Facebook Could Be Heading Towards a Breakup

Assuming Facebook’s acquisitions can be shown to have eliminated emerging rivals, reversing those acquisitions via divestiture—“the most important of antitrust remedies”—is the logical place to begin.

Facebook is facing two monster antitrust lawsuits, one from more than 40 State Attorneys General and another from the Federal Trade Commission. Both complaints assert plausible and well-documented theories of antitrust harm, and both call for divestitures. Are we heading towards a Facebook breakup? 

Buckle up, as the chances might be greater than you think. To get to divestiture, two things need to happen. First, the plaintiffs must prevail under antitrust’s liability standard, proving that Facebook violated the law. Second, conditional on a finding of an antitrust violation, the plaintiffs must convince the judge that divestiture is warranted. (To be clear, this won’t happen overnight or even in 2021, as antitrust moves like molasses.)

For a remedy to be warranted, it has to address the anticompetitive harms flowing from the challenged conduct, and there generally can’t be a less restrictive alternative that would mitigate the harms. In Clayton Act Section 7 cases, the principal federal substantive law governing mergers and acquisitions, there is a strong tendency for courts to embrace divestiture. In U.S. v. E. I. du Pont de Nemours & Co., 366 U.S. 316 (1961), Justice Brennan wrote this for the majority: “Divestiture or dissolution has traditionally been the remedy for Sherman Act violations whose heart is intercorporate combination and control, and it is reasonable to think immediately of the same remedy when § 7 of the Clayton Act, which particularizes the Sherman Act standard of illegality, is involved. Of the very few litigated  § 7 cases which have been reported, most decreed divestiture as a matter of course.” 

Interestingly, while the States styled their case as a violation of Section 2 of the Sherman Act and Section 7 of the Clayton Act, the FTC sought violations pursuant to Section 2 of the Sherman Act and Section 5(a) of the FTC Act.

Before getting to remedies, it’s important to assess the plaintiffs’ chances on the merits. The challenged conduct in both cases is Facebook’s acquisitions of WhatsApp and Instagram plus Facebook’s refusal to grant API access to certain third-party app providers. Notably absent from the challenged conduct was Facebook’s unique style of self-preferencing, whereby Facebook appropriates app functionality from a nascent rival and embeds it into its standard offering, as it did with Snapchat. (I was hoping that Facebook’s cloning would be challenged so that we could get some clarity in the law, but I digress.)

Facebook’s refusal to grant API access to certain apps will be assessed under refusal-to-deal law. Although the pathways to success under refusal-to-deal law are narrow, Harvard Law professor Einer Elhauge explained in a seminal article that discriminatory refusals to deal—whether the dominant firm’s present dealings discriminate between rivals and non-rivals—are still viable. For example, in Lorain Journal v. United States, 342 U.S. 143 (1951), the defendant discriminated by refusing to sell advertising space to those advertisers who dealt with its rival. As the complaints against Facebook make clear, in the cases of Vine, Path and Circle, as well as other apps whose names were redacted for confidentiality, Facebook discriminated by refusing to grant API access to apps that it perceived to be a potential rival. This theory of harm is very winnable.

Moving onto Facebook’s acquisitions, the complaints are replete with evidence that they were motivated by anticompetitive purposes. The FTC’s complaint reveals a damning Zuckerberg email from 2008, in which Zuckerberg wrote that  “it is better to buy than compete.” The States’ complaint cites a 2012 email from Facebook’s Business Development Manager in which he says that gaining better functionality in photos via the Instagram merger was “one of the most important ways we can make switching costs very high for users…”

Although pointing to an anticompetitive motive is helpful, the plaintiffs must ultimately connect the challenged conduct in a causal fashion to anticompetitive effects. This is where things will get interesting. Many of the consumer harms alleged in the States’ complaint are ephemeral, such as quality degradation in the form of fewer privacy protections, less choice, and less innovation. This framing is a bit of a departure from antitrust orthodoxy, although Microsoft was largely an innovation-harm case. When the harm is hard to measure, it is harder for an expert economist to connect it to the challenged conduct. This is where persuasive storytelling and qualitative evidence will have to suffice. Fortunately, the States’ complaint also asserts that the challenged conduct led to higher advertising prices—advertisers are consumers too—which is amenable to empirical proof. So the expert economists should be fully employed! 

It’s silly to place a percentage on plaintiffs prevailing on liability here, but let’s say it’s somewhere north of a coin toss. So long as the probability of securing a divestiture is a near certainty (conditional on getting to the remedies), and I think it is, then the product of the two probabilities also is more likely than not.

Assuming Facebook’s acquisitions can be shown to have eliminated emerging rivals, reversing those acquisitions via divestiture is the logical place to begin. Indeed, a structural remedy is the only viable path to restore competition. Facebook’s exclusionary conduct vis-à-vis rival apps does not lend itself to regulatory or behavioral solutions. How would compelling Facebook to grant API access unconditionally to rival apps that it has extinguished bring those apps back from the dead? Facebook might argue that an interoperability mandate would breathe life into a social platform rival, but a court would rightly be skeptical of its efficacy, and would not be interested in enforcing such a regulatory regime.

Facebook might also argue that the benefits from integration exceed the harms. But many antitrust analysts, beginning with Sally Hubbard, argue persuasively that the very recent bolting of messaging services across Facebook’s apps was litigation-inspired, rammed through in 2019 years after the acquisitions (2012 for Instagram, 2014 for WhatsApp) to generate a plausible efficiency defense. Even assuming it was not a pretext, Facebook would have to quantify the purported benefits of integration, a difficult undertaking, and convince a judge that they outweigh the anticompetitive harms flowing from the challenged conduct.

As a legal matter, antitrust lawyer Shaoul Sussman told me that divestiture is first in line for remedies for mergers that result in competitive harm. This is because there is a very clear Supreme Court precedent on this issue, where the nine justices voted unanimously in California v. American Stores Co., 495 U.S. 271 (1990). Even Justice Antonin Scalia signed on to this language, which originally appears in the aforementioned Du Pont case: “Divestiture has been called the most important of antitrust remedies. It is simple, relatively easy to administer, and sure. It should always be in the forefront of a court’s mind when a violation of § 7 has been found.”

Fortunately, I’m not alone in thinking divestiture is warranted here. Penn Law professor Herbert Hovenkamp said something similar in the Los Angeles Times this week: “What makes it novel in this case is the acquired firms were not all that big at the time they were acquired … If they can show that [the purpose of the acquisitions was anticompetitive], and I think they probably can, there will be warrant for the court to agree and order a divestiture.”

To the extent that Hovenkamp’s views reflect a new consensus among antitrust scholars, Facebook’s days of remaining intact could be numbered.

Hal Singer is a managing director at Econ One and an adjunct professor at Georgetown’s McDonough School of Business. Dr. Singer is currently engaged in an unrelated regulatory matter in which Facebook will be an adversarial party.