Facebook Inc could be forced to sell its prized assets WhatsApp and Instagram after the U.S. Federal Trade Commission and nearly every U.S. state filed lawsuits against the social media company, saying it used a “buy or bury” strategy to snap up rivals and keep smaller competitors at bay.

state sued Facebook on Wednesday,
 

With the filing of the twin lawsuits on Wednesday, Facebook becomes the second big tech company to face a major legal challenge this year after the U.S. Justice Department sued Alphabet Inc’s Google in October, accusing the $1 trillion company of using its market power to fend off rivals.

The lawsuits highlight the growing bipartisan consensus to hold Big Tech accountable for its business practices and mark a rare moment of agreement between the Trump administration and Democrats, some of whom have advocated breaking up both Google and Facebook.

The complaints on Wednesday accuse Facebook of buying up rivals, focusing specifically on its previous acquisitions of photo-sharing app Instagram for $1 billion in 2012 and messaging app WhatsApp for $19 billion in 2014.

Federal and state regulators said the acquisitions should be unwound - a move that is likely to set off a long legal challenge as the deals were cleared years earlier by the FTC.

“For nearly a decade, Facebook has used its dominance and monopoly power to crush smaller rivals, snuff out competition, all at the expense of everyday users,” said New York Attorney General Letitia James on behalf of the coalition of 46 states, Washington, D.C. and Guam. Alabama, Georgia, South Carolina, and South Dakota did not participate in the lawsuit.

James said the company acquired rivals before they could threaten the company’s dominance.

Facebook’s general counsel Jennifer Newstead called the lawsuits “revisionist history” and said antitrust laws do not exist to punish “successful companies.” She said WhatsApp and Instagram have succeeded after Facebook invested billions of dollars in growing the apps.

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

Newstead also raised doubts about alleged harms caused by Facebook, arguing that consumers benefited from its decision to make WhatsApp free, and rivals like YouTube, Twitter and WeChat did “just fine” without access to its developer platform.

In a post on Facebook’s internal discussion platform, Chief Executive Mark Zuckerberg told employees he did not anticipate “any impact on individual teams or roles” as a result of the lawsuits, which he said were “one step in a process which could take years to play out in its entirety.”

Comments were turned off for Zuckerberg’s post, as well as for other posts on the lawsuits shared by Newstead and Chief Privacy Officer for Product Michel Protti, according to copies viewed by Reuters. Newstead also warned employees not to post about the cases.

Facebook did not immediately respond to questions about the posts.

PROTRACTED FIGHT

Zuckerberg told employees in July that Facebook would “go to the mat” to fight a legal challenge to break up the company, calling it an “existential” threat, according to the audio of internal company meetings published by The Verge.

Although breakup remedies are rare, some antitrust experts said the case was unusually strong given damning statements by Zuckerberg plucked from Facebook’s own documents, like a 2008 email in which he said: “it is better to buy than compete.”

Other experts such as Seth Bloom of Bloom Strategic Counsel said the FTC complaint was “significantly weaker” than the DOJ’s lawsuit against Google.

“We’re talking about acquisitions that are six or eight years old and it will be difficult for a court to order divestitures of many years ago,” Bloom said.

Investors echoed similar concerns.

“I do not know if the FTC or DOJ will be successful in breaking Facebook up. I’m assuming this will be dragged out in the courts as FB defends itself,” said Daniel Morgan, a portfolio manager at Synovus Trust in Atlanta, Georgia.

The lawsuits are the biggest antitrust cases in a generation, comparable to the lawsuit against Microsoft Corp in 1998. The federal government eventually settled that case, but the yearslong court fight and extended scrutiny prevented the company from thwarting competitors and is credited with clearing the way for the explosive growth of the internet.


Last month, Facebook said it was buying customer service start-up Customer, in an acquisition that the Wall Street Journal said valued Customer at $1 billion.

Facebook also bought Giphy, a popular website for making and sharing animated images, or GIFs, in May. That acquisition has already drawn scrutiny from the United Kingdom’s competition watchdog.

Facebook shares fell as much as 3% after the news before paring losses to close down 1.9%.

