Meta’s Biggest Legal, Regulatory Questions

We chose Meta formerly Facebook for the company to examine in this and we're going to look at their litigation and policy risks world wide, from antitrust to data privacy to concerns about how social media is harming children. Now, our plan today is to give an overview of the most material leal risks that the company faces.

The FDC has been quietly litigating against the company. You know, we haven't seen very much in the news about this, and as Matt, as you said, it's primarily over the company's acquisitions of Instagram and WhatsApp, and I think it's really this suit is the only significant anti trust risk that Meta faces at least in the US right now.

And just by way of background, this suit was actually filed during the Trump administration, so some time ago, and then Biden's anti trust enforcers at the Federal Trade Commission picked it up and ran with it. And when this suit was filed, Meta was actually still called Facebook. So at least going forward, I'm going to refer to the

defendant as Facebook. And what the FDCs alleged here is that Facebook unlawfully maintained a monopoly position it had attained lawfully in a personal social networking services market in the US, and they did this through a pattern of buying up companies that they deemed to present competitive threats. Now, the FDC also says Facebook imposed some restrictive policies that unjustifiably hindered other potential rivals. But that conduct has kind of ceased.

That was highlighted, and it seesed many years ago. So really the primary issues here are the acquisitions. So what the FTC says is that there was this course of anti competitive conduct for years and the aim of it was to suppress serious competitive threats. So first one they highlight is Instagram, which Facebook bought in twenty twelve, and at the time, Instagram was a competitor in mobile photo sharing, which was becoming a really big deal right around then.

And Facebook actually tried to do this on their own, this mobile photo sharing, but wasn't successful, And according to the FTC, it was quite worried that Google or Twitter or Apple would buy Instagram and then expanded into a bigger Facebook competitor, so it bought the company to prevent that. And then the second acquisition that's highlighted is WhatsApp, acquired

in twenty fourteen and at the time considered a potential competitor. So, I mean, as most people know, WhatsApp is a messaging app, But what the FTC says is that it really had all the ingredients it needed to move into social networking,

and Facebook was worried that it would. So what the FTC says is that the harm caused by these i'll call them defensive acquisitions, that this has harmed users of personal social networking in the US because they're deprived of the benefits of competition, which could include increased choice, better quality,

more innovation, things like that. And the FTC says this also impacts advertising prices because by suppressing and neutralizing the emergence and growth of personal social networking rivals also suppresses meaningful competition in the sale of advertising. So, in other words, more competition and personal personal social networking is likely to mean more competition in the provision of advertising. So essentially that Matt is the suit in a nutshell.

that tend to support that. Even Mark Zuckerberg had a document that said it's better to buy than compete. That's not helpful, but you know, they also then have to argue with theoretical that consumers and the social media market would have been better off if Facebook hadn't bought the companies. And I think that's where it could get tough, because Facebook didn't buy these companies and then just kill them off. Facebook devoted a lot of resources to them and developed

them both into the popular products they are today. And there's no guarantee that either one of them would have thrived without those resources behind them. I mean, they were both really, really small when they were acquired, and Instagram had eight employees and had yet to be profitable at the time that Facebook picked it up, So who knows

what would have happened there. And there is some precedent that's been set in the big antitrust case that a lot of people point to against Microsoft that in the two thousand early two thousand there was a decision and there's some helpful precedent from that case for the FTC that says that the FTC doesn't have to prove that these companies would actually have developed into viable platform substitutes, but just whether the exclusion of the threat contributed significantly

to Facebook's continued monopoly power. But I still think that that's something that's very difficult to show when you think about the digital landscape and how it changes, including the rise of TikTok. Since this suit was filed, I think it's still hard to say, hey, because they bought these companies that contributed to their current dominant position in social networking.

And I should just add on this, Matt that even if the FDC did win on liability, I think unwinding the deal is very unlikely, again because of Microsoft precedent. That court said it cautioned against what it called a drastic remedy because of the uncertainty about the long term efficacy of a business that gets carved out, And certainly I think a judge would really worry about that now, because these are two very popular products, and who knows what would happen if Facebook had to carve them out

and sell them to somebody else. So, and the last thing I would say about remedies is that even if the FDC were to win on liability, there are less drastic remedies that could be imposed short of a breakup, like data sharing or interoperability requirements. So at the end of the day, I question even whether the FTC can win on liability, but even if it did, I highly doubt what will end up happening as a breakup.

to trial. And I think that can get done in twenty twenty four, and assuming met is unsuccessful, because I think they have a shot actually possibly a disposing of the case on summary judgment. But if they don't, that could probably get done next year, which could put trial in early twenty twenty five.

