Event Video: The Antitrust Cases Against Facebook: Examining the Lawsuits and Implications
Last week, the Federal Trade Commission (FTC) and a coalition of 48 state attorneys general filed two separate lawsuits against Facebook. The complaints argued that the company maintained a monopoly position in the “personal social media networking” market through a series of acquisitions over the past decade intended to buy up potential rivals and by imposing restrictive policies to hinder companies that present competitive threats. Both suits call for the divestiture of Instagram and WhatsApp, along with other proposed remedies.
These lawsuits raise broader questions. Critics argue that both suits rely on hypotheticals that fail to demonstrate consumer harm, are politically driven, and fail to consider the negative impact venture capital investments and procompetitive merger activity. And if successful, these retroactive challenges to consummated mergers would represent a major change in antitrust law, shifting the current enforcement framework to ex-post merger review. Our panel of experts discuss the lawsuits, the merger review process and FTC enforcement, and assess the implications for consumers, companies, and the law.
Featuring:
Steven J. Cernak
Partner at Bona Law PC
Steve Cernak is a partner in the Detroit office of the antitrust law boutique of Bona Law PC. He has practiced antitrust law for over thirty years, including more than twenty in house at General Motors, where he headed up the global competition practice. He is a longtime leader of the ABA Antitrust Law Section and has written for various publications, including The Antitrust Attorney Blog. He teaches antitrust law as an adjunct professor at two Michigan law schools.
Asheesh Agarwal
Deputy General Counsel, TechFreedom
Asheesh Agarwal is TechFreedom's Deputy General Counsel, where he examines issues of administrative and antitrust law and policy. Asheesh served in senior roles in the administrations of President Trump and President Bush, including at the Federal Trade Commission and Department of Justice. At the FTC, Asheesh served as Assistant Director of the Office of Policy Planning, where he helped to lead the Commission's competition advocacy program. Asheesh received his J.D. from the University of Chicago Law School and his B.A. from Northwestern University, which later this week will play for the Big 10 Championship against Ohio State.
Doug McCollough
Partner at McCullough Sudan PLLC & Director, Lone Star Policy Institute
With over 20 years of experience, Doug McCullough represents clients in business transactions, international business and taxation. McCullough’s clients range in size from startups to mid-market and publicly traded corporations. Doug is also a director of the Lone Star Policy Institute, a free-market think tank and a director of the Canada-Texas Chamber of Commerce. Doug is also a National Review Institute Regional Fellows and co-host of the Urbane Cowboys podcast on policy and society.
Event Transcript:
Ashley Baker (00:13):
Good afternoon, everyone. And welcome to the committee for Justice's virtual panel discussion, the antitrust cases against Facebook, examining the lawsuits and implications. My name is Ashley Baker and I'm your host. I'm the director of public policy at the committee for justice. And I'm not going to introduce our panelists briefly in the order in which they're speaking. Steven Cernak is a partner in the Detroit office of the boutique law firm of Bona Law, PC. He has practiced antitrust law for over 30 years, including more than 20 and house at general motors, where he headed up the global competition practice. He is a long-time leader of the ABA anti-trust law section and has written for various publications, including the antitrust attorney block. He teaches antitrust laws as an adjunct professor to Michigan law schools. Asheesh Agarwal is Tech Freedom's deputy general counsel, where he examines issues of administrative and antitrust law.
Ashley Baker (01:06):
And policy Asheesh, served in senior roles in the administration of president Trump and president Bush, including the, at the FTC and the DOJ. At that FTC, Asheesh served as assistant director of the office of policy planning, where he helped lead beacon missions, competition advocacy program, Asheesh graduated Feeney from the university of Chicago law school and his B.A. from Northwestern university, which will later this week played for the big 10 champions against Ohio State. That's all the case, right? I guess that hasn't happened. Okay. That hasn't happened. I don't know football.
Ashley Baker (01:37):
Nice. Doug McCullough represents clients in business transactions, international business and taxation, and has over 20 years of experience doing so. Doug's clients range in size from start-ups and mid-market and publicly traded corporations. He is also a director of the Lone Star policy Institute, a free market think tank, and the director of the candidate, Texas Chamber of commerce. Doug is also a national review Institute regional fellow and co-host of the Urbane Cowboys, a podcast on policy and society. So the brief remarks by our panelists are to be followed by discussion. And then, so a couple of housekeeping notes for Q and a and follow the members of the audience can just send in their questions via the Q and a function at the bottom of your screen. You can do so at any point during the, during the panel. And I will address those with our panelists after our discussion. So let's get started Steve the floor is yours.
Steven Cernak (02:30):
Thank you very much. And Asheesh, I will say that this week I am a Northwestern Wildcat fan as a three time university of Michigan grad. So good luck against that team down South. So we're talking about the FTCs' the complaints against Facebook by the FTC and the various States attorneys general both filed in the the district court in DC. Both of them taking on the same kind of actions that is saying that Facebook acted anti competitively in three different ways. The first two were, were acquisitions that is the Instagram and the WhatsApp acquisition. And then the third is first opening up their Facebook platform to connections to that platform to various app developers. And then later on closing down those connections for certain of those app developers, we'll talk more about that.
Steven Cernak (03:32):
I'm sure. One of the the, the differences is that the FTC makes the claim that all of these actions violate Sherman Act section two, that is the monopolization part of the antitrust laws. The state action claims that yes, all of those actions violated section two, but also that the two acquisitions of violate Clayton act section seven, the merger specific part of the antitrust laws. So I want to make four points quickly in the time allotted. And then we can talk about them a little bit more as, as Ashley and the audience likes first point is something that, that I wrote for the Washington legal foundation a few months ago, just because you can doesn't mean you should. So we've, we've got a pre-merger review system here in the United States and have had, since HSR was Hart, Scott Rodino was implemented in 1978 Clayton Act section seven allows plaintiffs, including the antitrust enforcers to invoke an incipiency standard.
