AAI Asks D.C. Circuit to Overturn Dismissal of States’ Monopolization Case Against Facebook (New York v. Facebook)

AAI has submitted an amicus brief urging the D.C. Circuit to overturn a district court ruling granting Facebook’s motion to dismiss a monopolization lawsuit brought by 46 states, the District of Columbia, and the territory of Guam (“States”).

In New York v. Facebook, the States allege that Facebook acquired some of its potential rivals and intentionally injured others as part of a coordinated scheme to deter future entry in the personal social networking services market.  The alleged two-prong “buy or bury” scheme was comprised of actual and attempted exclusionary acquisitions, a deceptive “open first–closed later” network-access strategy, discriminatory API-access policies, dealing on anticompetitive terms, and sabotaging rivals’ content.  Although some of the alleged acts included in the scheme injured or eliminated existing rivals, the alleged goal of the scheme was to build a competitive “moat” around the company in the markets where it competes, in an effort to thwart nascent and future competitors and deter entry.

The district court dismissed the States’ claim because it believed the States did not allege harm to competition that could be redressed with injunctive relief.  It held that the alleged discriminatory API-access policies, standing alone, were not illegal as a matter of law; they were only potentially illegal to the extent they were actually implemented in specific instances, and here the last specific instance in which the policies were allegedly implemented occurred five years ago.  Therefore an injunction would be inappropriate because it would not remedy ongoing and contemporary harm.

The AAI brief calls attention to four errors in the district court’s analysis.  First, the district court failed to evaluate the alleged “buy or bury” scheme as a whole, as Supreme Court law requires.  It reviewed the alleged exclusionary acquisitions separately from the alleged conduct, notwithstanding that the States allege they were part of a unified scheme.  The district court’s improper approach led to its second error, which was to misclassify conditional dealing allegations as a refusal to deal.  The court treated the specific instances in which Facebook allegedly revoked network access to existing competitors as alleging refusals to deal harming existing competitors, when their relevance to the scheme was that they deterred future entrants.  The harm to existing competitors was a means to that end, not the end itself.

Viewed as a coordinated scheme, the States’ allegations make more sense as conditional dealing because of how they fit together with the alleged acquisitions.  Both acquisitions and conditional deals give a monopolist power to shape future entry decisions; refusals to deal eliminate any relationship the monopolist might lever to steer the other firm’s future behavior.  Moreover, the dealing allegations are clearly conditional: they allege that Facebook is willing to deal with developers and other complementors on the platform provided they promise not to facilitate entry into markets where Facebook competes, or to enter themselves.  Enjoining that kind of behavior does not trigger the same policy concerns that courts have raised in cabining liability for unilateral refusals to deal.

The district court’s third error was to fail to properly credit the States’ “open first-closed later” strategy.  The States allege that Facebook pledged a level playing field for apps that compete with Facebook as a means to attract valuable content and then reneged on its promise once the market tipped in its favor.  In a network market, profiting from dishonesty after inducing reliance on an open system is a well recognized form of deception, and courts assume that deception can support a monopolization claim on a motion to dismiss because it is categorically incapable of generating procompetitive benefits.

The district court’s fourth error was its failure to recognize that injunctive relief can redress ongoing harm.  It’s distinction between “having” and “implementing” anticompetitive policies has no basis in antitrust law; both policies and particular acts can support a Section 2 claim if they cause anticompetitive effects.  Moreover, deception is a “particular act” that can support a monopolization claim.  If the States’ allegations had been properly credited, the district court would have realized that injunctive relief can remedy ongoing harm by reopening an unlawfully closed system.

The brief was written by AAI Vice President of Legal Advocacy Randy Stutz, with assistance from AAI Vice President of Policy Laura Alexander and several AAI Advisory Board members.