Some of them would impact Facebook Meta for sure, but they really haven't gotten any traction, and I don't really think they will, given that Congress is divided, and I think there are other matters that are likely higher on the priority list for those that are in a decision making position in the House of Representatives. But I'm just laying out what's out there right now that would impact

META if it went forward. You do have proposals for a Digital Platform Commission that would establish a commission to regulate digital platforms, and it would give that commission pretty broad authority to issue rules and recommend standards for how large tech platforms should operate. But honestly, that kind of expansion of the administrative state is unlikely in this Congress, particularly given current efforts in some quarters to actually reduce

the authority of the FTC. A couple of bills that would impact Meta. One would require data portability and interoperability buying among platforms. Another one would provide any anti exemption for news organizations that would allow collective bargaining by those organizations against the platform that use their new stories. So certainly that would impact Meta. But again, these bills have kind of been around for several years, they haven't really gained traction, so I don't see the threat of new

laws as a significant one right now. I think the FTC's lawsuit is the more immediate risk with respect to antitrust at least, and then I think to close up. The only other thing I should add is that for acquisition activity, I think, you know, Meta should continue to expect a skeptical and difficult FTC, at least in this administration, to throw up some hurdles. You know, we already saw the FTC challenging Meta's acquisition within it was unsuccessful and

Meta has bought the company. But I think going forward, if Meta tries to do other small deals or big deals, the FDC is probably going to carefully scrutinize those and throw some hurdles up in its way.

new content moderation and new competition rules. Now, the content rules which were brought in by the Digital Services Act do face an early test that that poses some risk if regulators managed to sort of broaden the scope of a platform's duties in connections with in relation to sort of harmful harmful content on the networks. Now, the competition rules, which are contained in the Digital Markets Act take effect in March, and those will focus further attention on how

Meta separates data across its various platforms. Now, the DMA looks to significantly the market dominance of large tech platforms, and it would do this by sort of erecting barriers to the practices that Meta and other large tech firms

have used to build those dominant market positions. And then meanwhile, in the back of all this, it is sort of assumed to be finalized AI regulation that could coultail Meta's roll out of sort of large language model systems in the U. So, yeah, I think I think it's fair to say there's a lot going on in Europe that could potentially throw throw up some more blocks to Meta over the near term.

regulated as a gatekeeper. Now, there is a long list of dues and don'ts that gatekeepers will need to comply with by March of next year. Now, the DMA restricts preferential display and ranking. It prohibits the exclusive pre installation of apps, and there's also an obligation to share a click and query data and searches with rivals. And there's

also the prohibition of wide parity clauses. Now, non compliance is going to be pretty stiff because the European Commission is going to be able to assess a spine of up to ten percent of a gate keeper's annual global revenue, and then multiple infractions can lead to the possibility for

structural remedies such jet the breakup. Now, Meta, I think is going to rely on user consent to mitigate a lot of the risks from the DNA, and I think what regulators are going to focus on is whether users data is being shared across platforms as well as how Meta is obtaining consent for the use of third party data, and finally, whether it's tying its marketplace to its dominant

social media networks for Instagram, Facebook. So I think we're going to buy as twenty twenty four goes along, we're going to see Meta in the sort of regulatory crosshairs of DMA enforcement makes sense.

platform to monitor for illegal content. So instead the platform is just required to quickly remove objectionable content once it is made aware of it. However, there is going to be this general duty to mitigate against systemic risks, and here's where things might get a little bit tricky. Now that mitigation obligation isn't going to kick in for a while, but the European Commission, which has direct DSA enforcement powers, has already raised this mutigation issue in the wake of

the violence in the Middle East. So after the violence erupted, there was an optick and objectionable content posted across social media platforms. So what we're going to see is is how broadly this mitigate these midilgation rules are stretched here. And while we don't think it's going to lead to this general duty to monitor, it could nonetheless result in some additional content moderation guidelines for metas platforms over medium term.