Steven Cernak (04:41):
If the merger may be substantially lessening of competition a court can, can block the merger that was difficult to implement when the, the parties would merge close the transaction and then the party or the, the enforcers would have to scramble to unscramble the eggs and, and try to gather the information to first decide if you wanted to unscramble legs. And then go ahead and try to unwind the transaction that all changed in the late seventies with Hart, Scott Rodino. And so for the last 40 plus years, we've had a system whereby the, the parties file for a clearance from the, the federal antitrust enforcers. And then once they get clearance, then they close the transaction. That process gives the enforcers the opportunity to obtain information sometimes over the course of once or more than a year and then make a determination.
Steven Cernak (05:44):
And that's what happened here. Now it is clear that even under HSR that the enforcers like the FTC can go ahead and and, and go after consummated, mergers, even ones that they cleared through the the antitrust, the, the HSR process. But that's not the way that things have worked out the last 42 years. And we've had parties, businesses, as well as their financing has get very used to the idea that once you get through the HSR review process, you're home free, you can close, and you won't get the, the antitrust enforcers coming after you. This case will at least damage those expectations, maybe even destroy them. And as a result, maybe we'll get fewer mergers. Maybe those mergers will not be fully implemented. Maybe the parties will be concerned about, you know, being too successful, going forward as, you know, as a merged entity.
Steven Cernak (06:45):
And they won't you know, make the investments that they otherwise would. We'll, we'll just have to see what the unintended consequences in merger review will be because of this action. Second point I wanna make is, on the Sherman act, section two, the monopolization claim under today's jurisprudence plaintiffs like the FTC or the States needs to show that Facebook is a monopolist and that they are monopolizing. So they need to prove both the noun and verb. We're gonna spend a lot of time on the verb and commentators have spent a lot of time with a verb, but I don't think we want to go running past the noun part is Facebook a monopolist that is, do they have monopoly power? In they act with impunity. Like they don't need to worry about what their competitors do when they change prices or take other actions.
Steven Cernak (07:37):
You know, can they just like rich uncle penny bags from the monopoly game, put their feet up on the desk and just collect $200 every time somebody logs into Facebook. That's really the, the question that needs to be answered here. Usually we've we get at that question indirectly through a static analysis, we define a market and then we'd figure out market shares. And if they've got more than 60%, they're a monopolist, that's, that's one way to do it. That's how the complaints do it. That's how we normally do it. But what we're really looking for is, you know, do they does the defendant here Facebook feel like they've got monopoly power, certainly they don't seem to be acting that way. And in a more dynamic analysis, such as one that's described by Nicholas petite in his new oligopoly book might be the better way to, to look at it.
Steven Cernak (08:30):
Even the complaint supports that kind of dynamic analysis,, in the market definition, section messaging services are excluded. They're not part of the market. And yet in the monopolization part, you know, what are the bad acts? You know, one of the bad acts was acquiring a messaging service what's app because it's supposedly it was competitive pressure on Facebook and the complaints lists several other potential acquisitions that Facebook has, has considered recently all with names redacted of other companies that supposedly are putting competitive pressure on Facebook. I suspect that we, that Facebook will make those kinds of arguments as well. And that third point again, section two you know, monopolists, monopolizing, the verb part of it, you know, what will the standard be? It w th the standard would be some consideration of the pro competitive aspects of, of these mergers, the complaints list, the anti-competitive aspects of it.
Steven Cernak (09:37):
And remember, the complaints are not saying that these assets were acquired through the mergers, and now those assets are being used in an anti-competitive way. The complaints are saying that the actual acquisitions themselves were anti-competitive whatever number of years ago. So I think that the the plaintiffs will need to go back in time and to see whether, you know, essentially the FTC made a mistake should not have cleared these transactions because the transactions at the time were going to be anti-competitive, they'll certainly be able to use the evidence that's been generated since then. But they'll still need to go back in time in order to, to take that look. One interesting subset of questions there is whether the section seven standard is easier than the section two standard for the plaintiffs to meet. That seems to me to be an obvious answer that it should be yes, after all the quite next section seven was passed, because Congress thought that the, the antitrust laws and the judges in interpreting them were, were not interpreting section two or section one in the right way.
Steven Cernak (10:46):
That's why Clayton act section seven was passed and then,, expanded in 1950. And we get the Supreme court in, in Brown shoe in the 1960s saying exactly that but professors, Tim Wu and Scott Hemphill have come up with an interesting theory based on the Microsoft case, out of the court of appeals for DC. That would say the opposite. And certainly we've heard that from FTC officials in the last couple of years as well. So that will be, I think, an interesting point know that we'll, we'll need to pay attention to. And then finally, on the actions regarding the the opening up of the Facebook platform to app developers, and then closing it down, if those app developers are supporting a Facebook rival you know, that it talks about a story of either a refusal to deal or essential facilities.
