False advertising-based antitrust claims against Facebook survive motion to dismiss

Klein v. Facebook, Inc., 2022 WL 141561, No. 20-CV-08570-LHK (N.D. Cal. Jan. 14, 2022)

Once in a blue moon, a false advertising-based antitrust claim survives a motion to dismiss in a circuit that imposes a list of excessive requirements on such claims.  That time has come for Facebook. Consumers and advertisers adequately alleged that Facebook has monopoly power in social network/social media (consumers) and social advertising markets. Though I’ll detail the advertising-based claims below, I will also note that the court did dismiss claims based on Facebook’s “Copy, Acquire, Kill” strategy as untimely. Advertiser claims based on Facebook’s Network and Bidding Agreement with Google also survived, while the court dismissed consumers’ unjust enrichment claims with leave to amend.

Plaintiffs successfully alleged that “Facebook acquired and maintained monopoly power by making false representations to users about Facebook’s data privacy practices.” The complaint pled a lot of specifics about how much consumers cared about privacy; how much Facebook advertised its privacy practices as better than they were; and how bad they actually were.

False advertising can violate the Sherman Act if a monopolist’s representations about its own products or its rivals’ products “were [1] clearly false, [2] clearly material, [3] clearly likely to induce reasonable reliance, [4] made to buyers without knowledge of the subject matter, [5] continued for prolonged periods, and [6] not readily susceptible of neutralization or other offset by rivals.”

Falsity: There’s a lot of detail I’m skipping, but in essence, Facebook knew that users wanted privacy and advertisers wanted users not to have privacy, so it concealed the extent of its data use, allowing it to “beat out companies that were truthful about their user data practices or did not collect and sell user data.” “Indeed, Facebook’s initial success in the Social Network and Social Media Markets arose directly from competitors’ failure to keep users’ data private,” particularly Myspace’s. Representative Zuckerberg quote (of which there are many): “I founded Facebook on the idea that people want to share and connect with people in their lives, but to do this everyone needs complete control over who they share with at all times.” Meanwhile, it was collecting and selling user data to third parties in ways that did not match its public representations. E.g., it used Beacon to track users who clicked “No, Thanks” to purportedly opt out; provided user data—and the data of users’ friends—to third party developers despite claiming in multiple fora that “Facebook does not give advertisers access to people’s personal information”; etc. etc. Even after the 2011 FTC settlement, it deceptively tracked users and gave data to third party developers.

The complaint also alleged in detail how these deceptions helped FB obtain and maintain monopoly power. For example, it defeated Google+ in part because of privacy concerns, along with network effects. In fact, “Facebook realized that it could not allow users to find out about Facebook’s privacy practices while Google+ was a viable alternative,” e.g. an executive stating that “it would be unwise to remove privacy protections because ‘IF ever there was a time to AVOID controversy, it would be when the world is comparing our offerings to G+.’” The executive stated that FB could remove those protections after “the directive competitive comparisons begin to die down.”

This “clear[]” falsity was alleged with sufficient particularity. Analogizing to securities fraud, the court required clear falsity to be a material misrepresentation/omission that was capable of objective verification, as opposed to puffery. “Indeed, the Ninth Circuit’s statement that misrepresentations are anticompetitive only if they are ‘clearly false’ and ‘clearly material’ mirror the basic requirements of a securities fraud claim.” Likewise, Rule 9(b) pleading requirements provided a structure for identifying the requisite clarity. Although several of the representations identified were puffery (“[k]eeping the global community safe is an important part of our mission – and an important part of how we’ll measure our progress going forward”), many were not, specifically representations that FB wasn’t sharing private information with third parties; statements about the Beacon tool; and statements that FB didn’t use cookies to collect users’ data for commercial purposes.

Were the claims timely? Non-original observation: If techniques are used to obtain monopoly power, that seems inherently in tension with requiring claims to be brought very quickly. Anyway, the claims weren’t time-barred on the face of the complaint. The limitations period is four years, but the “period of limitations for antitrust litigation runs from the most recent injury caused by the defendants’ activities rather than from the violation’s inception.” To qualify as an “overt act,” the act that restarts the limitations period must satisfy “two criteria: 1) It must be a new and independent act that is not merely a reaffirmation of a previous act; and 2) it must inflict new and accumulating injury on the plaintiff.” (The argument that each misrepresentation about privacy is a mere reaffirmation seems inherently in tension with the big claim of big tech that competition is "only a click away," since continued belief in the representations is necessary to avoid that click.)

The relevant date here was December 3, 2016, and the consumer plaintiffs adequately alleged at least two false representations after then. First, on February 2, 2017, Facebook stated in an SEC filing that Facebook provides only “limited information to [third party application developers] based on the scope of services provided to us.” Second, in March 2018, Zuckerberg called the Cambridge Analytica incident a “mistake,” pledged to take action against “rogue apps,” and stated that “[w]e have a responsibility to protect your data, and if we can’t then we don’t deserve to serve you.” These were adequately alleged to be clearly false, since the 2017 statement “would have given reasonable users the impression that Facebook was not providing third party applications with private information,” whereas Facebook had in fact provided users’ private information to numerous third party applications, including applications for which users were not registered. “For example, although Cambridge Analytica had only 270,000 users, Cambridge Analytica ‘was able to access the personal data of up to 87 million Facebook users.’” Zuckerberg’s statement likewise would have given reasonable users the impression that Cambridge Analytica was a “rogue app” and that Facebook had not been systematically providing users’ private information to third party application developers, but at least 10,000 applications had been able to access similar data for the entire period since the FTC settlement.