Facebook, faced with two major antitrust lawsuits, could be forced to break up, settle with changes to its business, or it could prove its government challengers wrong and win in court, antitrust experts said.

FILE PHOTO: A 3D-printed Facebook logo is seen placed on a keyboard in this illustration taken March 25, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

The Federal Trade Commission and a major coalition of states are asking that Facebook be forced to sell WhatsApp and Instagram, saying it used a “buy or bury” strategy to snap up rivals and keep smaller competitors at bay.

THE FTC AND STATES WIN

If the government wins, the judge could rule Facebook must divest its photo-sharing app Instagram and messaging app WhatsApp.

“At first blush, it’s a very strong case on the merits. The remedy is tough because the breakup is an unusual remedy, but it certainly may be merited here,” said Sam Weinstein, who teaches at Cardozo Law.

While a “breakup remedy” is rare, Weinstein said, “this is a case where it’s possible, I’d say, and maybe even likely.” He noted the Facebook case contained damning evidence from the company’s own documents, unlike the Justice Department’s lawsuit against Google.

Although breakup is not common, even on a small scale, in 2014 the Justice Department sued BazaarVoice after it bought PowerReviews and forced the deal between the consumer review sites to be undone. Most famously it forced the breakup of the telephone company ATT in 1982.

President-elect Joe Biden’s incoming administration, which did not respond to a request for comment, would also likely support the lawsuit. FTC commissioners voted 3-2 to file its lawsuit with two of the three votes in favor coming from Democrats.

A FACEBOOK WIN

One difficulty the FTC will face is that it cleared Facebook's purchase of Instagram in 2012 and WhatsApp in 2014 -- a point Facebook made in its response here to the lawsuits.

“It’s very difficult to unwind a consummated merger that’s been in place for years,” said Seth Bloom of Bloom Strategic Counsel. “A court would be very reluctant to unwind the merger.”

Further, Bloom said the argument in the complaint that Facebook required software developers on its platform to refrain from competing with Facebook was potentially outdated and certainly easy to resolve.

The complaint said: “Specifically, between 2011 and 2018, Facebook made Facebook Platform, including certain commercially significant APIs, available to developers only on the condition that their apps neither competed with Facebook ... nor promoted competitors.”

In a blog post, Facebook argued that the restrictions were standard in the industry.

“Companies are allowed to choose their business partners, and it gives platforms comfort that they can open access to other developers without that access being exploited unfairly,” wrote Facebook General Counsel Jennifer Newstead.

Facebook also believes it can prevail in court.

Newstead said the company continues “to operate in a highly competitive space.

“We look forward to our day in court when we’re confident the evidence will show that Facebook, Instagram, and WhatsApp belong together, competing on the merits with great products,” she said.

WILL THE TWO SIDES SETTLE?

With no criminal charges in the lawsuit there is no incentive for Facebook to cut a deal, argues George Hay, who teaches antitrust at Cornell University law school. He also predicted the case would take years of litigation.

“It’s not an obvious winner,” he said of the government’s arguments. “Everything that Facebook does is out in the open and it’s been out in the open for 15 years. They’ve never done anything without consulting with teams of antitrust lawyers.”

Still, Facebook agreed last year to pay $5 billion to resolve an FTC investigation into its privacy practices.

Facebook executives approached Ali Partovi, the creator of a popular app that used Facebook’s data, a decade ago with a threatening ultimatum. Sell your company to us or we will shut you down, according to legal filings. Partovi’s app, iLike, had built a predecessor to the “like” button.

Partovi refused the offer. Shortly after, Facebook discontinued features that iLike relied upon, pushing Partovi to sell his start-up to Myspace for a fraction of its previous value. Facebook then built its own “like” button, modeled after iLike.

The negotiations — when Facebook was a much smaller player — are early evidence of the hardball tactics to neutralize competition that got the social network to where it is today: a platform that counts more than a third of the world’s population as monthly users of its family of apps, which include WhatsApp messaging and the photo-sharing service Instagram.

