US antitrust charges are ‘all-or-nothing’ attempt to break up Facebook

Facebook’s chief executive Mark Zuckerberg told his staff last October he would “go to the mat and fight” if the US tried to break up his empire. Now the wrestling match has begun.

On Wednesday the Federal Trade Commission, and a group of 48 US attorneys-general, hit Facebook with its first antitrust charges on home soil.

Citing scores of internal emails, the two lawsuits allege that Facebook has defended its social media monopoly for years with a “buy or bury” approach to its rivals, such as Instagram and WhatsApp.

If the FTC and the state attorneys-general can convince the courts that Facebook’s allegedly anti-competitive behaviour has damaged the market, the default solution is nothing short of the dismantling of the company.

“We currently expect that [the remedy] will include divestiture of Instagram and WhatsApp,” the FTC said on Wednesday.

“The FTC is all-in on the pursuit of the break-up. I think it is fully committed,” said William Kovacic, a former FTC chairman and a current law professor at George Washington University. 

Joel Mitnick, a partner specialising in antitrust at law firm Cadwalader, Wickersham & Taft, said: “They are saying to the court that anything short of a really dramatic restructure is not going to cure the anti-competitive effects here. It’s kind of an all-or-nothing roll of the dice.”

But the high-stakes legal battle will be a long one, and the case will be hard to prove. The FTC and the state attorneys-general have both accused Facebook of criminally breaching section 2 of the Sherman Act, one of the oldest and broadest antitrust laws in the US, which carries plenty of leeway for interpretation by the courts.

Perhaps in recognition of the complex and lengthy fight ahead, the social media company’s share price fell by less than 2 per cent on Wednesday.

To illustrate Facebook’s allegedly anti-competitive behaviour, both cases focus on Facebook’s acquisitions of Instagram in 2012 for $1bn and WhatsApp in 2014 for $19bn, cast by the complainants as a bid to neutralise potential threats.

In its filing, the FTC repeatedly cites as evidence an internal email sent by Mr Zuckerberg in 2008 in which he says “it is better to buy than compete”. 

In 2012, an email from Mr Zuckerberg acknowledged that WhatsApp is “legitimately a better product for mobile messaging than even our standalone Messenger app” and that “[u]nfortunately for us, I don’t think there’s any way to directly minimise the advantage which is their momentum and growth rate”.

After buying WhatsApp, emails then showed Facebook employees celebrating the acquisition of “probably the only company which could have grown into the next FB purely on mobile”.

In another illustration of Facebook’s allegedly anti-competitive behaviour, both the FTC and the state attorneys-general charge that it squashed rivals by first allowing access to its data and platform, and then removing access to anyone it saw as a threat.

The lawsuit from the state attorneys-general listed seven apps, including Vine, Path and Circle, that Facebook had cut off from its platform “without a legitimate business justification”.

The state attorneys, led by New York’s Letitia James, also argued that Facebook had hurt its users, even while providing free services, by forcing them to surrender more of their privacy than they might have done if there had been more competition.

Column chart of Estimated ($bn) showing Facebook revenues in the US

This argument had been advanced in recent years by several academics, including Lina Khan of Columbia Law School, who helped write the recent influential report on antitrust in the technology industry for the House of Representatives’ antitrust subcommittee.

Ms Khan tweeted on Wednesday: “States’ complaint also reveals a sophisticated understanding of harms. It notes FB entered [the] market by competing on privacy but degraded privacy once it had eliminated rivals [and] secured a safe monopoly position.”

Facebook promised to defend itself “vigorously”. In previous cases testing the Sherman act, the courts have recognised that monopolies are not unlawful if they are the result of superior skill. “The successful competitor, having been urged to compete, must not be turned upon when he wins,” ruled the judge in a 1945 case regarding Alcoa.

In a statement on Wednesday, Facebook’s general counsel Jennifer Newstead noted that the deals for both Instagram and WhatsApp had been cleared by regulators at the time, and accused the government of wanting “a do-over”.

She argued that the success of both Instagram and WhatsApp should be credited to Facebook. “The Instagram you see today is the Instagram that Facebook built, not the app it acquired. When Facebook bought Instagram, it had about 2% of the users it has today, just 13 employees, no revenue and virtually no infrastructure of its own,” she said, while pointing to the fierce competition that Facebook faces from Apple, Google, Twitter, Snap, Amazon, TikTok and Microsoft.

New York state attorney-general Letitia James has argued that Facebook had hurt its users © Peter Foley/Bloomberg

Still, some argue Facebook has a difficult defence. It must on the one hand prove that it would have been able to achieve its success in those areas even without those acquisitions, and at the same time explain why it paid such hefty fees for both companies.

“This case throws up a lot of interesting legal questions,” said Doug Melamed, a law professor at Stanford and one of the lawyers who brought a 1998 antitrust case against Microsoft. “It looks on the face of it to be a pretty strong case, and certainly a more important one than the US case against Google.”

In pushing for a break-up, the FTC has gone further than the Justice department’s similar case against Google in October, which did not mention any specific remedies it was seeking.

The Facebook action also differs in other ways from that being brought against Google. In focusing on Google’s partnership deals with other technology companies, which the DoJ said harmed competition, lawyers were leaning heavily on arguments already explored in the case against Microsoft 20 years ago.

But by focusing on mergers — especially ones it previously approved under the Obama administration — the FTC will have to prove a complex case, arguing that Facebook would not have been able to achieve its market power in photo sharing and messaging without buying Instagram and WhatsApp.

Others argue that a break-up would disrupt Facebook’s services for users, and also hurt US competitiveness more broadly.

“Companies and investors are going to lose faith in regulators if policymakers want to reverse course on prior decisions and call a mulligan this late in the game,” said Robert Atkinson, president of Information Technology and Innovation Foundation, a non-partisan think-tank.

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However, the former FTC chairman Mr Kovacic said the Biden administration would probably feel extra pressure to aggressively pursue the case as a way of rebuilding its reputation after Big Tech had grown so powerful during the Obama era. 

“To retreat from [seeking a divestiture] would be such an obvious betrayal of the evident purpose of the lawsuit . . . that if you’re seen as backing off, wobbling at the knees, you lose your institutional legitimacy,” he said. “The break-up possibility is genuine and feasible.”

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