Why Losing to Meta in Court Could Still Be a Win for Antitrust Regulators
President Biden’s antitrust regulators have adopted a mantra: In order to win, they need to be willing to lose.
Since Mr. Biden took office in January 2021, the leaders of the Federal Trade Commission and the Justice Department’s antitrust division have been bringing risky cases that use novel legal arguments to stop corporate mergers and nurture competition. Their goal is to stretch the uses of antitrust law beyond the ways 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 lawyers for the F.T.C. plan to draw on some little-used legal arguments to urge a judge to block Meta, Facebook’s parent company, from buying a virtual reality start-up called Within.
In the case, which is the first challenge to a tech giant developed under the F.T.C. chair Lina Khan, the agency is employing an uncommon argument that Meta’s deal would hurt potential competition in a market for virtual reality products that could be robust in the future. In contrast, most antitrust cases have traditionally focused on how a deal would hinder competition in an area that is already mature.
Given how novel the F.T.C.’s argument is, it’s unclear if the agency will succeed in blocking Meta’s deal. But the agency may already see the case as a win. In April, Ms. Khan said at a conference that if “there’s a law violation” and agencies “think that current law might make it difficult to reach, there’s huge benefit to still trying.”
She added that any courtroom losses would signal to Congress that lawmakers needed to update antitrust laws to better suit the modern economy. “I’m certainly not somebody who thinks that success is marked by a 100 percent court record,” she said.
Under the Biden administration, the Justice Department has sued to block eight mergers and an alliance between American Airlines and JetBlue without announcing a settlement, while the F.T.C. has filed eight lawsuits challenging corporate mergers, including Meta’s virtual reality deal. In the same period of the Trump administration, the Justice Department announced one challenge to a merger without a settlement and the F.T.C. announced five, according to a tally by The New York Times. (Companies sometimes settle with the agency rather than go to court, or abandon deals when it is clear the agencies are planning to file a lawsuit.)
At least several of the cases test the limits of antitrust law. One — where the F.T.C. tried to block Illumina, a maker of gene-sequencing products, from buying a small company that makes a cancer detection test — was unusual because the two companies didn’t compete directly. Another — the Justice Department’s objection to Penguin Random House’s purchase of Simon & Schuster — focused on authors who supply books to the publishers rather than on consumers, who are often the focus of merger challenges.
In another case, the Justice Department tried to stop UnitedHealth Group from buying a company on the grounds that it would acquire reams of digital data that could be used against competitors. Regulators have long been concerned about the growing value of personal information to tech companies, but it is 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 UnitedHealth Group deal. That same month, the F.T.C.’s challenge of Illumina’s acquisition also flopped. The agencies could appeal both rulings.
After some early losses, Jonathan Kanter, who is leading the Justice Department’s antitrust division, said in April that he had told his staff to rally by blasting the Tom Petty classic “I Won’t Back Down.”
“We’re going to continue to bring the cases,” he said at a conference. In October a judge ruled in favor of the department’s challenge to the Simon & Schuster deal, which fell apart as a result.
A spokesman for the Justice Department declined to comment.
Agency officials argue they are harking back to an era of aggressive antitrust enforcement — before conservative legal scholars convinced courts in the 1970s to narrow their approach to cases — with lawsuits that use the full weight of the laws that Congress wrote.
“Congress created the F.T.C. to stop unfair methods of competition affecting commerce,” Douglas Farrar, an F.T.C. spokesman, said in a statement. “When we bring cases we are following the laws on the books, and using the tools Congress gave us to protect Americans from illegal business practices.”
Progressives have for years argued that the federal government shied away from filing antitrust lawsuits — and other charges against companies and executives — because it was afraid it could lose. They said the government had instead entered weak settlements with companies that failed to stop rampant consolidation and corporate misbehavior in tech and other industries.
But court losses have real risks, including setting precedents that make it harder for the government to pursue similar cases.
In 2018, for instance, the government asked the Supreme Court to settle a question of whether American Express was violating antitrust laws by prohibiting merchants from nudging customers to use other credit cards with lower fees. The court ultimately ruled for American Express.
At the time, Justice 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, like merchants and credit card holders. In 2020, the government lost a case challenging a travel company merger when a judge cited the American Express decision.
“You do have to be willing to continue to develop the antitrust law,” said Maureen Ohlhausen, a former Republican chair of the F.T.C. who has represented Meta and other companies in private practice. “But it has to be based on a good strong foundation for you to be, one, convincing in the courts 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 have cheered the lawsuit that the F.T.C. filed in July challenging Meta’s $400 million purchase of Within, which makes a virtual reality fitness game called Supernatural. The lawsuit stands out partly because the deal was relatively small and concerned a nascent part of Meta’s business.
But the F.T.C. argued that if Meta was allowed to buy Within, it would kill future head-to-head competition between the tech giant and the start-up’s marquee game. If the deal is blocked, the agency said, Meta can come up with its own virtual reality fitness game or turn an existing title into a formidable competitor. Such arguments over 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 F.T.C.’s lawsuit was filed, Nikhil Shanbhag, an associate general counsel at Meta, said the agency’s arguments were bunk. He said Meta had “looked into building a fitness-specific service and decided we simply weren’t in a position to do so.”
In October, the F.T.C. asked the judge in the case, Edward J. Davila of the U.S. District Court for the Northern District of California, to let it remove some claims in its lawsuit seeking an injunction on the deal. The suit now even more closely focuses on the claim that the deal could hurt future competition. Meta has asked the judge to dismiss the case outright.
Judge Davila is expected to hear arguments from the F.T.C. and Meta over several sessions starting on Thursday. Asked for comment, a Meta spokesman pointed to a statement about the case from November where the company said it believed the evidence would show the benefits of the deal and it was ready to make its arguments in court.