That behavior is now the subject of sweeping antitrust lawsuits filed Wednesday from 48 state attorneys general and the Federal Trade Commission. The suits allege that the company is a monopoly that abused its market power through years of anti-competitive conduct and illegal acquisitions, enabling Facebook to become the world’s largest social network while stripping users of alternatives.

The suits call specifically for breaking up WhatsApp and Instagram, which Facebook bought in 2014 and 2012, respectively. It quotes Facebook chief executive Mark Zuckerberg identifying both companies as growing threats that needed to be neutralized.

Facebook on Wednesday said the FTC’s actions would have a chilling effect on innovation and that the acquisitions had been reviewed by regulators at the time, including the FTC. “Now, many years later, with seemingly no regard for settled law or the consequences to innovation and investment, the agency is saying it got it wrong and wants a do-over,” the company said in a statement.

In an email to staff that was also posted on the company’s website, Zuckerberg said that the company faced an incredibly competitive landscape, noting Google, Twitter, Snapchat, Apple’s iMessage, TikTok, and YouTube. He also said that he didn’t anticipate any impact from the lawsuit on people’s jobs.

The social network has made a habit of buying up, threatening, spying on, and outright copying rivals, a strategy so successful that some investors have said in recent years that there was no point in even funding or building social apps anymore.

Facebook was “pouncing” on competitive threats in the same way Microsoft did when it got into trouble with regulators, said Scott Sandell, managing partner of the venture capital firm New Enterprise Associates, who was product manager for Microsoft’s Windows 95 until 1995.

Although Zuckerberg made promises of independence to the founders of WhatsApp and Instagram when he purchased the companies, today those apps are fully merged into Facebook, making a breakup technically challenging.

“Facebook is about to find out if there will be consequences to undermining American democracy and public health,” said Facebook critic and former investor Roger McNamee. “They have scrambled to make the job of regulators more difficult by merging the back end of key products.”

For most of the company’s history, Zuckerberg was laser-focused on growing the company’s user base, which had skyrocketed to a half-billion users at the time of its 2012 public offering, eight years after its founding — a trajectory that was then unheard of for a technology company. But Facebook was threatened by rising upstarts, including Path and Instagram.

Zuckerberg was impressed by Instagram’s exclusive focus on visual communication, telling a deputy that the company was “approaching this problem from the perspective of how to help people take beautiful photos,” which was different from Facebook’s “gimmicky” approach, according to the FTC suit. Facebook had not conquered smartphones.

Zuckerberg thought that utilizing the phone’s camera was a growing trend in social networking, one the company did not want to fall behind on. “One concerning trend is that a huge number of people are using Instagram every day,” he wrote, according to the documents.

Zuckerberg’s purchase of Instagram for $1 billion, which took its 16 employees by surprise, came with promises of independence.

But shortly after the company was acquired, a team from Facebook came in and began introducing photo-tagging and other Facebook features. Instagram’s product teams thought these features were too identified with Facebook, according to people familiar with the meetings. Facebook also prevented Instagram from introducing features that would compete with Facebook, according to documents in the lawsuit.

The clash over Instagram’s independence eventually led its founders, Kevin Systrom and Mike Krieger, to quit in 2018.

Over the years, the two apps have become fully integrated, sharing user data, ad systems, and merging messaging services.

In 2013, Facebook ramped up its growth strategy by purchasing a little-known app called Onavo. Onavo marketed itself to the public as providing secure virtual private networking services.

On the back end, however, it also tracked users’ online activity, including what apps they used, allowing it to see which ones were becoming popular. Executives would receive “Early Bird” reports on apps surging in popularity, according to the lawsuit, and quickly learned that WhatsApp was gaining 1 million users per day, many in the developing world. (Facebook shut down Onavo in 2019 after public scrutiny.)

Facebook executives feared being usurped by mobile messaging services, which we're taking on the characteristics of social networks. One executive described the rise of mobile messaging services as “the biggest threat to our product that I’ve ever seen in my 5 years here at Facebook … we’re all terrified,” according to the FTC documents.

Another Facebook executive described WhatsApp chief executive Jan Koum as the company’s biggest competitor, and that Facebook’s greatest problem would be if WhatsApp landed in the hands of Google.

