FTC and States Sue Facebook, Seeking to Force Divestitures of Instagram, WhatsApp

Social giant's general counsel calls legal actions 'revisionist history'

Facebook DOJ Lawsuit Discrimination

UPDATED: Facebook illegally acquired competitors Instagram and WhatsApp in a blatant abuse of its monopoly power, lawsuits filed by the FTC in coordination with more than 40 state attorneys general allege. The suits seek to force Facebook to divest Instagram and WhatsApp.

The lawsuits allege that Facebook broke U.S. antitrust laws in maintaining a monopoly on the social-networking market, from which it has earned billions of dollars from advertising and generated massive profits. In addition, they charge that the company’s unlawful monopoly has given it broad discretion to set terms for how users’ private information is collected and used to further its business interests — and has let Facebook impose anticompetitive conditions on third-party developers.

“For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users,” New York Attorney General Letitia James, who led the effort by the AGs to sue Facebook. “Today, we are taking action to stand up for the millions of consumers and many small businesses that have been harmed by Facebook’s illegal behavior.”

In a statement, Facebook VP and general counsel Jennifer Newstead called the lawsuits “revisionist history,” pointing out that the FTC already approved the company’s deals for Instagram and WhatsApp years ago.

“Antitrust laws exist to protect consumers and promote innovation, not to punish successful businesses,” Newstead said in the statement. “Instagram and WhatsApp became the incredible products they are today because Facebook invested billions of dollars, and years of innovation and expertise, to develop new features and better experiences for the millions who enjoy those products.”

Newstead added, “The government now wants a do-over, sending a chilling warning to American business that no sale is ever final.”

The AGs’ lawsuit, joined by 46 states and attorneys general for the District of Columbia and Guam, specifically charge Facebook with violating Section 2 of the Sherman Act, in addition to multiple violations of Section 7 of the Clayton Act.

The FTC’s lawsuit seeks a permanent injunction to force Facebook to divest or restructure assets including (but not limited to) Instagram and WhatsApp; prohibit Facebook from imposing anticompetitive conditions on software developers; and require the company to seek prior notice and approval for future mergers and acquisitions.

“Personal social networking is central to the lives of millions of Americans,” Ian Conner, director of the FTC’s Bureau of Competition, said in a statement. “Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition. Our aim is to roll back Facebook’s anticompetitive conduct and restore competition so that innovation and free competition can thrive.”

According to the state AGs’ suit, Facebook chairman and CEO Mark Zuckerberg saw Instagram as a direct threat soon after the photo-sharing startup launched in 2010. In April 2012, Facebook acquired Instagram for $1 billion, “despite the company not having a single cent of revenue and valuing itself at only $500 million,” according to New York AG James.

Meanwhile, Facebook in 2014 acquired mobile messaging app WhatsApp — which likewise posed a threat to Facebook’s growth — in a deal worth $19 billion, which was “wildly more than the extravagant price Zuckerberg had recommended paying a few months earlier and the $100 million another competitor offered to buy the company two years earlier,” according to James.

Critics of the legal actions by the FTC and state attorneys general say the lawsuits don’t actually show consumer harm — a key standard under U.S. antitrust law — and also presume that Instagram and WhatsApp would have thrived if Facebook hadn’t bought them.

“Today’s actions by the Federal Trade Commission and state attorneys general against Facebook are the perfect example of political theater dressed up as antitrust law,” Jessica Melugin, competitive associate director of the Center for Technology and Innovation at the Competitive Enterprise Institute (CEI), a free-market think tank. “The bottom line is that a billion consumers worldwide have benefited from Facebook’s purchase of Instagram and WhatsApp and it’s clear that the acquisitions did not harm consumers.”

Consumer-advocacy groups, meanwhile, lauded the antitrust lawsuits as long overdue.

“For years Facebook has grown its dominance and power by acquiring emerging companies seen as a threat to its business and imposing unreasonable conditions on third-party developers,” said Justin Brookman, director of technology policy for Consumer Reports. “These actions have limited consumer choice, insulated the company from competitive pressures and resulted in a worse online ecosystem. We hope that actions like this one will start to hold tech giants like Facebook accountable, limiting the amount of power they have on our communications and commerce online, and strengthen digital rights.”

Some analysts expressed doubt that the antitrust lawsuits will be successful in breaking up Facebook. Twitter, Snap (parent of Snapchat) and TikTok have each sustained strong growth despite Facebook’s alleged anticompetitive behavior, Wedbush Securities’ Michael Pachter pointed out.

It’s “difficult to see how Facebook’s competitive position was strengthened to the point that it precluded competition,” Pachter wrote in a research note. “We are skeptical that a federal court will compel a divestiture and equally skeptical that a divided Congress will pass a law that forces such a result.”

The FTC and the state AGs’ complaints were filed in the U.S. District Court for the District of Columbia in coordination with each other. The FTC’s lawsuit is available at this link and the state attorneys general lawsuit is at this link.