Steven Cernak (11:45):
Even monopolists normally have the right to choose who they partner with. It's only the, in the exceptional cases that the antitrust laws will force them to deal with somebody, especially in including the rivals lower courts have developed any essential facilities doctrine. So is this facility essential? That will be, that could be one of the questions that doctrine has not been endorsed or rejected by the Supreme court, what the Supreme court has said in refusal to deal cases, generally Otter tail Aspen skiing is that you know, a couple of those exceptional cases when we'll force a monopolous defendant to deal with its rivals are if the the monopolist there's voluntarily started dealing with those rivals and then stopped dealing with them. And there's no other good reason to stop dealing with them. Also, if, if the monopolist defendant is dealing with non rivals but it's choosing not to deal with rivals. So you can see where these claims might fit in into those areas. We'll just have to see exactly how this gets fleshed out going forward. So those are my four points, Ashley, again, happy to, to, to dive into them deeper once we get Asheesh and Doug's comments.
Asheesh Agarwal (13:06):
Well, Ashley, thank you so much for hosting this and Steve thanks for that overview. And for the shout out to my Alma mater, I'll come back to football at the end of my comments. So I'd like to make three comments about the complaint, and then maybe put it into a little bit of a historical context. So the, the first one I'd like to make is, I was very surprised that the FTC in this complaint did not mention that it had previously cleared Facebook's purchases of Instagram and WhatsApp, you know, normally in a litigation context, if you have the bad facts or facts that cut against your narrative, you either try to sort of hide the ball hide the ball regarding those facts, or get in front of them and provide, provide a narrative. The FTC obviously can't hide from the fact that it did pre-clear these deals, but it doesn't even attempt to provide, a narrative as to why it cleared these deals in the first place.
Asheesh Agarwal (14:01):
I would have expected the FTC to say something like, well, gosh, when we cleared these deals. We didn't have these facts available to us or Facebook misrepresented, what it was planning to do with these acquired companies, or even just, Hey, you know, we, we made a mistake and here's why the market has changed so significantly that we need to take this action. Now, the FTC hasn't done any of those things and not surprisingly, one of Facebook's main talking points out the gate is, Hey you know, the FTC already cleared these deals. Why are they, you know, revisiting history now? Not legally dispositive, but it certainly is part of the color of this lawsuit. Now this second point is that,, reading through the complaints, I mean, it is obvious without even hearing from Facebook that the time of these acquisitions, Instagram and WhatsApp were at most marginal competitors to Facebook.
Asheesh Agarwal (14:52):
And that's probably why the FTC cleared from at the time Facebook was thinking about getting into, you know, mobile photos. Wasn't really seriously thinking about getting into, mobile messaging. They saw these you know, companies, growing, they tried to develop some technology internally unsuccessfully and decided that the better thing to do was to purchase them and to add to their suite of products that they could offer to consumers. At the time, you know, Instagram and, WhatsApp had, a few dozen employees, one had 16, one had 55, they didn't have the revenue or a viable long-term business model. So, you know, at the time of the acquisitions they weren't really competitors in a meaningful sense. I think that gets to the heart of some of what Steve was talking about in this whole kind of nascent acquisition type of theory. And it really would be quite a sea change in antitrust law and enforcement. If, we go to a model where you know, if acquired companies do have happened to grow after an acquisition, that those acquisitions can be challenged and unwound. The third point I wanted to make about the complaint, and again, touches on something Steve mentioned was the the third part of the Facebook complaint sets forth
Asheesh Agarwal (16:14):
Interesting. And, you know at least facially
Asheesh Agarwal (16:17):
plausible theory as to how Facebook had, you know, maybe violated the you know, the antitrust laws. And it'll be curious to see what Facebook comes back with. So the, the basic, you know, narrative as laid out is in the complaint is that, you know, Facebook invited these developers to participate and develop software with it. But on conditions that they couldn't develop software that would rival Facebook's underlying product suite, or, you know, even work with you know, rivals to Facebook now, facially at least those, those could be, you know, troublesome from a competition standpoint, I think Facebook will either end up coming back with a narrative that says, Hey, that's, that's not what happened, or some sort of narrative you know, explaining why it's actions were, you know, were in fact pro competitive now Facebook limited or eliminated those restrictions in 2018.
Asheesh Agarwal (17:12):
So another question would be, well, even if there was arguably some anti-competitive behavior at some point in time, what sorts of remedies to be looking at, would we be looking at, you know, now that those practices have been, have been eliminated, so know more to come on that certainly. I did want to put this into a little bit of a historical context. A colleague of mine in tech freedom, Andy young, and I recently prepared a paper for a, that we submitted to the FTC as part of their six piece study on big tech. And it really covered the history of nascent acquisitions. And what we found is that these sorts of transactions have been a routine part of American corporate history for more than a century. Acquisitions of small companies provide, you know, those smaller companies with, you know, financing and resources and infrastructure that allow those small companies grow.
Asheesh Agarwal (18:07):
They allow the larger companies to expand their their products. We, and they help consumers by bringing you know, more products to more consumers, more cheaply. And the one example that I wanted to share with you is is John Deere. So you know, most people think of John Deere if they do the first thing that probably comes to mind to the green tractor with a leaping deer. Well, as it turns out, John Deere did not actually develop the John Deere tractor. That was developed by the Waterloo engine gas company in the early 20th century. John Deere this was around 1915, tried repeatedly to develop you know, a tractor. They all had all sorts of fuels and all sorts of models, like all flopped in the marketplace. And what they did was they saw, you know, a smaller company, you know, Waterloo engine that had developed a successful tractor.
Asheesh Agarwal (19:00):
And they bought it, they bought the company and they invested heavily in it. They you know, market marketed, it devoted a third of their advertising budget to it. And the bet paid off output, increased sales increased by about a third, and they ended up, investing in that acquired company. And a few years later, it came out with a new model. Well, in a lot of ways, what John Deere did is pretty similar to what the Facebook did with Instagram, which is to say, which is to say they identified a need in the market. They try to develop that technology internally, they weren't able to do so. So they purchased a smaller company that had, and, you know, increased output, but from a competitive stance point, there's a lot of you know, there's a lot of good there's a lot of good that comes from that.
