Facebook Complaint Dismissed; Anti-Monopoly vs. Antitrust, Revisited; Where Facebook Lost

Good morning,

Two truisms hold true today: sometimes expected outcomes are still a big deal, and sometimes the seeds of a potential defeat are buried in a victory.

On to the update:

Facebook Complaint Dismissed

From the Wall Street Journal:

A federal judge dismissed antitrust lawsuits against Facebook Inc. filed by the U.S. government and most states, a major win for the company before the cases even got off the ground.

U.S. District Judge James Boasberg in Washington on Monday granted the social-media giant’s requests to dismiss lawsuits filed by the Federal Trade Commission and state attorneys general in December. The dismissals, which came in a pair of rulings, came before any pretrial proceedings had progressed.

Judge Boasberg said the FTC’s lawsuit was “legally insufficient” because it didn’t plead enough allegations to support monopolization claims against Facebook. The judge, however, said the commission can try again and gave it 30 days to attempt to file an amended lawsuit.

The central problem facing the FTC (the case I’m going to focus on) and states was that usual antitrust bugaboo — market definition. I wrote when the lawsuit was filed in December:

The second challenge facing the FTC is that most classic of antitrust challenges: market definition. The complaint goes to great pains to narrowly define the relevant market as “Personal Social Networking in the United States”; personal social networking is further defined as:

  1. Being “built on a social graph that maps the connections between users and their friends, family, and other personal connections”.
  2. Including “features that many users regularly employ to interact with personal connections and share their personal experiences in a shared social space, including in a one-to-many “broadcast” format”.
  3. Including “features that allow users to find and connect with other users.”

The complaint further clarifies that this definition does not include “specialized social networking services” like LinkedIn or Strava, online video or audio services like YouTube or Spotify, or mobile messaging services. This last one is particularly strange because it seems to exonerate the WhatsApp acquisition: it seems like a stretch to complain that Facebook acted anticompetitively to acquire a service that was explicitly not in the market they monopolized because it might one day enter that market.

The reality, of course, is that this definition is ridiculously narrow; I can imagine an argument that says that Facebook competes in a different market than, say, Google search, even though both offer digital advertising. I have a much more difficult time buying the argument that Facebook is in a different market than LinkedIn, much less YouTube or Snapchat or TikTok, all of whom monetize via targeted display advertising.

Judge Boasberg, who, for what it’s worth, was appointed by President Obama, agreed; this was the basis on which he dismissed the complaint. From the opinion (I removed citations from the quotes for readability reasons):

Although the Court does not agree with all of Facebook’s contentions here, it ultimately concurs that the agency’s Complaint is legally insufficient and must therefore be dismissed. The FTC has failed to plead enough facts to plausibly establish a necessary element of all of its Section 2 claims — namely, that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services. The Complaint contains nothing on that score save the naked allegation that the company has had and still has a “dominant share of th[at] market (in excess of 60%).” Such an unsupported assertion might (barely) suffice in a Section 2 case involving a more traditional goods market, in which the Court could reasonably infer that market share was measured by revenue, units sold, or some other typical metric. But this case involves no ordinary or intuitive market. Rather, PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear. In this unusual context, the FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague “60%-plus” assertion too speculative and conclusory to go forward. Because this defect could conceivably be overcome by re-pleading, however, the Court will dismiss only the Complaint, not the case, and will do so without prejudice to allow Plaintiff to file an amended Complaint.

The challenge for the FTC is that I don’t think the case failed to include a reasonable market definition because of laziness (although, given the AT&T case, I think the null hypothesis should be that the case was politically driven); the real problem is that I don’t think that Facebook has a monopoly! It’s hard to prove something that doesn’t exist.

Anti-Monopoly vs. Antitrust, Revisited

I am cognizant, by the way, that I am using at least one loaded term here: “problem”. Obviously I mean “problem” in terms of the FTC attempting to win its case, but one thing that has been striking to me about the coverage of not just this case but antitrust in general is the assumption that tech companies are obviously guilty but for problematic judges. Just note some of the headlines and subheads — once you start noticing it the “rein in tech” rhetoric is everywhere:

Articles decrying Facebook's loss

This gets at the sentiment I was trying to identify last year in Anti-Monopoly vs. Antitrust; I continue to believe that much of the fervor against Facebook specifically and Big Tech generally (which, now that Facebook’s market cap has crossed $1 trillion, joining Apple, Microsoft, Amazon, and Google, can in fact be precisely defined as worth >$1 trillion) is best understood as part of a historical trend; I said in that Article with regard to the antitrust subcommittee report:

What matters more is the context laid out by Letwin: there is a strain of political thought in America, independent of political party (although traditionally associated with Democrats), that is inherently allergic to concentrated power — monopoly in the populist sense, if not the legal one. To more fully restate the first quote I used from Letwin:

Hatred of monopoly is one of the oldest American political habits and like most profound traditions, it consisted of an essentially permanent idea expressed differently at different times. “Monopoly”, as the word was used in America, meant at first a special legal privilege granted by the state; later it came more often to mean exclusive control that a few persons achieved by their own efforts; but it always meant some sort of unjustified power, especially one that raised obstacles to equality of opportunity.

In other words, this subcommittee report is simply a new expression of an old idea; the details matter less than the fact it exists.