FB argued that its false statements after 2016 were mere reaffirmations of a previous strategy, not new and independent acts.  But an act is not a reaffirmation “simply because the defendant has previously committed the same type of act as part of a unified anticompetitive strategy.” The Ninth Circuit has clearly held that “if a defendant commits the same anticompetitive act multiple times, each new act restarts the statute of limitations for all the acts.”

The complaint also sufifciently alleged that the new false representations allowed Facebook to maintain a “critical mass of users” “by convincing users that Facebook was protecting their data.” After all, “improperly prolonging a monopoly is as much an offense against the Sherman Act as is wrongfully acquiring market power in the first place.”

Further, the consumers adequately alleged that the false statements were “ ‘not readily susceptible of neutralization or other offset by rivals.’ ”  From the existing cases, the court derived a perfectly understandable principle that technical product aspects that are difficult for customers to confirm are “not readily susceptible of neutralization.” When “any customer who tried to obtain the defendant’s services could discover that this representation was false,” by contrast, the falsity was readily capable of neutralization. Plaintiffs successfully alleged that the deceptive privacy practices could not have been revealed “by anybody without significant technical expertise.” Indeed, plaintiffs pled that “even sophisticated third parties, such as developers and search engines, cannot access user data without Facebook’s permission, let alone determine what Facebook is doing with user data.”

While FB argued that other firms “could have improved their own policies, or called attention to Facebook’s supposed misstatements,” it didn’t explain how rival firms could have known that Facebook’s statements were false when Facebook made them. “[T]here was no publicly available information that Facebook’s rival could have consulted to determine whether Facebook’s representations about its data privacy practices were true.”

Clearly material: FB argued that the consumers didn’t explain how “Facebook’s alleged misrepresentations prevented other well-resourced firms—like Google or Snapchat—from competing effectively.” Plus, there were other “competing theories for Facebook’s success,” “including Facebook’s ‘realness,’ which is alleged to be Facebook’s ‘distinguishing feature.’ ” But the Ninth Circuit has set out a comprehensive test for whether false advertising can violate the Sherman Act, see above, and alternative explanations aren’t part of the test where materiality is present. Both securities fraud and Lanham Act cases extensively address materiality, and the court used them as guidance: materiality means likelihood of influencing consumer decisions, so “clearly material” requires plaintiffs to show that “customers would consider the representation important in deciding whether to use the defendant’s product or that the representation was likely to influence customers to use the defendant’s product.”

Plaintiffs did that. For example, consumer surveys showed the importance of privacy, and FB’s own statements repeatedly recognized that users would not use Facebook unless Facebook promised privacy protections. E.g., Zuckerberg explained that the reason “Facebook became the world’s biggest community online” was that Facebook “made it easy for people to feel comfortable sharing things about their real lives.” Under these circumstances, it was “more than plausible” that users would have considered these representations important in determining whether to use Facebook.  

There was no requirement that the falsity be the “but-for” or sole cause of consumer behavior, as FB argued. And indeed, FB’s argument ignored that privacy was the foundation of its purported alternative causes—the consumers alleged that FB’s representations about its data privacy practices were essential to creating Facebook’s “realness,” starting with its initial limitation to people who could verify that they were part of college communities.

Causal antitrust injury: The consumers alleged that Facebook’s monopolization of the Social Network and Social Media Markets harmed users because, without competition, Facebook can extract additional “personal information and attention” from users. A cognizable antitrust injury includes harm to a plaintiff’s “business or property.” Consumers adequately alleged that their “information and attention” had sufficient material value to constitute harm to “property,” given that those things have material value to advertisers. “In other words, users provide significant value to Facebook by giving Facebook their information—which allows Facebook to create targeted advertisements—and by spending time on Facebook—which allows Facebook to show users those targeted advertisements.” Indeed, FB’s revenue per user in the US in 2019 was over $41, making the material value of consumers’ information and attention undeniable. Even without FB’s own estimates, the consumers identified other companies willing to pay users for information and attention.

And consumers adequately alleged causation: Had FB not eliminated competition in the social markets, they would have been able to “select a social network or social media application which offers consumers services that more closely align the consumers’ preferences, such as with respect to the content displayed, quantity and quality of advertising, and options regarding data collection and usage practices.” In more competitive markets, some companies pay users for their data. For example, “[w]hen consumers agree to use Microsoft’s ‘Bing’ search engine and allow Microsoft to collect their data, Microsoft ... compensates consumers with items of monetary value.” Plus, with more competition, FB itself would plausibly have collected less data as part of the bargain: The fact that FB acted more hesitantly when G+ was around was indicative of that.

Relatedly, consumers’ request for injunctive relief was not barred by laches, given the timeliness of the claim. FB argued laches because its 2011 FTC settlement was public. But when claims are timely, “the strong presumption is that laches is inapplicable.” Moreover, FB failed to explain why consumers would know, because of the 2011 settlement, that FB continued to deceive them thereafter.