FTC’s Antitrust Complaint Against Facebook Highlights Another Missed Opportunity to Address Big Tech’s Anticompetitive Activities Through Patent Reform

On August 19, the Federal Trade Commission (FTC) filed a first amended complaint for injunctive and other equitable relief in the U.S. District Court for the District of Columbia seeking a judgment that would split Instagram and WhatsApp away from Facebook as punishment for the social media giant’s alleged violations of antitrust law. The complaint, which traces many of the same arguments raised in a previous FTC suit that was dismissed by the District of Columbia this June, is yet another reminder that the current wave of antitrust enforcement against Big Tech has been an inevitable result of abysmal reforms of the U.S. patent system that have taken place since the mid-2000s, especially those reforms creating the Patent Trial and Appeal Board (PTAB) and turning Section 101 subject matter eligibility analysis into “validity goulash.”

According to news reports, the amended complaint recently filed by the FTC includes nearly 30 additional pages of allegations that were drafted mainly to address a ruling by U.S. District Judge James E. Boasberg of the District of Columbia, who dismissed the FTC’s first complaint this June. These additions include both an identification of Snapchat as Facebook’s next-largest competitor in the personal social network sector, as well as detailed numbers on Facebook’s engagement with its user base that are redacted in the public version of the complaint. Like the December complaint, the FTC maintains that the relevant market for personal social network services, excluding similar networks like LinkedIn and NextDoor that connect users based on profession or residential neighborhood. It also heavily leans heavily upon allegations of anticompetitive activities surrounding Facebook’s acquisition of previous rivals Instagram and WhatsApp.

And yet, anyone who has followed developments within the U.S. patent system has to be struck by the fact that Facebook’s dominance in social media has at least as much to do with the inability of smaller competitors to protect their more innovative Internet-based services through patent rights as that dominance has to do with Facebook’s merger & acquisition activities. That’s a reality that was acknowledged by IPWatchdog back in 2017, when this blog profiled the many innovative features developed by Snap that Facebook copied with absolute impunity. While other Big Tech entities like Google may have played a bigger part in patent reform, Facebook is a member of United for Patent Reform, a group that supports reduced discovery in patent cases, more stringent patentability standards and other patent reforms that make it harder to enforce patent rights against infringers.

FTC Complaint Misses Obvious Impacts of Patent Reform on Competitors

A quick survey of some of the FTC’s own language from its amended complaint shows that Facebook’s anticompetitive activities involve far more than mere mergers:

Facebook’s internal documents confirm that it is very difficult to win users with a social networking product built around a particular social ‘mechanic’ (i.e., a particular way to connect and interact with others, such as photo-sharing) that is already being used by an incumbent with dominant scale. Oftentimes, even an entrant with a superior product cannot succeed against the overwhelming network effects enjoyed by an incumbent personal social network. (emphasis added)

Antitrust experts often come up against the subject of patent rights, especially in the context of standard-essential patents (SEPs). Although Facebook’s social media business doesn’t overlap with technical standards, it’s confounding to consider why the FTC would file an 80-page complaint arguing that Facebook squeezed out innovative competitors without mentioning the word “patent” a single time, despite consistent acknowledgements by the FTC that smaller innovators need help to compete with market incumbents.

Unable to maintain its monopoly by fairly competing, the company’s executives addressed the existential threat by buying up new innovators that were succeeding where Facebook failed.

The complaint assumes that Facebook’s major anticompetitive activity is an extensive buy-and-bury scheme without once considering the impact of Facebook’s activities at the U.S. Patent and Trademark Office to knock out patent rights owned by innovative competitors. According to Unified Patents’ Top PTAB Parties list, Facebook, WhatsApp and Instagram have filed a total of 216 petitions at the PTAB. Although there is some overlap in those petitions, Lex Machina shows that Facebook, Instagram and WhatsApp have combined for a total of 138 PTAB petitions,  23% of which have led to findings of all challenged claims being unpatentable.