Asheesh Agarwal (19:52):
And we see that sort of pattern play out in multiple industries automobiles, aviation and on and on. So there's a sense that, gosh, you know, big tech is, you know, you're brand new, we need new antitrust tools to look at it, but in reality, there's kind of nothing new, nothing new under the sun. And the final point that I wanted to make is to bring this back to football on a, on a, on an important weekend. We're going to tie this into Michigan, Steve. So I think, you know, the advocates of this kind of nascent acquisition theory are making what I like to call the Tom Brady fallacy. Now if you, if you remember Tom Brady, he was at one point in time, a backup quarterback for the university of Michigan and a sixth round draft pick by the new England Patriots. Now you could say that, Oh gosh, it was just destined. It was preordained. Tom Brady was going to win five super bowls
Doug McCollough (20:48):
suc marriages out and on. And on the reality is, is that if he had been drafted by say, a less successful franchise list of fade, Detroit lions to pick one at random one, would Tom Brady have become the same achieved the same level. probably not. He needed the infrastructure and brain trust of you know, it pains me to say this I'm not a Patriots fan, but you would need that in infrastructure and brain trust in order to be able to see it. I think you could say the same thing about, WhatsApp and other thanks, Ashley.
Steven Cernak (21:20):
Well, as somebody who used to root for, to play drew Henson, rather than Tom Brady at the big house in Ann Arbor, I, I under I get that reference so yet,
Doug McCollough (21:34):
Well Ashley, thank you for inviting me to be on the panel. And first off I want to say I thought that the presentations by Stephen and Asheesh were very good and, and saved me from really having to add much I guess from my perspective where I where I'm troubled by the lawsuit, and this kind of goes back to what Steven was getting at about what the power that FTC has versus what they should do. I'm concerned from sort of a what, what this does to corporations in their ability to make decisions about corporate development M&A, any type of big capital expenditure. If you have a situation where you go and you, you get an approval of any kind, and you can just imagine this, not only in the antitrust situation, but really across the board in any type of federal approval, any type of you know an IRS private letter ruling, a SEC no action letter across the board.
Doug McCollough (22:30):
If you have a situation where the federal government takes a second bite at the Apple the exact same fact pattern, and this isn't like some broad change to the tax code or something, but a second bite of the Apple and same set of facts. You really, it, Steven's already alluded to this, that you really hamper the ability to make strategic plans, whether it's, sort of the classic build orbuy, are you going to go build a new product line, or are you going to acquire some other company if you're not sure that just because you've gone, you've laid out all the facts with all the pertinent information you've been, that's been requested and the government gives you an approval, but then you still don't know that a few years down the road, they're not going to change their mind. That's troubling from a corporate perspective.
Doug McCollough (23:14):
You really can't make those long-term plans when you have that type of situation. So I think, I think Steven's right to that that may be, then you would see sort of almost hybrid acquisitions where sort of like we, we require a company, but we don't fully integrate it until a certain amount of time passes. And that's, that's not going to be efficient. That's not gonna, that's not going to lead to more integration and innovation. And so I have a lot of trouble with, with this whole approach to begin with. The other thing is, is again, we know that the, the acquisitions were approved and whether or not this is the law. What I would expect to see is I would expect to see that there, if there isn't a showing that there was some information was withheld or some misrepresentation, that there was some fact pattern after the fact that it shows that Facebook was being anti-competitive.
Doug McCollough (24:02):
And I think this goes back to the the API self preferencing, right? And that fact pattern, but part of the problem there is if, if there a showing that the F that there was some anti-competitive behavior that was actually harmful to consumers with the self preferencing, I'm not an antitrust lawyer. And I would defer to Steven on this, what I would expect is rather than a remedy of divesting those those acquisitions that I was think that you should first be looking for remedy this more narrowly tailored to say, well, if the problem is this particular practice, let's have a remedy that curtails, that particular practice, rather than all the talk about the divestitures. You know, and I'll just leave it with one other comment that's a little bit more broad is this is sort of why I, why I appreciate this idea of the consumer welfare standard, where we have something that we're actually looking for as a standard, because if we're left with the question of just simply competition, I'm looking through the petition and seeing all the, you know, essentially right now, I think most of what we're looking at are emails, internal emails from the corporate development team about M and A, and even some from Mark Zuckerberg and what, what the petition seems to be pointing to as anti-competitive behavior.
Doug McCollough (25:23):
I'm looking at a lot of these emails. I'm like, I'm actually seeing competition, not anti-competitive behavior. I'm seeing that Facebook was actually concerned about their competition. They were concerned that there were vulnerable and they were about to fall behind in certain verticals. And so it, you know, I guess my point to that is, I think that's where we we need to maintain that consumer welfare standard, because otherwise it's just sort of a Worshack test. But with that, I will defer to Ashley.
