform access policy but sided with the FTC on the remaining issues.5

Monopoly Power Allegations Held Sufficient

In any case where the plaintiff claims the defendant violated Section 2 of the Sherman Act by taking steps to maintain a monopoly, the plaintiff is required to show the defendant has monopoly power in the relevant market. Usually, the plaintiff accomplishes this by showing the defendant has a high market share (60 percent plus) in a market with barriers to entry. The fatal flaw of the FTC's initial Complaint was that it alleged Facebook had a "dominant share" of the U.S. personal social networking market without providing any details on the proper way to calculate a firm's share in this market.6

This time around, "the FTC [had] done its homework," according to the court.7 The FTC alleged that data from the media analytics firm Comscore show Facebook has commanded a 65 percent plus share of the market since 2011, whether measured by daily active users (DAUs), monthly active users (MAUs), or time in use. The court held the FTC sufficiently alleged that these are "appropriate indicators" to measure Facebook's market share because 1) it is "common sense" that a social network's competitive significance is tied to the size and engagement of its userbase, and 2) FTC alleged Facebook and its competitors look to these indicators to assess their performance in the ordinary course of business.8

Facebook raised various attacks on these market share indicators but the court rebuffed them all. First, Facebook noted that Comscore disclaimed responsibility for the "accuracy or completeness" of its data sets for the FTC's purposes, but the court held that was a factual issue for trial.9 Second, Facebook argued the time-in-use data were irrelevant because the data do not distinguish between time spent using Facebook and Instagram to as a personal social network (e.g., to connect with friends or share personal news) and time spent using these platforms for other purposes (e.g., to shop or watch movie trailers). The court nevertheless found the data informative given the plausible allegation that these platforms are "predominantly used as personal social networking services."10 Third, Facebook argued "MAUs and DAUs cannot plausibly be used to calculate relative market share" because 1) the same individual may use multiple personal social networks and 2) MAUs and DAUs do not take time-in-use into account.11 The court rejected the first argument as based on a false premise: the Comscore data do account for fact that some users use multiple platforms.12 The court held the second supposed shortcoming of the MAU and DAU data was overcome by viewing these metrics together with the time-in-use data in a "holistic[]" fashion.13

The court went on to hold the FTC plausibly alleged entry barriers in the form of direct network effects and high switching costs, based on allegations about ordinary course documents. Because the court held that FTC plausibly alleged Facebook enjoys a dominant share protected by entry barriers, it held that FTC plausibly alleged Facebook has monopoly power. It therefore did not reach FTC's allegations regarding "direct evidence" of monopoly power.14

FTC Plausibly Alleged the Instagram and WhatsApp Deals Were Anticompetitive

To survive a motion to dismiss, the FTC had to allege not only that Facebook had a monopoly, but also that Facebook took anticompetitive steps to maintain its monopoly by excluding competitors from the market.

The court held the FTC plausibly alleged that "Facebook acquired Instagram and WhatsApp to neutralize actual and likely future competitors" and that this led to "poorer services and less choice for consumers."15 Internal Facebook documents showed that Facebook personnel, including CEO Mark Zuckerberg, viewed Instagram and WhatsApp as serious threats, and sought to acquire them primarily for that reason. The FTC alleged that the elimination of competition among Facebook, Instagram, and WhatsApp led to "a decrease in service quality, lack of innovation, decreased privacy and data protection, excessive advertisements … and a general lack of consumer choice."16

Facebook argued that the FTC had not alleged the Instagram and WhatsApp acquisitions were anticompetitive and exclusionary, arguing the FTC's allegations of competitive harm decreased product quality were speculative. The court rejected this position based in part on the D.C. Circuit's holding in the Microsoft case.17 There, the court had found that Microsoft had successfully eliminated nascent threats to its operating system monopoly through a variety of actions. It was impossible for anyone to say for certain whether the nascent threats would have grown into serious rivals to Microsoft, but the court held this was not fatal to the plaintiff's case; in such situations, "[t]o some degree, the defendant is made to suffer the uncertain consequences of its own undesirable conduct."18 In the Facebook case, the inherent uncertainty of envisioning a hypothetical world without the acquisitions was not fatal to the FTC's case; however, the court did note that FTC would have to "prove" that the acquisitions negatively affected "market conditions and competition" at a later stage of the litigation, "likely with expert testimony or statistical analysis."19

The court next rejected Facebook's argument that the fact FTC had reviewed the deals under the Hart Scott Rodino Act (HSR) before they closed without issuing a challenge to either undercut its "belated" argument that the deals were anticompetitive.20 The court explained the HSR reviews "do not bear significantly" on the case because the FTC's failure to challenge a deal after HSR review is not an endorsement of the deal's competitive merits.21 The antitrust agencies have scarce resources and may have other reasons for not mounting a challenge.

