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The FTC’s Revival of its Facebook Complaint Shows That it’s Serious

Posted  August 27, 2021
By Jeffrey I. Shinder, Yo W. Shiina

The FTC’s revival of its monopoly maintenance claims against Facebook demonstrates what a serious antitrust enforcer can do after an unexpected setback.

As expected, the FTC has filed an Amended Complaint that adds substantial factual allegations to respond to U.S. District Court Judge James Boasberg’s order dismissing the FTC’s initial Complaint for supposedly failing to allege sufficient facts to support the agency’s allegation that Facebook had monopoly power in the alleged relevant market.  The FTC’s strategy raises several interesting procedural and substantive questions that merit further analysis.  Did it make the right decision in bringing the case back before the same judge who ruled, incorrectly in our view, against it the first time?  Did the FTC really have any other option?  And has it done enough to overcome the concerns articulated by that judge?

  1. The Court’s Decision Dismissing the FTC’s Original Complaint

We begin with the Court’s June 28, 2021, decision dismissing the FTC’s monopolization claims against Facebook.  The Court applied a novel approach to evaluating the sufficiency of the FTC’s allegations.  It declared the FTC’s allegations on the relevant market sufficient but tenuous, and on that basis, required the FTC to plead more to detail Facebook’s monopoly power.  Specifically, the Court agreed with Facebook that the FTC failed to sufficiently allege the first element of a Section 2 violation—the possession of monopoly power in the market for Personal Social Networking (“PSN”) Services.  Judge Boasberg grudgingly credited the FTC’s allegations concerning consumer preferences for purposes of market definition, characterizing them as “somewhat lean” but ultimately  “enough to make out a plausible” relevant product  market.

The Court then used its tenuous conclusion on market definition to deem the FTC’s allegation that Facebook possesses at least 60% of the relevant market  insufficient to properly allege its monopoly power in the relevant market.  The Court explained that  the FTC’s market share allegations  were “light on specific factual allegations regarding consumer-switching preferences,” and thus, insufficient to allege monopoly power.  This made no sense in light of the Court’s finding that the FTC’s allegations on consumer switching were sufficient to plead the relevant market.  In any event, the Court determined that the FTC must plead something more  than “Facebook has ‘maintained a dominant share of the U.S. personal social networking market (in excess of 60%)’ since 2011” because the PSN market is “unusual in a number of ways, including that the products therein are not sold for a price.”  Against that backdrop, the Court held that the FTC must show how it calculated Facebook’s market share, including how it determined that share to be greater than 60%. The Court also suggested the FTC should document which firms comprised the remaining 30-40% of the market, along with an explanation as to why those firms cannot restrain Facebook’s monopoly power.

In our view, this analysis creates an improper and wholly unwarranted elevated pleading requirement for products that are not sold for a monetary amount.  There is no doctrinal support for requiring more fulsome allegations of market power simply because of the purportedly slender nature of the market definition allegations.  In fact, this approach runs counter to precedent which states that market definition is unnecessary in the face of direct evidence of monopoly power, such as the ability to harm competition by reducing output and raising prices above competitive levels.

Moreover, on a motion to dismiss, the district court is required to accept as true all non-conclusory allegations.  The FTC had alleged more than enough to meet this lenient standard, including Facebook’s dominant share of the alleged relevant market.  The Court’s requiring the FTC to document how that share was calculated, along with the shares of the remaining firms—facts usually associated with summary judgment motions and expert reports—ignores black letter law on motions to dismiss, erecting one more hurdle for antitrust plaintiffs to meet to get their case off the ground.   This unjustified approach is especially concerning given that its basis—that consumers do not pay for the service, at least not in a monetary sense—can be applied to numerous platform industries where “users” are sold to advertisers to monetize the platform.

The Court erred by ignoring the FTC’s well-pleaded allegations of Facebook’s monopoly, which should have been sufficient to withstand a motion to dismiss irrespective of how the PSN market was pleaded.  We will return to this theme in further posts, but for present purposes this doctrinally suspect decision should have given the FTC at least some pause before deciding to file an amended pleading before this judge.

  1. The FTC’s Amended Complaint (8/19/2021) 

While we strenuously disagree with the Court’s analysis, it at least gave the FTC a clear roadmap on what it needed to fix to withstand Facebook’s inevitable second motion to dismiss.  The FTC, in our view, has more than met the challenge posed by the Court’s decision.  It did so by bulking up its theory of monopoly power, and by shoring up the core market definition allegations that were the target of some of the Court’s derisive commentary.