In a court case, though, details do matter, as Judge Boasberg noted:

The Court’s decision here does not rest on some pleading technicality or arcane feature of antitrust law. Rather, the existence of market power is at the heart of any monopolization claim. As the Supreme Court explained in Twombly, itself an antitrust case, “[A] district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed.” Here, this Court must exercise that power. The FTC’s Complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined antitrust product market. It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist. After all, no one who hears the title of the 2010 film “The Social Network” wonders which company it is about. Yet, whatever it may mean to the public, “monopoly power” is a term of art under federal law with a precise economic meaning: the power to profitably raise prices or exclude competition in a properly defined market.

That last sentence is why I have continuously maintained that antitrust laws are the wrong way to deal with Aggregators in particular (with the exception of mergers and acquisitions): they win not by excluding competitors or controlling prices but by controlling demand, willingly given and governed by the individual choices of users and advertisers.

Where Facebook Lost

The mergers and acquisitions bit is the biggest reason why Facebook isn’t completely out of the woods. First, as noted, the FTC can re-file their complaint with a more precise market definition. Again, I think that is far more difficult than it appears, but presuming they succeed, Judge Boasberg did do a precursory examination of the FTC’s two primary claims about Facebook’s alleged anticompetitive behavior.

Platform Policies

The FTC argued that Facebook illegally withdrew API access to competitors; Judge Boasberg said this argument failed for three reasons:

  • Facebook has no duty to deal with competitors (I covered “duty to deal” extensively in the context of Apple v. Epic).
  • While companies can be held liable for “changing the rules” (which I also covered), Facebook limited API access in 2013, which at a minimum means there is no need for an injunction.
  • There is insufficient evidence that Facebook engaged in “conditional dealing”, i.e. limiting access to its platform based on whether or not independent apps also accessed Facebook competitors.

This entire line of argument appears dead in the water; again, this is not surprising given current Supreme Court precedent.

Challenging Acquisitions

This was the big loss for Facebook: while Judge Boasberg said it was too late for the states to challenge Facebook’s acquisition of Instagram and WhatsApp, he did say that the FTC could do just that indefinitely:

Facebook argues that because those acquisitions happened all the way back in 2012 and 2014, respectively, Plaintiff’s challenges do not contend that the company “is violating” or “is about to violate” Section 2. In other words, Defendant maintains that the FTC’s assault on its mergers is aimed at the sort of “long-past conduct” that cannot form the basis of an injunction under Section 13(b)…While Facebook’s argument has some intuitive appeal, it runs into contrary precedent. The Supreme Court has clearly stated that the term “acquisition” as used in Section 7 of the Clayton Act — which prohibits purchases “the effect of [which] may be substantially to lessen competition, or to tend to create a monopoly,” does not refer to “a discrete transaction but [rather] a status which continues until the transaction is undone.” In other words, “acquisition . . . mean[s] both the purchase of rights in another company and the retention of those rights,” such that Section 7’s “ban against [certain] acquisitions . . . include[s] a ban against holding certain assets,” not just “obtaining” them in the first place. As ITT Continental Baking explained, that understanding is the necessary upshot of the Court’s earlier decision in United States v. E.I. du Pont, which held that the United States could seek divestiture in 1949 of stock that du Pont had first acquired, and was still holding, in 1919. The rule under Section 7 is thus that so long as an acquiring company continues to hold acquired assets, the Government may “at any time” argue that such company is violating Section 7. In such a case, it would follow that the company “is violating . . . [a] provision of law enforced by the [Commission]” and thus comes within the ambit of Section 13(b).

Because the FTC’s challenges to Facebook’s acquisitions here arise under Section 2 of the Sherman Act, not Section 7 of the Clayton Act, the question becomes whether that same principle applies to claims brought under Section 2. The Court sees no reason why not, nor does Facebook offer one. Just as “the Government may proceed at any time that an acquisition may be said with reasonable probability to contain a threat that it may . . . tend to create a monopoly,” in violation of Section 7’s proscription against transactions having that effect, so too it should be able to proceed against an acquisition whenever “a threat of [Section 2’s] prohibited effects is evident,” id. at 598 — namely, that the acquisition is “tend[ing] to destroy competition itself” via “means other than competition on the merits.” It is well established that mergers may constitute one such “means.”

Judge Boasberg does note that just because the FTC can bring a case about the acquisitions, that doesn’t mean they will win, or that the remedy would be break-up, particularly given how long ago they happened, but the fact it is possible was the biggest reason this wasn’t a complete victory for Facebook.

I do have mixed feelings on this point. On one hand, I do think that Facebook’s acquisition of Instagram in particular was anticompetitive, and said so at the time; still, as Judge Boasberg noted, facts matter, and facts to support that contention were not clear in 2012. That argues for the ability to go back in time. On the other hand, this idea of a federal agency being able to reverse any acquisition, no matter how long ago it happened, while, as has often been the case in rhetoric surrounding Facebook and Instagram, conflating current day outcomes (Instagram is huge!) with 2012 realities (Instagram is small!) with no acknowledgment of the role Facebook may have played in that transformation, is problematic as well.

Again, though, while talk matters in politics, facts matter in cases, and it is clear that the FTC will have to actually make a case as to why the acquisitions should be unwound. More broadly, the big picture takeaway from this case is that anti-monopoly rhetoric isn’t enough; the FTC et al. will have to actually make an antitrust case if they want to “rein in tech” and, frankly, that’s exactly what we should expect from any court.

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