Platform Access Policy Allegations Still Insufficient

The court was not impressed with the FTC's attempt to renew its challenge to the Facebook's former policy of restricting direct competitors' access to its platform, which Facebook voluntarily dropped in 2018. The court had rejected this challenge in its first opinion on the grounds that FTC cannot challenge a business practice unless it is "ongoing or likely to recur."22 This time around, the FTC had still not provided any plausible reason to think Facebook would revive its former policy.23

FTC Chair Was Not Required to Recuse

Facebook argued the Amended Complaint was improper because FTC Chair Khan voted on it despite Facebook's motion for her to recuse from the case.24 Facebook contended that Chair Khan's involvement in the case was improper because she prejudged Facebook's guilt during her academic career and her work on the U.S. House of Representative's antitrust subcommittee's investigation of Facebook. Facebook relied on the U.S. Court of Appeals for the D.C. Circuit's holding in Cinderella Career Colleges v. FTC, 425 F.2d 583 (1970), that an FTC commissioner should have recused himself from an administrative adjudication because of his work on a congressional investigation of the defendant involving many of the same issues.

The court was not convinced.25 It distinguished Cinderella Career Colleges, as that case involved an FTC commissioner acting in an adjudicatory rather than prosecutorial role. Standards of recusal for prosecutors are much higher than standards for judges. The court noted that a regulator having preconceived notions about the subjects she regulates is likely to be the norm—"it is natural that the President will select a candidate based on her past experience and views"—and expressed concern about interfering with the President's ability to select regulators who will implement his priorities.26 It held that Chair Khan's work in Congress and the academy did not create a conflict of interest that required recusal.

Conclusion

The U.S. District Court for the District of Columbia's opinion has important implications for technology companies. Following this court's lead, future courts considering markets for zero-price apps are likely to measure market shares using MAUs, DAUs, time-in-use, and other metrics used in ordinary course documents by the parties and their competitors.27 Further, the case confirms that platform network effects may constitute barriers to entry.

Finally, while it remains to be seen what level of proof the FTC will need to marshal to prove the Instagram and WhatsApp acquisitions harmed competition, the court signaled that harm will not be assumed where a monopolist acquires a nascent competitor.


[1] Federal Trade Commission and State Attorneys General File Separate Antitrust Complaints Against Facebook, Wilson Sonsini Client Alert, https://www.wsgr.com/en/insights/federal-trade-commission-and-state-attorneys-general-file-separate-antitrust-complaints-against-facebook.html.

[2] FTC v. Facebook, Inc. (“Facebook I”), ___ F. Supp. 3d ___, Case No. 1:20-cv-03590, ECF No. 73 (D.D.C., June 28, 2021), https://www.ftc.gov/system/files/documents/cases/073_2021.06.28_mtd_order_memo.pdf.

[3] FTC Revises and Refiles Complaint Against Facebook, Wilson Sonsini Client Alert, https://www.wsgr.com/en/insights/ftc-revises-and-refiles-complaint-against-facebook.html#4.

[4] Memorandum in Support of Facebook, Inc.’s Motion.to Dismiss the FTC’s Amended Complaint (“MTD”), FTC v. Facebook, Inc., Case No. 1:20-cv-03590, ECF No. 83-1 (D.D.C., Oct. 5, 2021).

[5] FTC v. Facebook, Inc. (“Facebook II”), ___ F. Supp. 3d ___, Case No. 1:20-cv-03590, ECF No. 90 (D.D.C., Jan. 11, 2022), https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2020cv3590-90.

[6] See Facebook I.

[7] Facebook II, at 20.

[8] Id. at 15-16.

[9] First Amended Complaint, FTC v. Facebook, Inc., Case No. 1:20-cv-03590, ECF No. 75-1 (D.D.C., Aug. 19, 2021).

[10] Id.

[11] MTD, at 12.

[12] Facebook II, at 19 (“[I]f one person used both Instagram and Snapchat on the same day, both uses would be included in the denominator to determine the total shares in the market for PSN services.”).

[13] Id.

[14] For more information, see FTC Revises and Refiles Complaint Against Facebook, Wilson Sonsini Client Alert, https://www.wsgr.com/en/insights/ftc-revises-and-refiles-complaint-against-facebook.html#4.

[15] Id. at 28-30.

[16] Id. at 30.

[17] United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001).

[18] Facebook II, slip op. at 32 (quoting Microsoft, 253 F.3d at 79).

[19] Id. at 31.

[20] MTD, at 20-21.

[21] Facebook II, at 33.

[22] Id. at 36-38.

[23] See FTC Revises and Refiles Complaint Against Facebook, Wilson Sonsini Client Alert, https://www.wsgr.com/en/insights/ftc-revises-and-refiles-complaint-against-facebook.html#4.

[24] MTD, at 38-44.

[25] Facebook II, at 41-48.

[26] Facebook II, at 33.

[27] Cf. Klein v. Facebook, Inc., Case No. 20-cv-08570, ECF No. 214, slip op. at 25-29 (N.D. Cal. Jan. 14, 2022) (measuring Facebook’s market share in part based on time-in-use and citing Facebook II).

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