The Antitrust Case Against Facebook Is Very Much Alive

A judge dealt the Federal Trade Commission a setback this week in its quest to break the company up—but also provided a roadmap for how to proceed.

You may have heard about how the government’s effort to break up Facebook was dealt a death blow by a federal judge on Monday. Per The New York Times, the case was “thrown out,” in a “stunning setback.” As The Washington Post put it, the ruling “handed Facebook a major victory.” One Wall Street Journal reporter summed up the mood by noting on Twitter, “Hard to overstate the blow Facebook landed here.”

But according to several antitrust experts I’ve spoken with, overstatement is precisely the way to describe these news reports. Yes, Monday was a good day for Facebook, whose market cap briefly cracked $1 trillion on the strength of the news. The company had been facing parallel cases filed in December: one by the Federal Trade Commission, the other by a coalition of 46 states, plus Guam and the District of Columbia. On Monday, Judge James E. Boasberg dismissed the states’ case in its entirety, primarily because he found they had waited too long to bring it. That’s a big deal. But, for weird legal reasons that we won’t get into, the timing problem doesn’t apply to the federal government. And so the heart of the FTC’s legal effort—which seeks to force Facebook to sell off Instagram and WhatsApp—is still very much alive. It wasn’t thrown out, it was just sent back to the kitchen. Boasberg has given the FTC, under newly appointed chair Lina Khan, 30 days to beef up the parts of its complaint that he found lacking in evidence. Assuming the agency chooses to refile the case, there’s good reason to think the agency will be able to meet the challenge.

“I think they can go into sufficient detail to overcome a motion to dismiss, going forward,” said Roger Alford, a law professor at Notre Dame who served in the antitrust division of the U.S. Department of Justice during the Trump administration. “Because I think the evidence will be there.”

It’s important to keep in mind that the case is still at the earliest procedural stage. At that phase of litigation, the plaintiff—in this case, the FTC—has a big advantage. It doesn’t have to prove anything. It just has to allege things that would amount to a legal violation if they turn out to be true. In a monopolization case under Section 2 of the Sherman Act, that means plausibly alleging that a company has a monopoly in some clearly defined market.

Step one is to define what that market is. Antitrust cases are often won or lost at this step, because the company being sued will always propose a definition that includes lots of competition. Facebook argues that it isn’t a monopoly at all, because it faces competition from the likes of LinkedIn, Twitter, and YouTube. If Boasberg had accepted Facebook’s definition of the market, it would have been game over for the government. Remarkably, however, Boasberg rejected Facebook’s claim. Instead, he accepted the FTC’s definition of the market as being limited to “Personal Social Networking Services.” Those services, the FTC says, have four key characteristics: they are “built on a social graph that maps the connections between users and their friends, family, and other personal connections”; they let users broadcast content in a shared social space; they allow people to find and search for other users; and they suggest potential new connections. A professional network like LinkedIn doesn’t count, the FTC argues, because it isn’t used for social and family connections; neither does a video platform like YouTube or an interest-focused platform like the running app Strava. Facebook and its subsidiary Instagram appear to be the only big players that fit the definition. For the purposes of this preliminary motion, Boasberg accepted that argument.

It’s the next step where the FTC ran into trouble. After defining the market, it had to show that Facebook has market power. If you take away only one thing from this article, let it be this: In antitrust law, having market power, also referred to as monopoly power, does not simply mean that a company is really big or influential. Market power has a specific, technical meaning: the ability to raise prices (or reduce quality) over an extended period of time without losing customers to the competition.

A common way to show market power is simply by showing that a company controls a massive share of the market. This approach, known as indirect evidence, is the one the FTC takes in its December filing. There’s just one problem. The sum total of the evidence it offers is the claim that Facebook “maintained a dominant share of the US personal social networking market (in excess of 60 percent).” Boasberg’s opinion understandably rakes the agency over the coals for this. Where does the 60 percent number come from? Sixty percent of what, exactly? (Users? Revenue? Time spent on the platform?) If Facebook doesn’t have any other major competitors, who is making up that remaining 30 to 40 percent? “These allegations—which do not even provide an estimated actual figure or range for Facebook’s market share at any point over the past ten years—ultimately fall short of plausibly establishing that Facebook holds market power,” Boasberg writes. “It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist.”