Voxer: One of Many Innovative Competitors Targeted by Facebook

The FTC’s complaint even mentions smaller competitors that have been targeted by Facebook at the PTAB without ever once alluding to such suits. The amended complaint notes that, in January 2013, Facebook cut off its application programming interfaces (API) from Voxer, a mobile voice messaging app, allegedly to prevent competition from that app. The FTC fails to mention, however, that Voxer was targeted in five petitions for inter partes review (IPR) filed by Facebook at the PTAB. Those IPRs have all been filed in the past year, well after Facebook allegedly cut off its APIs to Voxer in 2013, but according to AIPLA’s 2019 Report of the Economic Survey, the average cost of defending a single IPR through an appeal to the Federal Circuit is $451,000. The IPRs filed against Voxer all failed at the institution phase, but the average cost of defending a single IPR through the petition filing is $114,000, an average cost that grows to $224,000 through the end of motion practice. It can be safely assumed that Facebook bleeding Voxer for more than half a million dollars by filing IPR petitions that had no meritorious claims was likely detrimental to Voxer’s business interests.

Facebook could merely wait for an app built for Platform to gain widespread adoption, then either build a competing app or reap the benefits of that popular app’s user engagement, including valuable new social data for Facebook. (emphasis added)

Once again, the FTC gets tantalizingly close to realizing that much of the actual problem propping up Facebook’s monopoly has been its efforts to copy competitors, a Big Tech business model known as efficient infringement. Time and again, the FTC notes that Facebook’s social media platform failed to remain innovative during the nascent days of the mobile smartphone era, yet the federal agency evinces zero understanding that this would also mean that “build[ing] a competing app” would necessarily mean that Facebook was copying competitors, which is made clear by the company’s efforts to copy Snap.

Given these mounting consecutive failures, Facebook justifiably feared that its personal social networking monopoly, and its enormous advertising profits, would be threatened by a mobile-first competitor emerging and gaining traction by connecting users in innovative ways and exploiting mobile phones’ photo or messaging capabilities. Such an entrant could substantially threaten Facebook’s advertising profits. (emphasis added)

Again, not once does the FTC’s 80-page complaint ever note Facebook’s efforts to knock out its competitors’ IP, or even mention the word “patent,” despite every indication that the FTC realized that smaller competitors needed some form of protection to protect the innovative nature of their businesses and compete on a level playing field.

Big Tech Antitrust Enforcement Wouldn’t Be Necessary with Strong Patent Rights

The blind eye that antitrust regulators have been turning toward Big Tech’s patent killing activities would be laughable if it wasn’t so frustrating. The recent legislation introduced in Congress to reduce Apple’s anticompetitive app store practices? That probably would never have been needed if Smartflash, the inventor of data storage and access systems that Apple’s App Store was found to willfully infringe and whose patent rights were obliterated by Apple through questionable machinations at the PTAB, had its patent rights respected. Last December, 10 state attorneys general filed an antitrust suit against Google targeting its anticompetitive practices in online search advertising. Google didn’t invent search advertising, but the Internet giant did leverage PTAB trials to knock out seminal online search advertising patent claims owned by B.E. Tech, preserving many billions in Google’s corporate value while destroying the business interests of an innovative competitor. Earlier this month, B.E. Tech and inventor M. David Hoyle filed a Bivens action lawsuit naming several former USPTO officials, including Google’s former Head of Patents and former USPTO Director Michelle K. Lee, for rigging proceedings at the PTAB on behalf of Google, one of the agency’s largest stakeholders.

Antitrust suits may eventually be successful at splitting Big Tech giants into smaller firms, but none of these efforts does anything to actually ensure that the resulting markets will allow smaller competitors to protect their innovations against market incumbents that, while smaller, will still have market caps dwarfing small innovators and independent inventors. The sad truth of the matter is that Apple wouldn’t dominate app stores, Google wouldn’t dominate online search advertising, and Facebook wouldn’t dominate social media if the entire U.S. federal government hadn’t completely turned the patent system on its head over the past two decades.

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Author: nextnewmedia
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