The FTC’s Strong Case Against Facebook

The states are also demanding the media behemoth be broken up but the Federal Trade Commission’s case is paramount and the law is on the FTC’s side.

After years of inadequate fines, paltry settlements for overtly unfair and deceptive practices, profoundly substandard merger reviews, and numerous instances of broken consumer trust and unwarranted privacy invasions, on Wednesday the Federal Trade Commission finally initiated a blockbuster lawsuit, alongside a separate suit with 48 state attorneys general, against Facebook.

While the FTC has a significant chance of prevailing in its suit, the agency made two decisions that substantially weakened its legal firepower.

Many of the FTC’s factual findings in the complaint overlaps with the landmark 450-page House Antitrust Subcommittee report released in October. The extensive House report and the FTC’s complaint exposed almost a decade of predatory and exclusionary practices by Facebook and established that the company was purposefully monopolizing critical information and internet communications markets.

The FTC’s lawsuit primarily targets Facebook’s preemptive acquisitions of the photo-sharing application Instagram and communications platform WhatsApp. By integrating and copying their features, these acquisitions allowed Facebook to entrench its monopoly power in social networking, deter new entrants, and deprive consumers of alternative services. In addition to seeking penalties such as restricting Facebook’s ability to make acquisitions, the FTC’s lawsuit asks the court to mandate that Facebook divest (i.e., break off) Instagram and WhatsApp from the company and establish them as independent businesses. The FTC rightfully claims that this remedy will extinguish significant aspects of Facebook’s dominant and durable position in social networking.

While the FTC has declined previous opportunities to bring antitrust action against Facebook, its current action is justified. Facebook has consistently used its dominance to neutralize competitive threats. For example, to prevent Vine, a video application, from gaining momentum as a viable competitor against Facebook, in 2013, CEO Mark Zuckerberg personally approved revoking Vine’s access to Facebook’s platform to inhibit the upstart from obtaining Facebook users. Facebook also blacklisted companies from accessing its platform unless they spent more money on Facebook or because Facebook wanted to block a potential competitor from circumventing its monopoly.

Facebook has routinely acquired its competitors to entrench its position and destroy potential competitors. Between 2007 and 2019, it acquired almost 80 companies. The House report revealed that Facebook explicitly acquired Instagram as “insurance” to ensure the success of its other products. Only the corporation’s 2012 purchase of Instagram received any scrutiny from federal agencies, but, after a hasty review, was passed for review by the FTC. An even quicker review of WhatsApp took place in 2014 without any analysis of the anticompetitive effects the acquisition would have on communications applications. Skeptics of the FTC’s lawsuit will point out that the agency should not have another opportunity to review these mergers, a second or third bite at the apple. However, the agency did not conclusively approve Facebook’s acquisitions of Instagram and WhatsApp. The FTC merely chose not to stop them in court, allowing the agency to retain the right to revisit and review them later. Facebook is already arguing that the FTC action against it will have a chilling effect on all mergers. But that’s not the case. FTC data shows that reviewing these types of mergers has been quite common, with the FTC and DOJ challenging 18 previously completed mergers during the Bush Administration.

There are also multiple instances of Facebook deceiving its users about their privacy on the platform, the data it harvests, and how the company or third-parties use that data – much of which was revealed in the now infamous Cambridge Analytica scandal. The FTC has fined Facebook $5 billion for its deceptive privacy practices–an amount representing less than 8 percent of the company’s 2019 revenues.

The House report revealed that Facebook’s predatory practices also helped it amass enough market power in digital advertising to hollow out journalism. Over the last 15 years, Facebook and Google have captured billions of dollars in advertising from traditional outlets. Facebook maintains a stranglehold on how Americans obtain their news, with 43% of the population often getting their news from the site. Additionally, Facebook is also a top referrer for sites to acquire visitors. Thus, not only has Facebook monopolized the primary revenue stream for news outlets, but the corporation is also the primary platform as to how these news sites get views of their digital content. This control means that Facebook’s algorithms can fundamentally determine what news is shown to viewers and what content users ultimately see.