According to Rebecca Allensworth, an antitrust scholar at Vanderbilt Law School, the FTC may have had a good reason to try that approach. The past several decades of antitrust law have established narrow, technical tests for winning a monopolization case, and the doctrine is not designed with modern internet companies in mind. The FTC may have been gambling that an appeal to common sense would work better than a more technical economic argument.

“It’s a tradeoff between making an argument that fits within the kind of complicated set of case law that has grown up over the last 40 years, or making an argument that’s very intuitive and realistic,” she said. “If we take a big step back, the ultimate thing we’re asking is, ‘Does this company have power over the market? Does this company have power to decide what consumers are getting and aren’t getting, who will be allowed to compete and who won’t, or are they really feeling the bite of competition from others?’ I think from that perspective, which is what the whole case is supposed to be about, Facebook clearly has monopoly power.”

The fact that Boasberg didn’t buy that line of thinking doesn’t doom the FTC’s case. The judge gave the agency 30 days to come back with actual evidence to suggest that Facebook has market power. And his opinion goes one step further, by explicitly stating that the FTC’s proposed remedy—forcing Facebook to sell off Instagram and WhatsApp—remains on the table.

“I don’t think the court does that unless it is seriously contemplating a renewed complaint that would get past the motion to dismiss,” said Paul Swanson, an antitrust attorney in Denver. “The court is pretty clearly giving them another shot to plead market power; they just need to do it explicitly.”

So, how could the FTC strengthen its argument on round two? One way is to flesh out the indirect evidence of market share. Swanson suggested that the agency has already done most of the heavy lifting. Boasberg has already accepted its proposed market definition, which excludes all the other big social platforms besides Facebook-owned Instagram. And so it shouldn’t be hard to convince him that Facebook has a commanding share of that market. The agency might just need to be more explicit about it, and explain what data it’s relying on.

“I’m scratching my head and saying, ‘You’ve agreed that the market is Facebook now, and that Facebook crushed everybody else or bought them,’” Swanson said. “I don’t know how the court could say they haven’t made out a plausible claim for market power.”

Another angle for the FTC would be to use what’s called direct evidence: specific examples of Facebook flexing its market power. Typically, that entails showing that a company raised prices above competitive levels. Facebook is free, so that option is off the table. But another way to prove market power is to show that a company reduced the quality of its product while keeping the price constant. A central claim in the case filed by the coalition of states, now dismissed, was that as Facebook grew more powerful over time, it weakened or reneged on its commitments around user privacy, knowing that people who didn’t like it would have nowhere else to go. Internal emails revealed in the complaint even suggested that the company’s executives were consciously waiting to water down privacy policies until they had edged out Google Plus, which a decade ago seemed poised to threaten Facebook’s dominance. Assuming it refiles its complaint, the FTC is likely to lean on that evidence as proof that Facebook has so much power, it can make its product worse without losing users or revenue.

“One of the features of quality of a social network is privacy, and when it changes the privacy levels over time without any consequence to their market share or to the revenue—kind of the opposite, in fact—then we would say that’s direct evidence of market power,” said Allensworth.

Still, Allensworth said she thinks the FTC faces an uphill battle. In his opinion, Boasberg suggests and then dismisses several ways of establishing Facebook’s market share. And while the privacy-based argument seems very straightforward, modern antitrust doctrine, she said, focuses heavily on arguments about price. There’s no guarantee that a federal judge steeped in that doctrine will sign on to an innovative theory about the non-monetary ways a social network can extract concessions from consumers. Then, of course, there’s the fact that even if the FTC prevails, this just means it will survive Facebook’s motion to dismiss. It doesn’t mean it will ultimately win at trial, where the standard of proof is higher. (These prospects help explain why so many tech critics have called on Congress to update antitrust laws to deal with dominant internet platforms.)

All that said, it’s far too early to write the obituary of the government’s case against Facebook. Until the FTC submits a new complaint and Boasberg rules on it, the fate of the lawsuit—and, thus, of the extent of Facebook’s empire—remains up in the air.

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