Landmark suits call Facebook illegal monopoly, setting stage for potential breakup

The U.S. government and 48 attorneys general filed landmark antitrust lawsuits against Facebook on Wednesday, seeking to break up the social networking giant over charges it engaged in illegal, anti-competitive tactics to buy, bully and kill its rivals.

The twin lawsuits filed in federal district court allege that Facebook under its CEO, Mark Zuckerberg, behaved for years as an unlawful monopoly—one that had repeatedly weaponized its vast stores of data, seemingly limitless wealth and savvy corporate muscle to fend off threats and maintain its stature as one of the most widely used social networking services in the world.

The state and federal complaints chiefly challenge Facebook’s acquisition of two companies: Instagram, a photo-sharing tool, and WhatsApp, a messaging service. Investigators said the purchases ultimately helped Facebook remove potentially potent rivals from the digital marketplace, allowing the tech giant to enrich itself on advertising dollars at the cost of users, who as a result have fewer social networking options at their disposal.

The lawsuits together represent the most significant political and legal threats to Facebook in its more than 16-year history, setting up a high-profile clash between U.S. regulators and one of Silicon Valley’s most profitable firms that could take years to resolve. Antitrust regulators explicitly asked a court to consider forcing Facebook to sell off Instagram and WhatsApp to remedy their competition concerns. Such a punishment would unwind Zuckerberg’s digital empire and severely constrain Facebook’s ambitions.

The Federal Trade Commission, led by Republican Chairman Joe Simons, brought its lawsuit in a District of Columbia district court. Letitia James, the Democratic attorney general of New York, led her Democratic and Republican counterparts from dozens of states and territories in filing their complaint in the same venue. Appearing at a news conference, James on Wednesday sharply rebuked Facebook for having put “profits ahead of consumers’ welfare and privacy.”

“Today, we are sending a clear and strong message to Facebook and every other company that any efforts to stifle competition, hurt small business, reduce innovation and creativity, [and] cut privacy protections will be met with the full force of our offices,” James said.

The lawsuits drew swift rebukes from Facebook, which pledged to “vigorously defend” its business practices in a sign of the bruising legal war still to come.

“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,” Jennifer Newstead, the company’s vice president and general counsel, said in a statement.

The looming legal battle marks a dramatic fall from grace for Facebook, which Zuckerberg and his college companions launched from a Harvard University dorm room in 2004 as a way to help students meet their fellow classmates. Zuckerberg’s original, bare-bones website would be unrecognizable to the more than 2 billion users globally who now post a steady stream of photos, videos and other life updates on the site daily, part of Facebook’s ever-expanding digital empire, which includes newer gambits, such as virtual reality.

For years, U.S. regulators had maintained a hands-off approach to Facebook and its Silicon Valley peers, seeking to incubate their continued success. The lack of scrutiny stood in stark contrast to Europe, which saw serious threats in the tech industry and its growth-at-all-costs mentality—and sought to penalize Facebook and other companies in response.

But the 2016 presidential election eventually would rouse U.S. policymakers to the potential pitfalls posed by technology giants, including Facebook, which witnessed a series of high-profile scandals that drew once-unfathomable calls in Washington to punish the industry. Democrats and Republicans since then have found rare accord in challenging preeminent digital firms over their ever-expanding footprints and the consequences they pose.

Last month, the Justice Department filed a similarly sweeping antitrust lawsuit against Google, arguing the company struck special deals and engaged in other wrongful tactics to expand its search and advertising empires. Other antitrust watchdogs have set their eyes on Apple and Amazon, raising the potential for additional action on the horizon. Together, the cases threaten a dramatic reshaping of Silicon Valley, much in the way that the government’s multiyear battle with Microsoft decades earlier helped foster the very Web companies now seen as too powerful.

“It is a significant recognition we’ve got work to do, the tech sector is concentrated, and we need to find a way to restore competition,” said Phil Weiser, the Democratic attorney general of Colorado.