  • While the original Complaint states that Facebook holds its monopoly power through Facebook Blue (the platform generally known as “Facebook”) alone, the Amended Complaint states that Facebook wields monopoly power through its control over both Facebook and Instagram.
  • Unlike the original Complaint, the Amended Complaint emphasizes how Facebook’s poor performance in transitioning from desktop to mobile during the 2010-2014 time frame, when many users shifted to smartphones, created an “existential threat” that was exacerbated by the fact that Facebook “lacked the business talent required to maintain its dominance amid changing conditions.”  (Am. Compl. ¶¶ 5-7).  According to the Amended Complaint, Facebook leadership realized that it would not be able to maintain its monopoly through legitimate competition, prompting its strategy to “buy and bury” new startups.
  • The Amended Complaint improved the section defining PSN services in two ways.  First, the Amended Complaint now explains how providers of PSN services—such as Facebook, Instagram and SnapChat—are different from “online services that focus on broadcast or discovery of content based on users’ interests rather than their personal connections, such as Twitter, Reddit, and Pinterest.” Second, the FTC also explains how Facebook’s services can be distinguished from “content broadcasting and consumption service[s] such as TikTok where the poster share video content with audience that the poster himself/herself does not personally know.”
  • The original Complaint’s “Facebook’s Monopoly Power” section is reformatted as “Facebook’s Dominant Share of the U.S. Personal Social Networking Market” in the Amended Complaint.  In the original Complaint this section mostly included quotes from Facebook executives about how Facebook connects friends and families.  To shore up these allegations,  the Amended Complaint offers more concrete data and metrics (although the numbers are redacted) from third party sources such as Comscore Inc.  For example, the Amended Complaint describes the per-month number of people in the United States who visited Facebook Blue, Instagram and SnapChat and the average amount of time spent on each site. (¶¶180-184).  It also describes how other smaller personal social networking services, such as MeWe, pale in comparison to Facebook.  (¶ 185).  The Amended Complaint further details  how other well-known, sophisticated, and well-financed firms like Google—with the product “Google+”—tried, but failed, to successfully enter the U.S. PSN market, reflecting Facebook’s durable monopoly power. The revised pleading also points to other now-defunct PSN services such as Friendster, Myspace, and Orkut.  (¶¶ 186-88).  In contrast, the original Complaint described the PSN market’s high entry barriers in only general terms, without providing any concrete examples.
  •  The Amended Complaint  provides other metrics, such as (i) time spent, (ii) daily active users (“DAUs”), and (iii) monthly active users (“MAUs”) to support its contention that Facebook has monopoly power.  (¶¶ 189-203).  The FTC alleges that these are appropriate measurements of market share both because metrics for user engagement indicates the service’s competitive significance and because Facebook’s executives and investors, rival PSN providers, and industry observers look to such metrics in evaluating Facebook’s power in the marketplace.  . Additionally, the FTC notes that other antitrust authorities such as the United Kingdom’s Competition and Market Authority (“CMA”), Germany’s Federal Cartel Office (Bundeskartellamt), and Australian Competition and Consumer Commission (“ACCC”)  in part relied on these metrics in assessing Facebook’s monopoly power..
  • Lastly, reflecting the FTC’s recognition that market definition is not strictly necessary when direct evidence of market power is present, the Amended Complaint also includes a section titled “Direct Evidence, Including Historical Events and Market Realities, Confirms that Facebook Has Market Power.”  (¶¶ 204-210).  In that section, the FTC cites historical events (e.g., data harvesting and misuse by Cambridge Analytica in 2018 and FTC’s Consent Orders in 2012 and 2019 against Facebook regarding abuses of user privacy, which resulted in a $5 billion penalty) in which Facebook’s conduct degraded the user experience without causing any loss of user engagement, showing  inelastic demand and Facebook’s monopoly power.

These allegations belie the Court’s emphasis on the fact that consumers do not pay for Facebook.  In reality, they do pay for Facebook by delivering their personal information to the platform and through the loss of their privacy.  Facebook’s power to raise that price without losing customers is more than sufficient to allege  monopoly power at the pleading stage.

III.       Did the FTC make the right decision refiling in federal court?

As many observers have noted, the Court’s decision dismissing the FTC’s initial Complaint presented the Commission with a choice—refile in federal court before an arguably hostile judge or utilize the FTC’s administrative procedures.  The FTC elected the former, which, in our view, was the correct (and probably) only viable choice.  Given that the FTC initially brought the case in federal court, it would have been cosmetically problematic to switch gears in the face of an adverse ruling, even a bad decision such as this one.  Had the FTC utilized its administrative procedures to avoid this judge it would have been accused of forum shopping, and Facebook would have challenged the legitimacy of the process as part of its pressure tactics against the FTC’s new Chairwoman Lina Khan.

Given that the FTC’s new pleading has more than enough substance to survive a motion to dismiss, the Commission made the right decision in bringing the case back before the Court that gave it an opportunity to replead.  This time the result should be different, and if it isn’t, the FTC should appeal.  The FTC has put together a serious case against Facebook and it is time for that case to proceed to discovery.

Edited by Gary J. Malone

Tagged in: Antitrust Enforcement, Antitrust Litigation,

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