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FTC’s Antitrust Suit Against Facebook Survives Motion to Dismiss

Posted  January 19, 2022
By Yo W. Shiina

On January 11, 2022, the U.S. District Court Judge James Boasberg denied Facebook’s motion to dismiss the FTC’s Amended Complaint which alleges that Facebook maintained a monopoly in personal social service network market in violation of Section 2 of the Sherman Act.

While the FTC won this particular battle, it will now need to prove its allegations through expert testimony and statistical analysis. Judge Boasberg’s decision gives hints of being sympathetic to certain Facebook arguments, and takes the unusual step of placing a discovery ban on the FTC’s claim based on Facebook’s developer access policies, which could make the road ahead more difficult for the agency.

As this blog has previously discussed,  the Court  dismissed the FTC’s initial Complaint on the ground that the Complaint did not sufficiently allege Facebook’s monopoly power.  According to the court, the FTC’s original pleading was “light on specific allegations regarding consumer-switching preference,” and was not “robust” enough in its market share allegations. The FTC’s Amended Complaint fortified its theory of monopoly power by providing additional details with more specific data such as “daily average users” (“DAUs”), “monthly average users” (“MAUs”), and time spent on the Personal Social Networking (“PSN”) platform, as well as distinguishing Facebook—a dominant PSN platform—from non-PSN platforms such as Twitter, Reddit, or TikTok.

The Court’s decision focused on three issues: (1) whether the FTC plausibly alleged that Facebook has monopoly power in a relevant market;(2) whether the FTC adequately alleged anticompetitive conduct, either through acquisitions (Count I) or through acquisitions coupled with conditional dealing policies with developers (Count II); and (3) Facebook’s new argument for dismissal based on the FTC Chair Lina Khan’s supposed “prejudgment” on Facebook’s antitrust liability and her refusal to recuse from the case.

In the monopoly power analysis, the Court acknowledges that the FTC had already plausibly established a relevant antitrust market for PSN services. It then analyzes the “Achilles’ heel” of the FTC’s initial Complaint: the FTC’s allegation of Facebook’s monopoly power. The Court commended the FTC’s inclusion of specific data: e.g., Facebook’s market share of DAUs and MAUs among apps providing personal social networking services, holding that with these new allegations the Complaint “provides reinforcing, specific allegations” that support the conclusion that Facebook has maintained a dominant market share.

Facebook presented three counterarguments, each of which involved factual questions inappropriate for a motion to dismiss. Facebook challenged the reliability of the FTC’s data (i.e., commercial data source Comscore’s disclaimer as to “accuracy and completeness”), the possible inclusion of “non-PSNS usage into its data metrics, along with the FTC’s use of MAU and DAU because “the same individuals may (and often do) use more than one service.”

The Court properly dismissed Facebook’s attack on reliability of data as “inapposite” at the motion to dismiss stage. Facebook also attacked the FTC’s data because, rather than tracking solely “PSNS usage”—e.g., connecting with friends and family—it tracks “users of online services and total time spent on those services” which includes “non-PSNS usage”—e.g., “video or audio consumption” or “content broadcasting and consumption.” (Yet how are we supposed to categorize when a user watches a video shared by his friend, and later writes a comment about it—which part is PSN and which part non-PSN?)  Notwithstanding the artificiality of this argument, the Court held that “[w]hile [Facebook] is correct that data capturing time spent on platforms providing PSN services includes more than time spent just using such services, that imperfection is not fatal at this stage.”

The Court also dismissed Facebook’s third counterargument because “the FTC indicate[d] that a single user’s consumption of services from multiple providers is reflected in the MAU and DAU metrics”—e.g., if an individual used both Facebook and Instagram on the same day, both uses would be included in the denominator. The Court concluded its monopoly power analysis by holding that the FTC sufficiently showed that Facebook’s dominant position in the PSN market is “durable due to significant entry barriers, including direct network effects and high switching costs.”

In the anticompetitive conduct analysis, the Court came to different conclusions as to Count I and Count II. With respect to Count I, the Court held that the FTC sufficiently alleged both that Facebook acquired Instagram and WhatsApp in order to neutralize likely potential competitors and that these acquisitions had anticompetitive effects.  The Court acknowledged that, although the FTC could not demonstrate any anticompetitive effects by increased consumer prices (because Facebook’s PSN service is “free”), the FTC sufficiently alleged other harms such as “a decrease in service quality, lack of innovation, decreased privacy and data protection, excessive advertisement and decreased choice and control with regard to ads, and a general lack of consumer choice in the market for such services.”

With respect to Count II, however, the Court came to a mixed conclusion. While holding that the FTC failed to allege an ongoing refusal regarding interoperability permission to app developers such that would warrant a forward-looking injunction remedy under Section 13(b) of the FTC Act, the Court declined to dismiss Count II entirely to the extent that acquisitions could be subject to Section 13(b). However, the Court effectively dismissed the claim by issuing an order barring any discovery as to Facebook’s platform policies. The Court justified this unusual outcome by suggesting it was necessary to prevent FTC from reaping a discovery “windfall.”

Lastly, the Court declined to side with Facebook that the case should be dismissed because of FTC Chair Khan’s “prejudgment” as to Facebook’s antitrust liability and her refusal to recuse. The Court reasoned that her role in voting affirmatively to file the Amended Complaint was more akin to that of prosecutor rather than an agency official adjudicating. Because “[t]he standards of neutrality for prosecutors are not as necessarily stringent as those applicable to judicial or quasi-judicial officers,” and because prosecutors “are necessarily permitted to be zealous in their enforcement of the law,” the Court held that her recusal was not necessary.

By Yo W. Shiina

Edited by Gary J. Malone

 

Tagged in: Antitrust Enforcement, Antitrust Litigation,