Near term though DSA is mostly going to pose headline risk for Meta and for other social media platforms.

we see very limited risk of operational disruptions. And also Meta's decision recently to offer a subscription model in Europe for users that do not want the free ad space accounts, and that's going to offer for Instagram and Facebook users. I think that removes some of the GDPR scrutiny now, although the move will almost certainly be challenged by privacy advocates. I think these further inquiries are going to focus sort

of on how content is structured. I think on the whole these are going to be much less disruptive than the GDPR inquiries that Meta has weathered today is I do think it's moving beyond GDPR as being a persistent risk.

the chat GPTs that open ai has developed. Now, these transparency obligations would include requiring information on how the models were trained, a summary of what data was used to train them, and it would require these systems to have a copyright policy. Now, of course, there's been a lot of copyright noise for a lot of these systems because a lot of the right holders are worried about the ways that they were changed trained and are seeking compensation

for that. Now, I should note that these still rules are still a long way from taking effect, and there's a chance that the obligations are going to be watered down. I think in the meantime, it's safe to say that Meta and pretty much any other tech platform investing in AI is going to have to pay attention to how the regulatory framework shapes up. But I think let's leave it there for Europe and let's go back to the US. Now, Matt in the US after the Cambridge Analytica Meta matter.

Meta entered into a five million dollar settlement with FDC back in twenty twenty. I don't think that's the end of Meta's leader risk in the issue. So what is happening now?

The FTC said that that they've conducted the first assessment under Meta's privacy program that it promised as part of that settlement, and the FDC found non compliance there So, instead of bringing a new action for non compliance, the FTC looked into its book of statutory Powers and it found that it had the power to modify previous consent decrees, and so in May, the FTC proposed a number of changes to that settlement, including a total ban on monetizing

data from user users under eighteen. The FDC would also bar Meta from releasing any new products, any new features, any new services until an Assessor confirms that that medicine compliance with this privacy program. And so this is kind of a big deal for the company when when you

have a federal agency imposing bans like that. Meta raised this on its last earnings calls as a material risk in the near term, and now the company's sort of throwing the kitchen sink of its litigation resources at trying to stop it. Earlier this fall, the company ran into the court that that blessed this twenty twenty settlement agreement, and it asked the court stop, you need to stop this,

stop the FTC process before it can start. This is your jurisdiction, Court, It's not the FTC's role to come in and change an agreement that you already endorsed. But in November, the court refused to do so. It rejected Meta's request. The court said it didn't think it has jurisdiction. And so now we're sort of at the next step of Meta's efforts to try to stop the FTC process before it starts. Meta filed a new lawsuit just a week or two ago in federal court, saying the FTC

is unconstitutional and it's using an unconstitutional process. It seeks a stay or an injunction to stop the process based on that claim. It also has has appealed the other judges ruling when he refused to stop the FDC, and it just a day or two ago filed another stay related to that, asking that court to hit pause on the FDC's proceeding. So the FTC's response, I mean, Meta's response to the FTC is due at the end of January, and metas sort of fighting hard to not even let

that process start. I think what we should see two rulings from courts in January and whether it will hit whether those courts will hit pause on the process. I'm skeptical. I think that that's a hard thing for META to win. To stop the FTC process before it starts, Meta will have to show that it both that it's likely to prevail and that it's irreparably harmed. And I think that's going to be tough to do both because some of

its constitutional theories are sort of novel. They're not necessarily losers, but they're not slammed dunks. But the show it's a reparably harmed will be tough because anything the FTC does, Meta can challenge it after the fact it can file a lawsuit in an appeals court and then overturn it so it can remedy the harm to it, at least in some respect. I think for that reason, most likely Meta loses has a tough January. Loses in these two courts where where it's seeking an immediate stay, the FDC

moves ahead with its process, modifies the settlement agreement. Meta sues then in an appeals court, and then I think it's going to have a very strong case because the FDC really is using its powers in a novel way, and this is not a good time for agencies to be stretching their powers in novel ways. I think a court is very likely to strike this down. So look for a bumpy road for Meta in the near term

on this early in twenty twenty four. But I think in the end it's not going to be a material risk for the company.