Facebook’s business model has had profoundly negative effects on democracy. As a result of Facebook’s and Google’s oligopoly over digital advertising, 25% of American newspapers have closed or merged. The absolute number of journalists has declined by 60%, and 1,800 communities have no local reporting since 2004. Both Facebook and Google have sought to pay off their critics by offering multi-million-dollar grants to journalism organizations. Nevertheless, these quasi-bribes amount to crumbs compared to the devastation these corporations have caused. At the same time, the company continues to inadequately deal with disseminating fake news, conspiracies, misinformation, and addictive content in the name of retaining users and generating advertising dollars. As Representative David Cicilline (D-RI), head of the House Antitrust Subcommittee, stated aptly, these practices are “too profitable to eliminate completely[.]”

Without significant structural change spurred by antitrust lawsuits, Facebook will likely remain an immoveable monopoly. Perhaps most revealing of Facebook’s durable market position is that Google has tried several times and invested billions of dollars to displace or diminish Facebook’s monopoly position in the social networking industry. Google developed and promoted Orkut and Google+ multiple times to try to take on Facebook. If Google has failed to create a viable competitor social networking site every time, that’s telling.

Facebook likely could not have gotten away with so much nefarious, predatory, and illegal conduct if not for its entrenched monopoly power. Taken together, Facebook’s repeated contempt for the law is perfectly tuned to be tackled by the FTC.

Some background will show how the FTC could have gone even farther this week. Congress created the FTC in a wave of progressive activism after the Supreme Court in its infamous 1911 case that broke up Standard Oil shrewdly restricted the Sherman Antitrust Act, our nation’s primary anti-monopoly law. The court restricted Sherman Act violations to only predatory and exclusionary behavior that was, in the court’s exclusive view, “unreasonable.” This restriction was contrary to the act’s legislative intent and significant public demand for federal action against concentrated corporate power when Congress enacted the Sherman Act in 1890. After the Supreme Court’s Standard Oil decision, the public backlash was swift, and Congress created the FTC in 1914.

Congress granted the FTC broad authority to define and enforce its namesake statute prohibiting both “unfair methods of competition” and “unfair or deceptive acts or practices.” Congress specifically chose these expansive terms to prevent the courts from restricting the agency’s authority. These words ensured that the agency would have the necessary congressionally authorized power to be a guardian against concentrated corporate power. Senator James Reed, one of the architects of the FTC Act, stated that the agency would be a “death blow to monopoly” in America.

Here’s where the FTC could have used an even more powerful weapon. As the agency did in its lawsuit, the FTC can invoke its namesake statute to enforce the Sherman Act. But, the FTC can invoke Section 5 on its own without the Sherman Act. The Section 5 route gives the agency enhanced statutory firepower against formidable monopolies like Facebook since controlling Supreme Court precedent grants the FTC substantial deference to interpret it. In the words of the Supreme Court, the FTC “considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.”

However, in its lawsuit against Facebook, the FTC decided to restrict its claims to fit within the Sherman Act rather than its Section 5 authority. The agency has, therefore, radically restricted the deference it could have received from the courts. The FTC has missed an opportunity to use a bazooka in a knife fight and has instead chosen to battle Facebook using the Judiciary’s restricted interpretation of the Sherman Act. The agency should have brought this case as a pure Section 5 claim.

The FTC made an additional error by bringing the case in federal court rather than initiating its suit against Facebook in its own administrative forum. Unlike lawsuits in federal court, where the case is now, controlling Supreme Court precedent warrants that the courts grant the commission deference for any fact-finding done by the agency during the administrative process, which carries over for any subsequent appeals. Here again, the FTC chose to fight Facebook on less favorable terms by initiating the case in federal court.

Nonetheless, the agency’s lawsuit is a bold attempt to correct its past failures. The agency could have taken other legal avenues or even implement other prophylactic measures such as public utility regulations or bright-line merger rules to prevent Facebook’s predatory conduct from arising. Fortunately, the FTC’s requested structural separation to break up Facebook. This has been the preferred way to tackle monopolies and has decades of backing by the Supreme Court as “the most important of antitrust remedies.” The court has a duty to restore competition in the marketplace when antitrust violations are found by the agency, and it should follow through with the FTC’s requested remedy to break up Facebook

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Daniel A. Hanley

Daniel A. Hanley is a Policy Analyst at the Open Markets Institute.