FTC and states sue Facebook, could force it to divest Instagram and WhatsApp

The Federal Trade Commission and a coalition of attorneys general from 48 states and territories filed two separate antitrust lawsuits against Facebook on Wednesday. The suits target two of Facebook's major acquisitions: Instagram and WhatsApp.

Both lawsuits are seeking remedies for the alleged anti-competitive conduct that could result in requiring Facebook to divest the two apps.

The company's stock was down nearly 2% by Wednesday's market close.

Facebook pushed back against the lawsuits, calling it "revisionist history" of two major acquisitions the government approved several years ago.

"The most important fact in this case, which the Commission does not mention in its 53-page complaint, is that it cleared these acquisitions years ago," Facebook's chief counsel Jennifer Newstead said in a statement. "The government now wants a do-over, sending a chilling warning to American business that no sale is ever final."

Newstead later published a lengthy blog post elaborating on Facebook's opposition to the complaint.

The lawsuits focus primarily on Facebook's history of acquiring or attempting to acquire smaller companies, alleging it used its market power to quash potential competitors before they could turn into true rivals. In addition to the WhatsApp and Instagram acquisitions, the FTC's lawsuit points to Facebook's previous attempts to buy other social networking companies like Twitter and Snap.

As a result, Facebook's acquisition strategy harmed competitors and advertisers that rely on the platform to reach massive audiences with few alternatives to choose from, the lawsuits allege.

FTC lawsuit

The FTC alleges that Facebook engaged in a systematic strategy to eliminate threats to its monopoly, including the 2012 and 2014 acquisitions of Instagram and WhatsApp, respectively, which the FTC previously cleared. Facebook acquired Instagram for $1 billion and WhatsApp for $19 billion.

The complaint alleges Facebook holds monopoly power in the U.S. personal social networking market.

As part of the lawsuit, the FTC will seek a permanent injunction that could result in the divestitures of Instagram and WhatsApp, the agency said. Additionally, the FTC will seek to prohibit Facebook from imposing anti-competitive conditions against third-party software developers.

"Since toppling early rival Myspace and achieving monopoly power, Facebook has turned to playing defense through anticompetitive means," the FTC states in its lawsuit. "After identifying two significant competitive threats to its dominant position — Instagram and WhatsApp — Facebook moved to squelch those threats by buying the companies, reflecting CEO Mark Zuckerberg's view, expressed in a 2008 email, that 'it is better to buy than compete.'"

The FTC lawsuit also notes that Facebook tried and failed to purchase rivals Twitter and Snapchat.

"In lamenting that Twitter had 'turned down [Facebook's] offer' to be acquired in November 2008, Mr. Zuckerberg wrote: 'I was looking forward to the extra time that would have given us to get our product in order without having to worry about a competitor growing,'" the FTC lawsuit states.

A partially redacted portion of the FTC lawsuit states that Facebook's main blue app has lost users and engagement to Instagram.

"Through its control of Instagram, Facebook has attempted to prevent Instagram from 'cannibalizing' Facebook Blue, confirming that an independent Instagram would constitute a significant threat to Facebook's personal social networking monopoly," the lawsuit reads.

"Facebook has kept WhatsApp cabined to providing mobile messaging services rather than allowing WhatsApp to become a competing personal social networking provider, and has limited promotion of WhatsApp in the United States," the FTC states in another partially redacted portion of the lawsuit.

The FTC opted to file its case in federal court rather than before its in-house administrative law judge. In the complaint, the FTC explained that this decision was due to the fact that "it has reason to believe that Defendant Facebook is violating or is about to violate a provision of law enforced by the Federal Trade Commission, and this is a proper case for permanent injunctive relief" within a portion of the FTC Act.

The commissioners voted to file the complaint in the U.S. District Court for the District of Columbia in a 3-2 vote. Republican Commissioners Noah Phillips and Christine Wilson dissented while Republican Chairman Joe Simons joined his two Democratic colleagues Rohit Chopra and Rebecca Kelly Slaughter in the majority.

States complaint

While the states and FTC cooperated during the course of their investigation, the coalition of states led by New York Attorney General Letitia James chose to file a separate lawsuit.

James said at a news conference Wednesday that while the states are "aligned substantively with the FTC" there may be stylistic differences in the lawsuits. She made clear that the states are "independent enforcers of the law."

The coalition of states suing Facebook is much broader than that which initially joined the Department of Justice in its suit against Google. Eleven Republican state attorneys general joined the DOJ in its suit. Other states are continuing to investigate Google and could file their own charges and potentially join them with the DOJ's complaint.

The states suing Facebook include a wide swath of backgrounds, both Democratic and Republican, and include Facebook's home state of California.

The states' complaint alleges Facebook holds monopoly power in the U.S. personal social networking market, similar to the FTC's suit, which it says Facebook illegally maintains by "deploying a buy-or-bury strategy that thwarts competition and harms both users and advertisers."

It suggests that Facebook was "driven, in part, by fear that the company has fallen behind in important new segments and that emerging firms were 'building networks that were competitive with' Facebook's and could be 'very disruptive to' the company's dominance."

The states claim Facebook kept Instagram and WhatsApp running as independent brands "to fill the void, so they would not be replaced by another app with the potential to erode Facebook's dominance."

The states allege Facebook used exclusionary tactics on top of its acquisition strategy to identify competitive threats in such a way that "has chilled innovation, deterred investment, and forestalled competition in the markets in which it operates, and it continues to do so."

Facebook began making acquisitions with the goal of squashing competition and depriving competitors of valuable services far before its deals to buy Instagram and WhatsApp, the complaint claims. In 2009 it bought FriendFeed after Facebook Chief Product Officer Chris Cox allegedly told Zuckerberg it "would be a bad scene" if the company went to Twitter instead. The next year, Facebook bought Octazen after a Facebook executive suggested such a move would deprive rivals of access to its contact importing service that could help social networks grow.

The lawsuit focuses attention on the role data collection by Facebook plays in allegedly maintaining its monopoly power. The complaint describes how that alleged power gives it "wide latitude" in creating the terms on which it can collect and use information from its users. The states allege Facebook can do as it pleases with users' data to serve its own business interests because users' have no alternatives to turn to even if they would prefer other data practices.

Facebook's data collection has also allowed it to create an experience that keeps users from switching to another service, the suit alleges. Because Facebook has such detailed data on users, it is able to build a highly customized experience that other platforms would simply not be able to. On top of that, the complaint says, the sunk cost that users put into creating their profiles in the first place and the huge networks effects Facebook has from its extensive userbase prevents users from looking for alternatives.

Facebook harms consumers, advertisers and competing firms through its practices, according to the complaint. Advertisers, for example, are allegedly harmed by being granted limited transparency into the value they receive from their ads as well as brand damage resulting from "offensive content on Facebook services."

Facebook initially lured developers to its platform in the early days of its service by opening its application programming interfaces (APIs), only to later close them when those same developers became competitive threats, the complaint alleges. That action helped spread the message that access to those APIs was conditional on "staying away from Facebook's turf in personal social networking services," the states claim.

The states ask the court for a variety of remedies, including preventing Facebook from making further acquisitions exceeding $10 million without first notifying the complainant states, deeming its acquisitions of Instagram and WhatsApp in violation of the Clayton Act and imposing other conditions to prevent possible future violations, which could including divesting the two apps.

James said the state lawsuit sent a message that "any efforts to stifle competition, hurt small business, reduce innovation and creativity, cut privacy protections, will be met with the full force of our offices."

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