FTC Chair Lina Khan Overturns Antitrust Standards in Court Against Meta

WASHINGTON. Early in his tenure as chairman of the Federal Trade Commission Lina Khan said it would harness the power of the biggest tech companies in a new way.

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

This week, Ms Khan took her first step towards stopping the technology monopolies of the future when sued to block a small acquisition from Meta, the company formerly known as Facebook, or virtual reality fitness startup Within. The deal was significant for the development of Meta the so-called metaversewhich is an emerging technology and far from the mainstream.

In doing so, Ms. Khan has upended decades of antitrust standards in a move that could potentially revolutionize how Washington enforces competition in corporate America. The FTC lawsuit is based on the idea that regulators can enforce antitrust laws without waiting for the market to mature to the point where it becomes clear which companies have the most power. The FTC said such early action was warranted as the Meta deal would likely eliminate competition in the fledgling VR market.

Since the late 1970s, most federal merger challenges have been in large, well-established markets and aimed at preventing already-blatant monopolies. Regulators largely stamped out startup purchases by tech giants, such as Google’s 2006 deal to buy YouTube and Facebook’s 2012 acquisition of Instagram, because those markets were still in their infancy.

As a result, Ms. Khan is faced with an uphill climb. Regulators are reluctant to try to stop corporate mergers, relying on the theory that competition and consumers will suffer in the future. The federal government has lost at least two cases using this strategy in the past decade, including an attempt block a $1.9 billion merger in 2015 among X-ray sterilization providers that the FTC predicts will hurt future competition in regional markets.

The FTC’s lawsuit against Meta in the nascent virtual reality market is “a deliberately experimental case to push the boundaries of merger enforcement,” said William Kovacic, the agency’s former chairman. “Case like that is definitely harder to win.”

The FTC’s actions immediately caused an uproar in antitrust circles and in the technology industry. Silicon Valley tech executives have said trying to block a deal in a nascent tech field could stifle innovation and scare technologists away from bold breakthroughs in new areas.

“Regulators are predicting the future of the markets, which is a very, very dangerous precedent and position,” said Aaron Levy, chief executive of cloud storage company Box. He warned that venture capitalists and entrepreneurs would become wary of entering new markets if regulators prevent companies like Meta from buying startups.

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

“This is such an extreme and unwarranted reaction to a small deal that many tech industry leaders are already worried about what an FTC win will mean for startups,” he said.

For Ms Khan, winning the lawsuit may be less of a priority than showing that it’s still too early to file a case against the tech deal. She said that in the past, regulators have been too cautious about merger interventions for fear of hurting innovation, leading to a wave of deals between tech giants and startups that ultimately cemented their dominance.

“We see that inaction after inaction after inaction can have serious consequences,” she said in an interview with The New York Times and CNBC in January. “And that’s what we’re really trying to change.”

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

Meta said that the FTC is misapplying antitrust laws. The lawsuit focuses on how a merger with Within would eliminate competition, but Meta said the agency is ignoring a large number of companies that also have health and fitness apps.

“The FTC doesn’t have an answer to the simplest question — how can Meta’s acquisition of a single fitness app in a dynamic space with many existing and future players hurt competition?” Nikhil Shanbhag, Vice President and Assistant General Counsel of Meta, wrote in blog mail.

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

The FTC accused Meta of building a virtual reality “empire” starting in 2014. buying an oculusmanufacturer Quest Virtual Reality Headset. Since then, Meta has acquired about 10 developers of virtual reality applications, such as the creator of the combat game Viking, Asgard’s Wrath, and several first-person shooters and sports games.

The FTC said that by buying Within and its VR fitness app Supernatural, Meta would not create its own competition app and deter potential competitors from trying to create alternative apps. The agency said it would slow down competition and consumers.

“This acquisition creates a reasonable likelihood of eliminating both current and future competition,” the lawsuit says. “And Meta will be one step closer to its ultimate goal of owning the entire Metaverse.”

Rebecca Howe Allensworth, a professor of antitrust law at Vanderbilt University, said the FTC’s arguments will face tough scrutiny because Meta and Within aren’t competing with each other and the VR market is still in its infancy.

“The way merger analysis is worth at least 40 years is how much direct competition that merger eliminates from the big picture,” she said.

It will now be up to the agency to convince the judge that its predictions about the Metaverse and the Metapurchase will harm the competition.

“The FTC has the burden of showing, among other things, the reasonable likelihood that Meta would have entered the VR fitness app market had it not acquired Within,” said Diana Moss, president of the American Antitrust Institute.

If the court dismisses the case, Mr. Khan may have set a precedent that will make nascent competition cases more difficult to handle, antitrust experts warn. This can then inspire tech giants to break into new lines of business.

“It’s a precedent system that works both ways — if you win or lose — and sends a signal to the market,” Ms. said. Allensworth said.

The FTC is considering other technology deals, including Microsoft acquisition of game company Activision for $70 billion as well as Amazon merger with One Medical worth $3.9 billion, a national network of primary health care clinics. In addition, the agency was investigating Amazon’s allegations of market monopoly abuse by third-party sellers.

Mrs. Khan appears to be ready for a lengthy legal battle with the tech giants, even if things don’t end up going the FTC’s way.

In her earlier interview with The Times and CNBC, she said, “Even if it’s not a slam dunk case, even if there’s a risk that you might lose, that risk can be of enormous benefit.”