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

President Biden’s antitrust regulators have adopted a mantra: To win, they must 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 brought risky cases that use new legal arguments to stop corporate mergers and promote competition. Their goal is to expand the use of antitrust law beyond the ways it has been applied for decades, including against the largest technology companies.

That strategy will be put to the test in a federal courtroom in San Jose, Calif., on Thursday, when FTC lawyers plan to use little-used legal arguments to urge a judge to close down Meta, its parent company. from Facebook, to block. buying a virtual reality start-up called Within.

In the case, which represents the first challenge for a tech giant developed under FTC chair Lina Khan, the agency is using an unusual argument that Meta’s deal would hurt potential competition in a market for virtual reality products that could be robust in the future. can be. In contrast, most antitrust cases have traditionally focused on how a deal would hinder competition in an area that is already mature.

Given how new the FTC’s argument is, it’s unclear whether 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 is a breach of the law” and agencies “think the current law makes it difficult to reach, it’s a huge advantage to still try.”

She added that any losses in court would send a signal to Congress that lawmakers should update antitrust laws to better suit the modern economy. “I’m certainly not one to think that success is defined by a 100 percent record,” she said.

Under the Biden administration, the Justice Department has filed suit to block eight mergers and an alliance between American Airlines and JetBlue without announcing a settlement, while the FTC has filed eight lawsuits against corporate mergers, including Meta’s virtual reality deal. 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 count by The New York Times. (Companies sometimes settle with the agency instead of going to court, or back off deals when it’s clear the agencies intend to sue.)

At least some of the cases test the limits of antitrust law. One, where the FTC tried to stop Illumina, a maker of gene-sequencing products, from buying a small company that makes a cancer-detection test, was unusual because the two companies were not in direct competition with each other. Another — the Justice Department’s objection to Penguin Random House’s purchase of Simon & Schuster publishing house — targeted authors who supply books to the publishers rather than consumers, who are often the focus of merger challenges.

In another case, the Justice Department tried to stop UnitedHealth Group from buying a company because it would acquire large amounts 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’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 UnitedHealth Group deal. That same month, the FTC’s challenge of the Illumina takeover also flopped. The agencies could appeal both rulings.

After some early losses, Jonathan Kanter, who heads the Justice Department’s antitrust division, said in April that he had instructed his staff to rally by destroying the Tom Petty classic “I Won’t Back Down.”

“We will continue to file the cases,” he said at a conference. In October, a judge ruled in favor of the Justice Department’s challenge to the Simon & Schuster deal, which fell apart as a result.

A Justice Department spokesperson declined to comment.

Bureau officials claim they hark back to an era of aggressive antitrust enforcement — before conservative jurists convinced courts to limit their approach to cases in the 1970s — with lawsuits using the full weight of laws Congress has written.

“Congress created the FTC to end unfair competitive practices that affect commerce,” Douglas Farrar, a spokesman for the FTC, said in a statement. “When we bring cases, we follow the laws on the books and use the tools Congress has given us to protect Americans from illegal business practices.”

Progressives have argued for years that the federal government shied away from filing antitrust suits—and other charges against corporations and executives—because it was afraid of losing. They said the government had instead made weak settlements with companies that failed to stop rampant consolidation and corporate misconduct in technology and other industries.

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

For example, in 2018, the government asked the Supreme Court to resolve whether American Express violated antitrust laws by prohibiting merchants from urging customers to use 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 credit card holders. In 2020, the government lost a lawsuit against a travel company merger when a judge cited American Express’ decision.

“You do have to be willing to develop the antitrust law,” said Maureen Ohlhausen, a former Republican chairman of the FTC who has represented Meta and other companies in private practice. “But it has to be based on a good, strong foundation to be convincing in the courts on the one hand and justify the spending of resources on the other.”

Allies of Ms Khan and Mr Kanter said the risks were worth taking to help modernize antitrust law. They have welcomed the lawsuit filed in July by the FTC against Meta’s $400 million purchase of Within, a virtual reality fitness game called Supernatural. The lawsuit is notable in part because the deal was relatively small and involved an emerging part of Meta’s business.

But the FTC argued that if Meta were allowed to buy Within, it would kill future head-to-head competition between the tech giant and the startup’s big game. If the deal were blocked, the agency said, Meta could invent its own virtual reality fitness game or turn an existing title into a formidable competitor. Such arguments about competition that could theoretically arise over an emerging technology in the future are less common than battles over established parts of the industry.

In a blog post after the FTC’s lawsuit was filed, Nikhil Shanbhag, an associate general counsel at Meta, said the agency’s arguments were bogus. He said Meta had “looked at building a fitness-specific service and decided we simply weren’t capable of doing that.”

In October, the FTC asked the judge in the case, Edward J. Davila of the United States District Court for the Northern District of California, to quash some claims in the lawsuit seeking an injunction against the deal. The lawsuit now focuses even more on the claim that the deal could harm future competition. Meta has asked the judge to dismiss the case out of hand.

Judge Davila is expected to hear arguments from the FTC and Meta in several sessions beginning Thursday. When asked for comment, a Meta spokesperson pointed to a statement on the matter from November, in which the company said it believed the evidence would demonstrate the benefits of the deal and was ready to make its arguments in court.