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Facebook sued by FTC, 48 attorneys general alleging it operates an illegal monopoly

·6 min read

A group of 48 U.S. attorneys general led by New York filed an antitrust lawsuit against Facebook (FB) on Wednesday, alleging the social media giant is violating antitrust law by buying up competitors and depriving consumers of alternatives that would better protect their privacy. The Federal Trade Commission (FTC) filed a separate suit alleging similar antitrust violations.

At the heart of both lawsuits are claims that Facebook’s acquisitions of Instagram in 2012 for $1 billion and WhatsApp in 2014 for $19 billion, as well as other smaller technology companies, were carried out in order to quash competition. As part of its lawsuit, the FTC wants to force Facebook to break off both Instagram and WhatsApp.

“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 stated.

Facebook is the largest social network in the world with 2.7 billion monthly active users across its four apps: Facebook, Messenger, Instagram, and WhatsApp.

Facebook Chairman and CEO Mark Zuckerberg testifies at a House Financial Services Committee hearing in Washington, U.S., October 23, 2019. REUTERS/Erin Scott     TPX IMAGES OF THE DAY
Facebook Chairman and CEO Mark Zuckerberg testifies at a House Financial Services Committee hearing in Washington, U.S., October 23, 2019. REUTERS/Erin Scott TPX IMAGES OF THE DAY

“No company should have this much unchecked power over our personal information and our social interactions and that’s why we are taking action today and standing up for the millions of consumers and millions of small businesses that have been hurt by Facebook’s illegal behavior,” New York Attorney General Letitia James said on Wednesday, speaking on behalf of the attorneys general, which included those for Guam and Washington, DC and every state except for Alabama, Georgia, South Carolina, or South Dakota.

In a Senate hearing in November, Facebook’s CEO downplayed the significance of the company’s Instagram acquisition. “At the time, I don’t think we or anyone else viewed Instagram as a competitor as a kind of large multipurpose social platform,” Zuckerberg said. “In fact, people at the time kind of mocked our acquisition because they thought that we dramatically spent more money than we should have to acquire something that was viewed as primarily a camera and photo sharing app at the time.”

Facebook’s general counsel, Jennifer Newstead, on Wednesday called the FTC’s lawsuit “revisionist history,” noting that the commission approved the acquisition of both WhatsApp and Instagram.

“The government now wants a do-over, sending a chilling warning to American business that no sale is ever final,” she said in a prepared statement. “People and small businesses don’t choose to use Facebook’s free services and advertising because they have to, they use them because our apps and services deliver the most value. We are going to vigorously defend people’s ability to continue making that choice.”

The second major antitrust action in less than two months

The suits mark the second major action in the U.S. against a Silicon Valley tech giant in less than two months. In October, the Justice Department, joined by a coalition of state attorneys general, filed a lawsuit against Alphabet’s Google (GOOG) (GOOGL), accusing the firm of abusing its monopoly power by positioning itself as a default general search engine with de facto exclusivity on millions of users’ phones and tablets. Google, the DOJ said, violated the law by entering into exclusivity deals with mobile device makers and carriers, including Apple, Samsung, AT&T (T), T-Mobile, and Yahoo Finance’s parent Verizon (VZ), that mandated the device makers use Google's services and apps.

The Facebook lawsuits focus on its history of acquisitions, and according to Stanford Law School professor Mark Lemley, the FTC action is a “much bigger deal” than the case against Google.

“They are seeking to break up parts of Facebook (though not the central piece) and to prevent future mergers,” he told Yahoo Finance in an email. “Unraveling existing mergers is hard, especially when ten years have passed. But it's easier than carving Facebook itself into pieces.”

The states are asking the court to find that Facebook has violated antitrust law by acquiring WhatsApp and Instagram and to bar it from buying any other companies worth more than $10 million without notifying the states first. Speaking on Wednesday, Letitia James said, “Facebook sent a clear message to the industry. Don’t step on Facebook’s turf."

Facebook and Google are not alone as targets of increasingly antitrust scrutiny.

Amazon (AMZN) and Apple (AAPL) are also under investigation for their business practices. Amazon is facing investigations, both in the U.S. and the European Union, for its treatment of third-party sellers on its e-commerce platform, while Apple is dealing with a probe into how it exerts control over its App Store.

Instagram Chief Executive Officer and co-founder Kevin Systrom attends the launch of a new service named Instagram Direct in New York December 12, 2013. Photo-sharing service Instagram unveiled a new feature on Thursday to let people send images and messages privately, as the Facebook-owned company seeks to bolster its appeal among younger consumers who are increasingly using mobile messaging applications. The new Instagram Direct feature allows users to send a photo or video to a single person or up to 15 people, and have a real-time text conversations. REUTERS/Lucas Jackson (UNITED STATES - Tags: SCIENCE TECHNOLOGY BUSINESS LOGO)
Instagram Chief Executive Officer and co-founder Kevin Systrom attends the launch of a new service named Instagram Direct in New York December 12, 2013.

Facebook’s complicated relationship with the FTC

While the FTC approved Facebook’s acquisitions of WhatsApp and Instagram, it has also taken the social network to task. In 2019, the agency slapped the social media company with a $5 billion penalty for allowing Cambridge Analytica, a data firm conducting election research on behalf of then candidate Donald Trump’s campaign, to access private data of 87 million Facebook account holders. In a settlement agreement the agency also mandated that Facebook implement new privacy safeguards, including third party access to user information.

Critics of the FTC’s fine were underwhelmed. The $5 billion sum, they said, was nothing more than a slap on the wrist for the company that reported $70.7 billion in revenue in fiscal 2019. In her statement on Wednesday, Facebook’s general counsel suggested that the recent lawsuit seeks to punish Facebook without the benefit of protecting consumers.

“Antitrust laws exist to protect consumers and promote innovation, not to punish successful businesses,” she said. “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.”

Correction: Due to an editor’s error, an earlier version of this story stated that 48 state attorneys general had sued Facebook. In fact, it is 46 state attorneys general along with attorneys general for Washington, DC and Guam.

Alexis Keenan is a legal reporter for Yahoo Finance and former litigation attorney. Follow Alexis Keenan on Twitter @alexiskweed. Daniel Howley is the tech editor for Yahoo Finance.

Got a tip? Email Daniel Howley at dhowley@yahoofinance.com over via encrypted mail at danielphowley@protonmail.com, and follow him on Twitter at @DanielHowley.

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