Ashley Baker (25:54):
Thank you, Doug. Thank you, everyone. That was really great. There are two main points I'd like to first kind of follow up on they're both, I suppose, pretty broad, but my question is, I mean, first we number one, so like this, this does have larger implications for our system of merger review. This goes way beyond, just Facebook. And it seems there's a lot of, and you can trust now there's way too much emphasis placed on these tech companies in it, you know, it will influence industries beyond that. So how does it, how does it influence our system of merger review more broadly? Does it move us more into kind of an ex-post system? And also I'd like to touch a bit on just the, the buy and bury type strategy itself that they're describing. It doesn't sound exactly unique to tech. It doesn't sound historically unique. I think in the house judiciary committee report was something like 63 companies or something that were bought over the past 10 years. I don't remember exactly what the number was, but it, that does not sound like actually statistically that many. And I guess maybe this would be a question for Steve too, is how does this compare to other industries? Is this behavior at all, even really that out of the ordinary,
Steven Cernak (27:05):
I think, Asheesh, has, has a lot of this in his great paper you know, the, the idea of it rather than a buyer barrier, it's really is Doug put it sort of a buyer build you know, can, can we do it, should we do it ourselves? Those are two different questions or has somebody already done it or has already gotten a start on it? And if so, you know, let let's, let's go ahead and do that. And, you know, yes, Asheesh was, was talking about John Deere. Yeah, I, I mean, I, I've got the, the GM background and can go to, you know, whether it's the Fisher brothers or all of the entities that, you know, became part of AC Delco and, and everything else that's our general motors grew for for years and years.
Steven Cernak (27:52):
And that obviously did not make them a, a, you know, a monopolist that could never be toppled as, as we all know and even in particular industries. So that was true, it used to be the general motors, had a monopoly in locomotives and that, you know, the electromotive division was started with an acquisition of a teeny tiny company in Ohio that general motors built on because of its great research and development, and came up with the the diesel electric locomotive that, that put, you know, the, the old style locomotive out of business and generated, you know, lots of benefits for consumers as well as plenty of brackets worked for general motors. So yeah, I don't, I don't think that that kind of strategy is unique to big tech. And yeah, if, if that's going to be in and of itself something that is anti-competitive as compared to, as Doug described, you know, there's, there's some change surface dances or the way that use those assets assets going forward. Yeah. That, that could put a creep on deal-making.
Doug McCollough (29:05):
Yeah. I w I would comment that you know, I'm being in Texas, I'm familiar with the oil industry, and it's not that unusual to, to essentially see what you might call corporate venturing where you have big oil companies that create what, what might look like a venture capital fund. Although really not so much a fund as much as this, their, this, their venture capital arm, where they are acquiring or investing in small growing tech companies, they may be clean tech companies are trying to be able to incorporate those technologies. So outside of big tech
Asheesh Agarwal (29:42):
It's definitely a thing. And corporations are, you know, do this on a regular basis. I think we should be very wary about, changing the antitrust rules or, or bringing, a very aggressive antitrust lawsuits that would have the same effect as changing the rules. You know, none of this happens in a vacuum and the United States is not operating in a vacuum here. I think, one point that, we like to make that really unites people across the political spectrum is concern about foreign competition in particular, China look, the council of economic advisors, congressional research studies have pointed out rightly so that, Chinese state affiliated companies are investing heavily in new technology companies. Those are direct threats to US global technological leadership. And, I certainly wouldn't advocate at all for a national champion strategy. Look, we should absolutely treat, you know, Facebook and Google and all of the rest with the same we treat them the same under the antitrust laws as we would treat, any other industry, but I also wouldn't try to change those laws or you know, bring, you know, these novel antitrust cases aren't grounded in the consumer welfare standard because the effect of that could be to discourage, you know, US investment in startups and new technologies that quite frankly, we need as a nation.
Ashley Baker (31:10):
I agree. And I feel like the message that they're sending is kind of, you know, the only way out is not to be acquired it's joke, kind of fight these companies and beat them. But which is pretty discouraging for a lot of entrepreneurs, I think. So one issue, with this suit too, is that, you know, it's built on all of these hypotheticals, and it's also assuming that the only reason that they would acquire these companies is because they would, they were potential competitors. Can you talk a little bit about the different reasons why tech companies would acquire other companies you know, and bef you know, years ago you had acquired other companies that had physical assets or something that was not necessarily data or part of their business model or another service offering. How are things a bit different now?
Asheesh Agarwal (31:58):
I don't mind starting in that. I mean, every acquisition I do, you're, you're essentially you're acquiring something and that is either technology, it's a customer base. It's you know, a geographical expansion. So , reading the, lawsuit I was writing, I was sort of chuckling when I saw that the FTC almost made it seem conspiratorial, that, that Facebook was concerned about maintaining their customer, their, you know, their user base, expanding their user base and acquiring technology. And that's, you know, that's 80% of all deals. It's just, that's just the norm.
Speaker 1 (32:38):
That's, I mean, what, what's
Asheesh Agarwal (32:40):
Wrong with that? I mean, Facebook saw that you know, mobile was the wave of the future. They were right about that. And they acquired a company that was well ahead of them technologically in that space. Isn't that what we want to happen? You know, a company sees that, Hey, there's a, you know, there's a need here. There's a demand here. Okay. We just haven't been able to get it done internally. Let's go out and acquire that company, making investments and you know, we'll increase output. It seems to me to be a good story. You know, if you look at other industries, so we talk about John Deere a lot. So they, they, they bought know Waterloo engine because they, John Deere saw that, you know, farmers want to trackers and they weren't able to develop on internally. So they went out and they bought a company that had, achieve that. And they grew that company and they, you know, expand it out. But for consumers, what's wrong with that. That seems to me to be the kind of thing that we want our companies to do,
Steven Cernak (33:36):
I will say that I agree with you, Doug, and Asheesh that sometimes the, the hot documents aren't are not quite as hot as, as you know, the FTC or the States I think they are. But I will say that if I were a lawyer inside Facebook, I think I would go to Mr. Zuckerberg and say, perhaps just pick up the phone a little more often, not quite put everything in an email or at least not stream of consciousness. But, you know, because there's obviously a lot there and I'm sure those were not the only emails that, that the FTC got a chance to review. So, they, gave them plenty of ammunition and plenty of stuff to put in the complaint that they will have to deal with. Yeah.
