Why losing to Meta in court could still be a win for antitrust regulators

President Biden’s antitrust regulators have adopted a mantra: to win, they must be prepared to lose.

Since Mr. Biden took office in January 2021, leaders of the Federal Trade Commission and the Justice Department’s antitrust division have brought risky cases that use new legal arguments to stop corporate mergers and favor competition. Their goal is to expand the uses of antitrust law beyond the way it has been applied for decades, including against the biggest tech companies.

That strategy will be put to the test in a federal courtroom in San Jose, Calif., on Thursday, when FTC attorneys plan to rely on little-used legal arguments to urge a judge to block Meta, the parent company of Facebook, the purchase of a virtual reality start-up called Within.

In the case, which is the first challenge to a tech giant developed under FTC Chairman Lina Khan, the agency uses an uncommon argument that Meta’s deal would hurt potential competition on a market for virtual reality products which could be robust in the future. In contrast, most antitrust cases have traditionally focused on how an agreement would impede competition in an already mature field.

Given the novelty of the FTC’s argument, it’s unclear whether the agency will succeed in blocking Meta’s deal. But the agency can already consider the case a victory. In April, Ms Khan told a conference that if there is a “breach of the law” and the agencies “believe the current law could make it difficult to access, there is a huge upside to continuing to ‘try”.

She added that any courtroom loss would signal to Congress that lawmakers needed to update antitrust laws to better adapt to the modern economy. “I’m definitely not someone who thinks success is marked by a 100% criminal record,” she said.

Under the Biden administration, the Justice Department filed a lawsuit blocking eight mergers and an alliance between American Airlines and JetBlue without announcing a settlement, while the FTC filed eight lawsuits challenging corporate mergers, including including Meta’s virtual reality agreement. During the same period of the Trump administration, the Justice Department announced one challenge to a no-settlement merger and the FTC announced five, according to a tally by The New York Times. (Companies sometimes settle with the agency rather than go to court, or drop deals when it’s clear the agencies are planning to take legal action.)

At least several of these cases test the limits of antitrust law. One — where the FTC tried to stop Illumina, a maker of genetic sequencing products, from buying a small company that makes a cancer detection test — was unusual because the two companies weren’t directly competing with each other. Another – the Justice Department’s objection to Penguin Random House’s purchase of publisher Simon & Schuster – has focused on authors supplying books to publishers rather than consumers, who are often at the center of merger disputes.

In another case, the Justice Department tried to block UnitedHealth Group from buying a company on the grounds that it would acquire tons of digital data that could be used against competitors. Regulators have long worried about the growing value of personal information to tech companies, but it’s unusual for that data to be the central argument in an antitrust case.

Some of these arguments have already failed to gain traction in court. In September, a judge ruled against the Justice Department in the settlement with UnitedHealth Group. That same month, the FTC’s challenge to acquire Illumina also failed. The agencies could appeal both decisions.

After a few early losses, Jonathan Kanter, who heads the Justice Department’s antitrust division, said in April he told his staff to rally by blasting the Tom Petty classic “I Won’t Back Down.” .

“We will continue to carry the business,” he told a conference. In October, a judge ruled in favor of the Justice Department’s challenge to the Simon & Schuster deal, which collapsed as a result.

A Justice Department spokesperson declined to comment.

Agency officials say they are returning to an era of aggressive antitrust enforcement – before conservative jurists convinced courts in the 1970s to restrict their approach to cases – with lawsuits that use the full weight of the laws drafted by Congress.

“Congress created the FTC to end unfair competitive practices affecting commerce,” FTC spokesman Douglas Farrar said in a statement. “When we pursue lawsuits, we follow applicable laws and use the tools Congress has given us to protect Americans from illegal business practices.”

Progressives have argued for years that the federal government has been reluctant to bring antitrust lawsuits — and other charges against companies and executives — because it was afraid of losing. They said the government instead made weak deals with companies that had failed to stop rampant consolidation and corporate misbehavior in technology and other industries.

But court losses carry real risks, including setting precedents that make it harder for the government to pursue similar cases in the future.

In 2018, for example, the government asked the Supreme Court to decide whether American Express violated antitrust laws by prohibiting merchants from tricking customers into using other credit cards with lower fees. The court ultimately ruled in favor of American Express.

At the time, Judge Clarence Thomas wrote an opinion endorsing the idea that courts should consider whether a company operates in a market where it sells products to two different parties in a transaction, such as merchants and cardholders. credit. In 2020, the government lost a case challenging a travel agency merger when a judge cited American Express’ decision.

“You have to be prepared to keep developing antitrust law,” said Maureen Ohlhausen, a Republican former FTC chairwoman who has represented Meta and other companies in private practice. “But it has to be based on a good solid foundation so that you are, one, persuasive in court and, two, justify the expenditure of resources.”

Allies of Ms Khan and Mr Kanter said the risks were worth it to help modernize antitrust law. They applauded the lawsuit the FTC filed in July against Meta’s $400 million purchase of Within, which makes a virtual reality fitness game called Supernatural. The lawsuit stands out in part because the deal was relatively small and involved a nascent part of Meta’s business.

But the FTC argued that if Meta were allowed to buy Within, it would kill future direct competition between the tech giant and the startup’s flagship game. If the deal is stalled, the agency said, Meta could offer its own VR fitness game or turn an existing title into a formidable contender. Such arguments about competition that could theoretically occur in the future over an emerging technology are less common than fights over well-established areas of the industry.

In a blog post after the FTC’s complaint was filed, Nikhil Shanbhag, associate general counsel at Meta, said the agency’s arguments were false. He said Meta had “considered creating a fitness-specific service and decided we just weren’t in a position to do that.”

In October, the FTC asked judge hearing the case, Edward J. Davila of the U.S. District Court for the Northern District of California, to allow it to strike certain claims in its lawsuit seeking an injunction over the deal. . The lawsuit now focuses even more on the claim that the deal could harm future competition. Meta asked the judge to dismiss the case outright.

Judge Davila is expected to hear arguments from the FTC and Meta in multiple sessions beginning Thursday. Asked for comment, a Meta spokesperson pointed to a statement about the November case in which the company said it believed the evidence would show the benefits of the deal and was prepared to make its case. arguments in court.