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D.C. Court Says FTC’s Antitrust Claim Against Facebook Can Proceed

“[The FTC] sufficiently allege[d facts showing] Facebook acquired Instagram and WhatsApp in order to neutralize actual and likely future competitors.”

U.S. Federal Trade Commission

On Tuesday, January 11, the United States District Court for the District of Columbia denied Facebook’s motion to dismiss a complaint brought against it by the U.S.  Federal Trade Commission (FTC), holding that the FTC had stated a plausible claim for relief under Section 2 of the Sherman Act.

The FTC filed a complaint on December 9, 2020, asserting one count of monopoly maintenance under Section 2 of the Sherman Act. Facebook moved to dismiss both this case, and a related state case. The district court dismissed the Commission’s complaint but granted the FTC the opportunity to amend. Following a leadership change from when the complaint was initially filed, the FTC filed an amended complaint in August of 2021. Like the initial complaint, three of the five Commissioners voted to authorize filing the amended complaint. However, Chair Lina Khan was one of the three voting in favor this time.

Amended Complaint

The amended Complaint again alleged unlawful monopoly maintenance under Section 2 of the Sherman Act; this time however, the FTC listed two counts. The first count alleged that “Facebook has willfully maintained its monopoly power through its course of anticompetitive conduct consisting of its anticompetitive acquisitions.” The second count argued that “Facebook has willfully maintained its monopoly power through its course of conduct that includes both anticompetitive acquisitions and…maintaining and enforcing anticompetitive agreements relating to Facebook Platforms to deter competitive threats to its personal social networking monopoly.”

The FTC also again invoked Section 13(b) of the FTC Act, which authorizes the Commission to seek an injunction against any entity that “is violating” or “is about to violate” antitrust laws. The FTC sought an injunction aimed at preventing the allegedly unlawful conduct in the future, in addition to an order mandating “divestiture of assets, divestiture or reconstruction of businesses (including, but not limited to, Instagram and/or WhatsApp), and such other relief sufficient to restore the competition that would exist absent the conduct alleged in the Complaint.”

Motion to Dismiss

In response to the FTC’s amended complaint, Facebook filed a motion to dismiss under Federal Rule of Civil Procedure (FRCP) 12(b)(6) for failure to state a claim upon which relief can be granted. Citing Sparrow, the district court recognized that when evaluating Rule 12(b)(6) motions, courts must “treat the complaint’s factual allegations as true…and must grant plaintiff ‘the benefit of all inferences that can be derived from the facts alleged.” Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1113 (D.C. Cir. 200). However, referencing Iqbal, the court noted “ a complaint must contain sufficient factual matter accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Quoting Microsoft, the court noted that the offense of monopoly maintenance under Section 2 of the Sherman Act “has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful…maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001)(en banc). Facebook sought dismissal on the ground that the FTC had not adequately pled either of the prerequisites. Specifically, Facebook argued that the FTC failed to allege facts to plausibly establish Facebook’s monopoly power. Additionally, Facebook argued that the FTC did not adequately allege legally cognizable exclusionary conduct by Facebook. Separately, Facebook contended that the FTC’s vote authorizing the amended complaint was invalid because of Chair Khan’s biased participation.

Monopoly

Turning first to the monopoly allegations, the court noted that a monopoly can be shown to exist if a company can profitably raise prices beyond the competitive level. However, since this type of evidence can be difficult to procure, courts will typically use other, indirect indications to show monopoly power. Citing E.I. du Pont de Nemours & Co., the court noted courts often infer monopoly power from “a firm’s possession of a dominant share of a relevant market. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 391 (1956). However, market power is not meaningful if it is fleeting. Again, citing to Microsoft, the court noted that a showing of the existence of “barriers to entry” protecting a company’s market share may indicate a monopoly is present. Microsoft, 253 F.3d at 51. Therefore, the court recognized that to successfully indirectly show that a monopoly exists, a plaintiff must establish what the relevant market is, adequately allege that the defendant has a dominant share of the market and that it is protected by barriers to entry.

