FTC Chair Lina Khan changes antitrust rules by suing Meta

WASHINGTON — Early in her tenure as chair of the Federal Trade Commission, Lina Khan declared that she would harness the power of the biggest tech companies in a radical new way.

“We are trying to look ahead, anticipate problems and take quick action,” Ms. Khan said in an interview last month. She promised to focus on “next generation technologies” and not just areas where the tech giants were already well established.

This week, Ms. Khan took her first step in stopping the tech monopolies of the future when she filed a lawsuit to block a small takeover by Meta, the company formerly known as Facebook, of virtual reality fitness startup Within. The deal was significant for Meta’s development of the so-called metaverse, which is a nascent technology and far from conventional.

In doing so, Ms. Khan has upended decades of antitrust rules, potentially triggering a sea change in the way Washington enforces competition on American business. At the heart of the FTC’s lawsuit is the idea that regulators can enforce antitrust law without waiting for the market to mature to the point where it becomes clear which companies have more power. The FTC said such early action was warranted because the Meta deal would likely eliminate competition in the young virtual reality market.

Since the late 1970s, most federal challenges to mergers have been in large, well-established markets and are aimed at avoiding already clear monopolies. Regulators have mostly approved takeovers of startups by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s 2012 acquisition of Instagram, because those markets were still emerging.

As a result, Ms. Khan faces an uphill climb. Regulators have been reluctant to try to stop corporate mergers on the theory that competition and consumers will be hurt in the future. The federal government lost at least two cases using this strategy in the past decade, including an attempt to block a 2015 $1.9 billion merger between X-ray sterilization providers that the FTC had predicted would harm future competition in markets. regional.

The FTC’s lawsuit against Meta in the nascent virtual reality market is a “deliberately experimental case that seeks to extend the limits of the application of mergers,” said William Kovacic, a former president of the agency. “These cases are certainly more difficult to win.”

The FTC action immediately caused an uproar within antitrust circles and throughout the tech industry. Silicon Valley tech executives said moving to block a deal in an embryonic area of ​​technology could stifle innovation and scare technologists from taking bold leaps into new areas.

“Regulators predicting future markets is a precedent and a very, very dangerous position,” said Aaron Levie, CEO of cloud storage company Box. He warned that venture capitalists and entrepreneurs would be wary of entering new markets if regulators cut off the ability of companies like Meta to buy startups.

Adam Kovacevich, president of the Chamber of Progress trade group, which represents Meta, Amazon and Alphabet, also said the demand would have a chilling effect on innovation.

“This is such an extreme and unfounded reaction to a small settlement that many tech industry leaders are already concerned about what an FTC victory would mean for startups,” he said.

For Khan, winning the lawsuit may be a lower priority than proving that it’s possible to sue a tech deal early. She has said regulators were too cautious in the past to intervene in mergers for fear of harming innovation, allowing a wave of deals between tech giants and startups that ultimately cemented their dominance.

“What we can see is that inaction after inaction after inaction can have severe costs,” he said in an interview with The New York Times and CNBC in January. “And that’s what we’re really trying to reverse.”

Ms. Khan declined interview requests for this article, and the FTC declined to comment on Thursday.

Meta said the FTC was applying antitrust law incorrectly. The lawsuit focuses on how the merger with Within would eliminate competition, but Meta said the agency was ignoring the large number of companies that also had health and fitness apps.

“The FTC has no answer to the most basic question: How could Meta’s acquisition of a single fitness app harm competition in a dynamic space with many existing and future players?” Nikhil Shanbhag, vice president and associate general counsel at Meta, wrote in a blog post.

The company added that it had not decided whether to contest the lawsuit, which was filed Wednesday in the US District Court for the Northern District of California.

The FTC accused Meta of building a virtual reality “empire,” beginning in 2014 with the purchase of Oculus, the maker of the Quest virtual reality headset. Since then, Meta has acquired about 10 VR app makers, including the creator of a Viking combat game, Asgard’s Wrath, and various sports and first-person shooter games.

By buying Within and its Supernatural virtual reality fitness app, the FTC said, Meta would not create its own app to compete and would scare potential rivals away from trying to create alternative apps. That would hurt competition and consumers, the agency said.

“This acquisition poses a reasonable probability of eliminating current and future competition,” according to the lawsuit. “And Meta would be one step closer to her ultimate goal of owning the entire ‘Metaverse.'”

Rebecca Haw Allensworth, an antitrust law professor at Vanderbilt University, said the FTC’s arguments would face close scrutiny because Meta and Within were not in competition with each other and because the virtual reality market was nascent.

“The way merger analysis has been going for at least 40 years is about what kind of head-to-head competition this merger eliminates,” he said.

The onus will now fall on the agency to convince a judge that its predictions about the metaverse and buying Meta would hurt competition.

“The burden is on the FTC to demonstrate, among other things, a reasonable likelihood that Meta would have entered the market for dedicated VR fitness apps, had it not been for the acquisition of Within,” said Diana Moss, President of the American Antitrust Institute.

If the court dismisses the case, Khan may have created a precedent that would make it more difficult to pursue nascent competition cases, antitrust experts warned. That could encourage tech giants to break into new lines of business.

“This is a precedent system that works both ways, whether you win or lose, and it sends a signal to the market,” said Ms Allensworth.

The FTC is reviewing other tech deals, including Microsoft’s $70 billion acquisition of gaming company Activision and Amazon’s $3.9 billion merger with One Medical, a national chain of primary care clinics. Additionally, the agency has been investigating Amazon for claims of monopoly abuses in its third-party seller marketplace.

Ms. Khan appears poised for lengthy legal battles with the tech giants, even if the cases don’t end up going the way of the FTC.

In his earlier interview with The Times and CNBC, he said, “Even if it’s not an easy case, even if there’s a risk that you might lose, there can be huge payoffs to taking that risk.”

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