U.S. investigators initiated their antitrust probes targeting Facebook last year. Dozens of attorneys general led by James in New York promised a broad review of Facebook’s business, aiming to explore the nexus between its digital dominance and ever-growing efforts to siphon users’ data.

The FTC, meanwhile, took aim at Facebook almost immediately after concluding an investigation into the company over its entanglement with Cambridge Analytica, a political consultancy, that forced the tech giant to pay a $5 billion penalty.

Regulators turned their attention to Facebook’s purchase of Instagram for $1 billion in 2012 and WhatsApp for $19 billion in 2014, two deals that the government could have blocked at the time but did not. For Facebook, the two transactions—and their jaw-dropping size—reflected its aggressive attempts at the time to pivot to smartphone devices, as millions of users began to spend more time on iPhone and Android apps than desktop computers and traditional websites.

State and federal investigators, however, found that the two acquisitions reflected a troubling strategy at Facebook dating back more than a decade—an aggressive ploy to buy or kill competitive threats, large or small, before they could sap away the social networking giant’s popularity.

The government lawsuits at times point to correspondence from Zuckerberg, who acknowledged in 2012—before purchasing Instagram—that Facebook had fallen “very behind” in photo sharing and needed to make the critical acquisition to catch up, according to the FTC complaint. In making its move, Facebook sought to wield its “power as a sword,” the state attorneys general found, threatening negative repercussions against Instagram and its founders if they did not agree to a sale.

State and federal investigators detailed a similar troubling pattern with WhatsApp, highlighting additional emails from Zuckerberg, who saw the company and other messaging services at the time as “the next biggest consumer risk” for his social networking empire. In 2013, a year before the acquisition, WhatsApp had outpaced Facebook’s messenger product globally as measured by the number of messages sent daily, state officials estimate.

In acquiring the company, Facebook initially promised users that it would preserve WhatsApp’s independence and strong privacy protections, state investigators said. But Facebook reversed course years later, frustrating regulators, who said the bait-and-switch had the effect of eliminating a privacy-protective competitor from the digital marketplace.

Facebook’s aggressive “buy-or-bury” strategy, the state attorneys general added, ultimately meant that users who were “otherwise dissatisfied with the data usage and privacy options available on Facebook have nowhere else to go.” In the meantime, Facebook reaped massive profits, since its popularity helped it generate data about users’ relationships and interests—which in turn generated more money from advertisers.

Facebook on Wednesday strenuously sought to rebut the state and federal charges: Newstead, the company’s general counsel, stressed that WhatsApp and Instagram became successful precisely because of the tech giant’s massive investments in them.

“This is revisionist history. Antitrust laws exist to protect consumers and promote innovation, not to punish successful businesses,” she said, arguing that federal regulators could have stopped the Instagram and WhatsApp deals but did not.

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

The argument, however, has hardly dissuaded the company’s critics, including those in Congress, who found reason for suspicion after concluding their own antitrust investigation this year. The review unearthed a trove of emails from Zuckerberg and his lieutenants apparently plotting against competitors in a series of discussions in which they referenced making a “land grab” for rival apps.

Legal experts also said that the government was well within its rights to challenge those transactions on grounds that they ultimately enabled Facebook to act anticompetitively. Ian Conner, the director of the agency’s Bureau of Competition, said in a statement that the FTC seeks to “provide a foundation for future competitors to grow and innovate without the threat of being crushed by Facebook.”

Investigators on Wednesday also faulted Facebook for the way in which the company manages its vast trove of user data and the policies that govern when and how third-party app developers and other companies can access it. Such tactics allowed Facebook to stamp out potential rivals before they could become too popular, investigators found.

In 2013, for example, Facebook sought to neuter the rise of Vine, a short-video service launched by Twitter, the FTC complaint says. Facebook that January cut Vine off from accessing Facebook’s features, such as users’ friend lists, in effect halting its growth, according to the federal agency.

“Facebook has hindered, suppressed, and deterred the emergence and growth of rival personal social networking providers, and unlawfully maintained its monopoly in the U.S. personal social networking market, other than through merits competition,” the FTC charged.