Asheesh Agarwal (34:19):
And that'd be curious, and you're going to say Doug, in your, you know, your deal history, I mean, is that something that is in the mind sometimes with the acquired companies, like, gosh, here's a company that really is going to add to our you know, product offerings and help us grow. And, and, Oh, by the way, if we don't do this, if we don't adapt maybe we'll be suppplanted one day. Does that ever happen? And is it for companies to think that way that's the norm is? I mean, I think that unless you're talking about some small family run business where they're just simply thinking of things as, as pure business succession, that's the norm. I mean, you're always looking for sustainability, you're looking for growth and everyone knows that if they're not if they're not growing, they're not developing new technology or acquiring new techniques and technology, they're going to be, you know, they're going to be on the receiving end, they're going to be either liquidating or they're going to be gobbled up by someone else. So, yeah, it's, it's always the norm.
Ashley Baker (35:15):
What about these are using surrounding data? For example, it seems that one of their orders is, seems to kind of assume that one of the reasons for acquisitions would be to get more information about their consumer base, but this isn't exactly, you know, new as it and unique to tech companies, consumer data has always existed for, you know, lots of companies for many years. Yeah.
Steven Cernak (35:38):
I don't, I don't think there's anything magical about the data. I think that the secret sauce is, is what you do with the data, in the form of an algorithm, but also more than that. And so I don't think there's anything here in this complaint that is specifically focused on, on data or there's certainly shouldn't be, instead the allegation seemed to be, you saw them as potential competitors or maybe actual competitors, and you bought them up and, and then you invested in them and made them better than, the product that you otherwise had. And as we've already talked about, what, what's exactly wrong with all of that, it certainly, the complaint assumes that if the acquisitions have not taken place that Instagram and WhatsApp would have continued to grow and would haved continued to succeed in the areas where they were, but also that they would have then expanded into an area that, Facebook was in personal social networking is, is the market that they've defined that the complaints define. And I don't know that that's a real it seems like a stretch at least. And I don't think that anybody quite saw that certainly with Instagram in 2012, yes. There are some quotes from a financial analyst about WhatsApp in 2014, perhaps eventually growing in something like that. So no, I don't, I don't think that there's something magical about data and that's not part of this case
Asheesh Agarwal (37:16):
Actually. I think you're exactly right. I mean, data has, has been around forever, I suppose. And, companies have been using data forever. You know Tim Muris former chairman of the FTC my former boss wrote a great paper about A&P grocery stores. Well, back in the day, A&P grocery stores did a really good job of using consumer data sales data to figure out what products sold in what markets. And it used it to adjust its product offerings with what, with what you might call, you know, private labels, the same thing. So sorts of things like, Walmart and Costco does today, Amazon does today as well. And A&P ended up getting hammered and by Congress and in antitrust legislation because of its successful business practices. So again, at one level, there, there's nothing new under the sun
Steven Cernak (38:10):
Before we get to our, a couple of questions in the audience, Steve you raise the point of market definition. I think that's something we should all maybe touch on a bit, just the market definition here. Personal social media networking, does that not seem to be gerrymandered to apply to this case? What do you all make of that? Yes, I think it, it is. And I'd love to Doug [and Asheesh] to weigh in on that as well. I will say that in a way the gerrymandered sounding market definitions are often the result of the process that we use in order to determine the market and market or here monopoly power. And, and so, you know, we go through and we try to find the perfect substitute through these small, but significant non transitory, increasing price process. And we often end up with those kinds of odd sounding market definitions, odd to the ear of the people who are actually in, in the market. And I think you see that here, even in the complaint where obviously you know, if Facebook thought they were in an only, in a personal social networking market, they would be a lot less concerned about all these other entities that are not in that market. So I think there's more competition out there that is, is not shown by going through that, that usual market definition process.
Asheesh Agarwal (39:39):
Well, that is an amusing part of the complaint where the plaintiffs go through and they really try to explain a way why it is that, you know, LinkedIn and Tik Tok and Snapchat and all these others, aren't perfect substitutes, and they're not perfect substitutes. They're all a little bit different, but they are at bottom, all social networks and alternatives. I don't have anything to add to that. I think you're, I think you're both right.
Ashley Baker (40:17):
Sorry about that. So first question for our audience is what are the speakers thoughts on implications of the FTCs actions and approach in this case for competition policy internationally, especially in government intervention in the European union?
Steven Cernak (40:34):
Well I'll start off. To the extent that there, the other end to other enforcement agencies around the globe, you know, have any you know, reluctance to take on these big tech companies, not because they're American. But because the U S antitrust agencies who have been amongst the leaders, leaders are now maybe amongst the leaders in the antitrust agencies around the globe, it, to the extent that the U.S. Has not taken them on you know, that might give at least some other of those antitrust agencies, some pause before taking them on, and also taking on this, in this particular way that is going back and looking at prior acquisitions that were not opposed at, at the time. So I think it does give other agencies, the freedom to perhaps pursue similar theories against these company or Facebook or against other big tech companies or other companies generally.
Steven Cernak (41:42):
So I know that a number of commentators have been concerned that we in the U S are falling behind the EU. I've always thought it's not a, you know, a game who, who files the most lawsuits or who has the most enforcement actions, but who gets it right? And who has the strongest economy perhaps as a result of, or at least partially as a result of the, the right antitrust policy. But to the extent that other agencies are trying to keep up with the Joneses yeah, this is now they've got another reason to go ahead and take another step.