I think the efforts to move anything forward. And so I think there's, you know, in theory that could be a big deal if they ever got their act together on limiting how the companies use data for advertising. I just don't really see a path, especially as we head into an election year, for Congress to do anything comprehensive there. There is still again, the Federal Trade Commission has started a rulemaking to say, Okay, Congress, you're not going to

in this area, we'll do it. We'll use our power to address unfair and deceptive practices to make a bunch of rules on this stuff. That really hasn't advanced at all this year either. So I think that's more likely than not going to be a priority. If President Biden wins a second term, you could see the Federal Trade Commission speed up its efforts to try to make rules in this area. Traditionally, the FTC hasn't really acted through rulemaking very much, and so it's sort of a novel

area for it to be acting there as well. But I would expect that won't be real busy in twenty twenty four. I expect it to heat up in a second Biden term most likely. So I placed that in the category of things to watch keep an eye in. Could be a big deal if they ever got some momentum, but so far not much moving.

of stalled at this point. And as I said, we're moving into an election year. But if anything's going to pass on data privacy related, it's going to be focused on kids, I would say, at least for the next for this year and next. I don't really see this as as you know, business model disruptive to to META. I see it as adding compliance costs. It would require them to to to take additional interests to to act

in the best interests of kids. Uh that Federal Trade Commission could bring a lawsuit if they don't comply with it. It would add transparency duties and things along those lines. So added compliance risk and costs, those are things META can can bear. I think as long as you're not going after the business model, I think that's that's it's something the company can manage. And related to that, the the other key thing to watch for for kids here.

There is litigation in the Northern District of California Federal court out there that has has multiple prongs, all focused on basically the claim that that social media is too addictive and it's harming kids. And so we've seen lawsuits out there brought by over i think forty attorneys general states across the United States saying that that that social media,

that meta has misled about the risk to kids. You see lawsuits brought by school districts across the country saying that that social media has inflicted harm on youth and raised the cost of of of all the health issues related to that. And then you see lawsuits brought from by by children themselves saying that this is this is a defective product and using product liability law to go

after the company. And we had an important development in that litigation that that product liability litigation that's really leading there on this issue in November when when when the social media companies acting together had had filed the motion to dismiss the case and the judge refused to do that. She led it advance. But I think there was an

important win in that as well. The court said that both Section two thirty, the liability shield that protects these companies, and the First Amendment carves away cuts out a lot of these the claims in these lawsuits, and it cut out a lot of the claims about the most important

functions to the company's business model. So things like the algorithm in terms of generating content that it's most likely to draw people to keep a youth to keep watching or keep scrolling, stuff like that that the court threw out. And so it was a loss for the company in the sense that, look, this litigation is going to continue and it you know, it could be could be significant down the road. But at the same time, the most business model disruptive elements of that case really got tossed

in November. So in that sense, I think it's much less threatening to to Meta and to other social media companies.

be opened to to all. There's a concern about the the the companies engaging in censorship of certain views that they may not favor, and and so there's a push to to take their ability to control the content away from the companies and and just make make the platforms open, you know, effectively common carriers and and you know, this is a risk for for the companies in the sense that, look, they make so much money that the key to their

business is their digital ad business. And and if if if their platforms are overwhelmed by content that they themselves can't control. That risks causing advertisers or users to to to look elsewhere, and so control really is important. And and so the companies come back and say, look, we have we have a First Amendment right to control what is on our platform, just as a newspaper has the ability to control what stories it prints in its daily newspaper.

And so that's really fundamentally the issue. Can states regulate the platforms to take away control or does the First Amendment right to free speech limit the state's ability to regulate in that space. So look for an argument here either in February or March that draws a lot of headlines. You would then see a decision from the Supreme Court,

very likely in May or June. What's the outlook. I give the companies a slight edge to make that First Amendment argument and to strike down these state laws, this form of state regulation. I think there are three justices that are going to be pretty sympathetic to Texas and Florida. Here, Justices Thomas, Alito and Gorsic might be vote in their favor. I think that the states, though, are going to have a tougher time getting two more votes to get to

a majority. I'm pretty confident that the Democratic pointed joint Justices Justices Soda, Mayor, Kagan, and Jackson will be on the company's side here, and that leaves Justices Roberts, Kavanaugh, and Barrett in the middle. And when you look at a vote that they took earlier in this case and whether to hit pause on the Texas law to let it not take effect now, they all voted to block that law from taking effect. I think that's the best

indicator of how they're likely to evaluate this case. So going into it, I see that Texas and Florida the states as slight underdogs in this case.