The court previously endorsed the FTC’s definition of the relevant market as that for Personal Social Networking (PSN) services in the United States consisting of “online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space.” The court here held that since the Amended Complaint provided essentially an identical definition of the relevant market, and Facebook raised no objection, the FTC made out a plausible market for PSN services.

With the relevant market in mind, the court turned to the FTC’s allegations that Facebook has a dominant market share. Previously, the FTC failed to satisfy their burden in this area of the pleadings. This time, the FTC added several factual allegations to support their complaint. For example, the FTC noted that from “September 2016 through December 2020, Facebook’s share of [Daily Average Users} DAUs among apps providing personal social networking services in the United States averaged 80% per month for smartphones, 86% per month in tablets, and 98% per month for desktop computers, and Facebook’s share of DAUs has not dropped below 70% in any month on any device-type.” With new factual support, the court found the FTC satisfied the pleading standard set forth in FRCP 12(b)(6).

The court then turned to the final prong required for an indirect showing of monopoly power, barriers to entry. The FTC alleged that “Facebook’s dominant position in the U.S. personal social networking market is durable due to significant entry barriers, including direct network effects and high switching costs.” As in the last complaint, the FTC alleged here that “because the core purpose of personal social networking is to connect and engage with personal connections, it is very difficult for a new entrant to displace an established personal social network in which users’ friends and family already participate.” Additionally, the FTC for the first time argued that a new user must wrangle with high switching costs. Specifically, “[o]vertime, users of Facebook’s and other personal social networks build more connections and develop a history of posts and shared experiences, which they cannot easily transfer to another personal social networking provider.” The court concluded that it is “at least plausible” that these two issues pose barriers to entry in the market for PSN services, and that the barriers to entry are “enough to raise a right to relief above the speculative level”

Anticompetitive Conduct

Noting that monopoly power alone is insufficient and must be paired with anticompetitive conduct, the court turned to the allegations of anticompetitive conduct in Count I and II. Count I alleged that Facebook engaged in anticompetitive conduct by acquiring firms such as Instagram and WhatsApp. Whereas Count II alleged that those acquisitions, along with Facebook’s agreements and practices allowed software developers to create interoperability between their products that constitutes anticompetitive conduct.

Turning to Count I, the court noted that the key question is whether the FTC plausibly alleged that Facebook engaged in “anticompetitive conduct by acquiring actual or potential competitors, harming the competitive process, and thereby harming consumers.” The court found that “[the FTC] sufficiently allege[d facts showing] Facebook acquired Instagram and WhatsApp in order to neutralize actual and likely future competitors.” Additionally, the court found that the FTC’s complaint sufficiently alleged harm to the competitive process and thereby to consumers.

Count II alleged that Facebook “has willfully maintained its monopoly power through its course of conduct that includes both anticompetitive conditional dealing practices, and maintaining and enforcing anticompetitive agreements relating to Facebook Platform to deter competitive threats to its personal social networking monopoly.” The court previously rejected this allegation by the FTC in the original complaint for “failing to provide a viable basis for an injunction under Section 13(b) of the FTC act.” In response to the FTC’s amended complaint, Facebook argued that the court should not allow the new allegations related to the Platform because the FTC was not invited to replead them with respect to this issue. However, the court held it was unnecessary to decide whether the FTC was allowed to replead these allegations because, it had failed to do so successfully again. Since only the Platform portion of Count II was defective, the court ultimately concluded that it should not dismiss Count II but rather allow it to proceed to the summary judgment stage where portions of the Count may be attacked. Accordingly, the court denied Facebook’s motion to dismiss.

Recusal of Chair Khan

Facebook also sought recusal of FTC Chair Khan based on her extensive past work on antitrust issues and prior factual findings that found Facebook had “monopoly power.” Facebook argued this prior experience biased Khan and therefore she should recuse herself. However, the court was unconvinced, concluding that Khan’s participation in the FTC’s vote did not violate ethical rules. Therefore, the amended complaint was properly authorized.

Image rights acquired by AdobeStock 

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