Asheesh Agarwal (42:21):
Well, Steve, I completely agree. I think this lawsuit probably enables a foreign competition agencies to take more aggressive actions against against big tech. And I think, Europe has been quite open about this, that they are using antitrust law for what we might call protectionist means. They make no bones about the fact that they don't like that, that the biggest platforms are,, so far still American based companies. And they'd like to change that. And they're using European competition policy as a mechanism to do that. Yeah. And just the only thing to add to that is just, I think you're exactly right calling it protectionist. I think that if, if we're not, we it's going to basically prevent us from having American administration stand up for American tech companies when the EU or other countries cracked down on American tech companies, because they're going to see that we have been rather mercurial about the way that we have gone through antitrust enforcement,
Ashley Baker (43:25):
Right. I mean, it's no accident and there are no large tech companies really in Europe are very few at least. And speaking what, so our next question is about the consumer welfare standard. It says the lawsuits confront a question as long foreshadowed the push for antitrust enforcement against tech platforms. How do you prove antitrust injury with a product that's offered for free? It said time to start considering privacy as part of the consumer welfare standard. I know that's a pretty broad question, but what are all of your thoughts on that?
Steven Cernak (43:53):
Well, I think even even before this, this lawsuit, we you've had you know, former chairman Ohlhausen and then others at the FTC talk about privacy as, as a part of quality. And certainly quality can be part something, an attribute that is part of the considered as part of the consumer welfare standard. I think the question becomes do we need to have privacy specific regulation or, or is it only something that should be, it can be covered under the antitrust laws? So I think you can bring this kind lawsuit under the consumer welfare standard. And I think, these kinds of these complaints are consistent with that. We might agree or disagree whether they're appropriate under that standard, but I don't know that that they're, they're under a different standard. But I do think that, it sort of emboldens you know, either this, these agencies or others to perhaps think of even more adventurous theories under which Facebook or other big tech companies can be can be charged, you know, outside of the consumer welfare standard,
Ashley Baker (45:10):
Speaking of adventurous theories and standards the duty to deal arguments ended up as essential facilities doctrine. We've seen a lot of instances aside from this, just this suit, which has kind of pushed forward towards a revivial of the essential facilities doctrine caused for such a thing. What can you explain that argument as part of this response a little bit and just the broader context there?
Steven Cernak (45:36):
Sure. I mean, I think the, the idea is under essential facilities is that this monopolist has a facility that, is essential to its rivals and, not sharing it with its rivals will, will harm them in some way. So in the olden days you would think of it as the owner, one railroad company that owned the only bridge across the Mississippi ford, some number of miles. So the question is do Facebook's competitors, can they only reach ultimate users through Facebook in some way and does preventing the app developers from either supporting Facebook competitors, or actually being Facebook competitors, does preventing them from fully using Facebook. Does that prevent them from reaching customers in some way, again, that's the theory that's not been approved or rejected by the Supreme court?
Steven Cernak (46:40):
So the Supreme court refusal to deal doctrine under, especially Aspen skiing has been a little broader, but also a little narrow or broader than that. The facility doesn't need to be essential, but narrower in the sense that if, if the monopolist seems to only have a bad anti-competitive reason for not dealing with a particular competitor, then that can be a refusal to deal with anti-competitive refusal to deal. And that's Justice Scalia has described Aspen skiing is at, or near the outer boundary of, of Sherman act section two. So that's why a lot of these cases tried to fit within the Aspen scheme template. Was there prior voluntary dealing that's been stopped are you dealing with non rivals now and not dealing with, with rivals that's where I think you see the complaint try to fit within those within that either one of those two templates because that's where , the law is now. Yes. It appears that, you know, others would like to broaden that out, but I think, I think the complaint does a decent job of at least trying to fit within the, that, that template, whether, you know, it does, you know, after Facebook's gets a chance to explain why it is that it's taking those actions. It is a different question.
Asheesh Agarwal (48:05):
I think Steve's exactly right. And I, you know, referred to the Epic versus Apple sued, Apple has a walled garden that is created for it its app store. And that makes a lot of, people like like Epic, unhappy, but Apple has , a number of pro-competitive reasons for that, whether you buy them or not, Apple will say, well, gosh, we need to maintain the, you know, the brand of our Apple store, we have all these security and privacy reasons for you know, imposing these restrictions on working with us. But there, there are real consumer benefits to that. The complaint the complaints against Facebook do lay out is, as Steve said a story whereby you know, Facebook was doing imposing its restrictions for reasons that weren't pro-competitive, that were instead to stifle competition. And we'll just see what we'll just have to see what Facebook comes back with on those.
Ashley Baker (49:04):
Okay. We have another question. I'm going to direct this one first to Asheesh it's what do you make of the fact that that buildup in the FTC complaint was three, two with two Republicans voting No, and I'm going to add to that question kind of a follow up is how might this play out in the next administration?
Asheesh Agarwal (49:21):
I think you have so you know you know, commissioners Wilson and and Noah are are what you might think of as more traditional you know, conservatives both in terms of kind of, kind of their overall political philosophy, but also in terms of their approach to antitrust you know, chairman Simons, who I worked with when I was at the FTC is, is what you might call more of a, more of an antitrust practitioner. Somebody who wants to, develop and bring you know, good cases and test the boundaries of antitrust law. So I think you see that a little bit with I think you see that a little bit with you know, the makeup of the folks who voted for the complaint.
Asheesh Agarwal (50:06):
Yeah. It'll be, it'll be interesting to see you know, what happens as we go into the, into the next administration you wouldn't you know, I think chairman Simons has said that he's planning to step down you know, maybe even before Inaguration day. And so you certainly have the prospect of a, 2-2 commission for a while. So it'll be interesting to see how that affects you know, any settlement talks, for example, that might arise over the next few months.