When Facebook acquired WhatsApp in 2014, for $19 billion, it was one of the largest acquisitions in the history of Silicon Valley.

Zuckerberg told WhatsApp co-founder Brian Acton that he would not merge data from Facebook with data from WhatsApp, a promise that Acton reiterated to European regulators, who were scrutinizing the deal.

But a few years later, that is exactly what Facebook did. That move — and other actions to compromise WhatsApp’s independence — led Acton and Koum to quit the company and Facebook to be fined $122 million by the European Union in 2017.

As Facebook grew through acquisitions, it also cut off smaller competitors that depended on its platform. Facebook had long given developers access to its platform, known as an API, but was often fickle with how developers could use the data. The FTC’s lawsuit alleges that Facebook used its clout to leverage its power and hurt competition.

In 2011, Facebook changed its policies so that apps that could potentially compete with Facebook were no longer allowed to use its data. The policy change was so abrupt that one employee protested, “I think it … sends a message to the world (and probably more important to our employees) that we’re scared that we can’t compete on our own merits,” according to the lawsuit

But Facebook knew it could do what it wanted because by that time its API had become essential for any aspiring social app, according to documents unearthed by the FTC.

Even as Facebook’s problems have mounted in recent years, few in Silicon Valley have been willing to publicly criticize the company’s business practices.

But the impact has surfaced in court records. In a deposition in another company’s lawsuit, Partovi, who declined to comment, said he never forgot Facebook’s intimidation tactics. “When you’re threatened, it only takes once,” he said. “So from that point on, we lived under that threat.”


The EU will require “very large” tech companies such as Facebook and Amazon to take greater responsibility for policing the internet or face fines of up to 6 percent of their turnover, under a draft regulation to be published next week. Big tech companies will have to vet third-party suppliers like the vendors who sell products on Amazon and share data with authorities and researchers on how they moderate illegal content, according to the confidential document, seen by the Financial Times. Large online platforms will have to ensure greater advertisement transparency by letting users know “in a clear and unambiguous manner and in real-time” that they are viewing an ad. Consumers will also have to be told who is behind the ad and be given “meaningful information about the main parameters used to determine” why they were targeted. For the first time, regulators in Brussels define “very large platforms” as those with more than 45m users or the equivalent of 10 per cent of the bloc’s population. The plan targets such companies because of their “disproportionate influence” on internet users in the EU. The time has come to end the tech giants’ ability to game the digital economy to suit their own narrow vested interests Monique Goyens, director-general of Beuc “Very large platforms now have a systemic role in amplifying and shaping information flows online and for the largest part of EU citizens,” said the draft regulation. According to the draft, large platforms, most of which are based in the US, will have to appoint “one or more” compliance officers to make sure they abide by the new Digital Services Act rules. Failure to comply will lead to fines up to 6 per cent of their total turnover in the previous financial year, the document revealed. The size of the fines will depend on the severity of the violations, how long they have been taking place, and whether they recur, the draft said. The EU is making its first big overhaul of the bloc’s internet rules in two decades, addressing everything from the level of responsibility online platforms should have when it comes to taking down illegal content to how to curb their growing market power.  Large online platforms are “where the biggest audiences are reached — and, potentially, the most severe harms are caused”, the confidential document said. “Such very large online platforms should therefore bear the highest standard of due diligence obligations, proportionate to their societal impact and means.” Recommended News in-depthThe Big Read EU vs Big Tech: Brussels’ bid to weaken the digital gatekeepers Thierry Breton, the French commissioner leading the push for tougher regulation of Big Tech, said last June: “Online platforms have taken a central role in our life, our economy, and our democracy. With such a role comes greater responsibility, but this can happen only against the backdrop of a modern rule book for digital services.” Consumer groups have repeatedly warned that consumers are exposed to scams online or faulty products with no legal protection online. Monique Goyens, director-general of Beuc, an umbrella organization of European consumer associations, said the Digital Services Act will “allow the EU to get better tools to ensure that the digital economy works to the benefit of consumers rather than maximizing tech giants’ huge profits”.  “The time has come to end the tech giants’ ability to game the digital economy to suit their own narrow vested interests,” she added.