Ashley Baker (50:40):
So what are the next steps for the suit though? And you know, what kind of arguments can you see Facebook potentially using or successfully using? I mean, it's not like you can, you know, invoke the failing firm defense and say, well, this company that doesn't exist anymore now, it, wouldn't have existed anyway. I mean, what, what exactly is their best strategy and why, how do you deal with these sort of hypothetical scenarios they've kind of laid out?
Steven Cernak (51:07):
Well, I think first of all, Asheesh referred to, to this, I get that the initial reaction, you know, outside of the courthouse of the FTC approved these, and this is bad is, is disingenuous. And, but it does, it does raise a real policy issue. And we've, we've, we've talked about that and that's, that's fine. But I do think they've got to go beyond that. And I think they, at the very least, they've got to explain why it is that they are taking the actions they are taking regarding the APIs, that the connections and, and I think that frankly, that would be helpful information to get out into the public or outside the outside of the courthouse, so that people start understanding why it is that, you know, these kinds of, of, of restrictions were put in place.
Steven Cernak (52:02):
And, and then yes, they were changed a couple of year, year and a half ago. But you know, to, to start explaining that I think it would also be helpful to start explaining the great investments that they have made in Instagram and WhatsApp happening with, they started to do some of that, or at least refer to that. But I think it would be helpful to explain that, you know, the you know, certainly at the very least the acquisitions were not just anti-competitive that they were not just done for a bad buy and bury reason. But that they were done for good reasons. And as a matter of fact, look at the experience that we've had in the, in the intervening time,
Asheesh Agarwal (52:49):
I think Steve's exactly right. Certainly by traditional antitrust metrics, price, output, arguably quality you know, the, the acquisitions have been very pro-competitive certainly in Instagram and, and what's, the applicant had taken off as measured by the number, number of users. For example, the monetary price has remained zero that recognizing that consumers are kind of paying for something in terms of their, in terms of their privacy, that's pretty well known that you are giving some privacy when you're using these free services. Now I do, and as we've talked about, I do think that Facebook is on that third prong going to have to come up with a narrative as to how its actions were pro-competitive.
Steven Cernak (53:37):
Wow.
Ashley Baker (53:41):
Okay. We have time for one final question. And is it a factor during the case that Instagram and WhatsApp in particular cannot likely stand on their own without the backing of Facebook and the revenue from Facebook ads spinning them off would result in fewer services and WhatsApp might like likely more back free pay model, move back to a pay model.
Steven Cernak (54:05):
I think that that can go to whether there's a violation. I think it also goes to whether the, a divestiture is the appropriate remedy or, or not that is, you know, can you really split them apart in some way? I think that that could be handled you know, through some, a number of years of transitional services. Certainly we've seen conflicting reports in the media about how difficult it would be to have one of these, or either one of these divested it's, it'll either be, be amazingly easy or amazingly difficult, depending on who you talk to. But I think that, yes, those factors can be important on both the liability side, as well as the remedy side. And I think we just, but they assume an answer to a factual question that I just don't know.
Asheesh Agarwal (54:59):
I agree that it gets to remedies and let's, since we're at the end, let's bring this back to Tom Brady. What happens when he is separated from the Patriots well they are flailing and his new team is at most a marginal playoff team. So, forced divestitures could have really negative consequences. The only thing I have go ahead, Steve.
Steven Cernak (55:23):
I don't think we can top that one. Got, there you go.
Ashley Baker (55:30):
So we have about five minutes left. Any closing thoughts to wrap this up?
Steven Cernak (55:37):
I'll start again. this is just the beginning you know, in fact you know, after you asked us to speak and before we got a chance to speak, we all saw the the Texas AG lawsuit against Google, which kinda sorta brings in Facebook as well. And we'll hear more about what's going on in, in Europe. There are continuing investigations by attorneys general and either the FTC or department of justice here. So you know, this investigation of big tech and the potential expansion of antitrust laws with the merger review or monopolization laws is just beginning. And that's just in with the laws that we have today and the courts with the new makeup of Congress, I think that we'll see at least discussion of expansion of antitrust laws, you know, changing legislation. So 30 years ago people asked me, why are you getting into antitrust? It's a dying area. And it only took 30 years, but eventually, I was right.
Asheesh Agarwal (56:44):
Yeah. I would just say something that I'm sure everybody on this call would agree with is, you know, I would just urge you know, the new administration coming in to stay within the, the white lines of the 40 year consensus on antitrust law, which is to adhere to the consumer welfare standard and, bring enforcement actions on empirical evidence rather than on theory. You know, I think it was Lyndon Johnson's President Johnson's antitrust division that started to chip away at the notion that, big is bad and we should go after big companies just because they're big. Well, I hope we, I hope we keep that in mind as we examined the conductivity company. Well, I guess for me sitting here in Texas, I suspect that I'm going to be spending more time thinking about antitrust, because it looks like the Texas is not only a leader in election lawsuits, but now also taking the lead in antitrust enforcement. So I'm thrilled.
Ashley Baker (57:48):
Yeah. See even had like a little, I guess, but they'll reference here, play off video sort of thing. They were taking the lead yesterday. It seemed a more appropriate for ESPN or somewhere okay. With that. Thank you all for coming out today. Especially so close to the holidays and I will have for anyone who missed part of this presentation. It will be on YouTube later on the committee for justices page or in the follow-up email that each of you will receive afterwards. I can include a link there as well. So everyone Merry Christmas, happy holidays and have a great new year.
Steven Cernak (58:23):
Thank you, Ashley.
