Lina Khan may set off a shift in how Washington regulates competition by filing cases in tech areas before they mature. She faces an uphill climb.
WASHINGTON — Early in her tenure as chair of the Federal Trade Commission, Lina Khan declared that she would rein in the power of the largest technology companies in a dramatically new way.
“We’re trying to be forward looking, anticipating problems and taking fast action,’’ Ms. Khan said in an interview last month. She promised to focus on “next-generation technologies,” and not just on areas where tech behemoths were already well established.
This week, Ms. Khan took her first step toward stopping the tech monopolies of the future when she sued to block a small acquisition by Meta, the company formerly known as Facebook, of the virtual-reality fitness start-up Within. The deal was significant for Meta’s development of the so-called metaverse, which is a nascent technology and far from mainstream.
In doing so, Ms. Khan upended decades of antitrust standards, potentially setting off a wholesale shift in the way Washington enforces competition across corporate America. At the heart of the F.T.C.’s lawsuit is the idea that regulators can apply antitrust law without waiting for a market to mature to the point where it is clear which companies hold the most power. The F.T.C. said such early action was justified because Meta’s deal would probably 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 aim to prevent already clear monopolies. Regulators have mostly rubber-stamped the purchases of start-ups 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 by relying on the theory that competition and consumers will be harmed in the future. The federal government lost at least two cases that used this strategy in the past decade, including an attempt to block a $1.9 billion merger in 2015 among X-ray sterilization providers that the F.T.C. had predicted would harm future competition in regional markets.
The F.T.C.’s lawsuit against Meta in the budding virtual-reality market is a “deliberately experimental case that seeks to extend the boundaries of merger enforcement,” said William Kovacic, a former chair of the agency. “Such cases are certainly harder to win.”
The F.T.C.’s action immediately caused a ruckus within antitrust circles and across the tech industry. Silicon Valley tech executives said that moving to block a deal in an embryonic area of technology might stifle innovation and spook technologists from taking bold leaps in new areas.
“Regulators predicting future markets is a very, very dangerous precedent and position,” said Aaron Levie, the chief executive of the cloud storage company Box. He warned that venture capitalists and entrepreneurs would become wary of going into new markets if regulators cut off the ability of companies like Meta to buy start-ups.
Adam Kovacevich, the president of the trade group Chamber of Progress, which represents Meta, Amazon and Alphabet, also said the lawsuit would have a chilling effect on innovation.
“This is such an extreme and unfounded reaction to a small deal that many tech industry leaders are already worrying about what an F.T.C. win would mean for start-ups,” he said.
For Ms. Khan, winning the lawsuit may be less of a priority than showing it’s possible to file against a tech deal while it is still early. She has said regulators were too cautious in the past about intervening in mergers for fear of harming innovation, allowing a wave of deals between tech giants and start-ups that eventually cemented their dominance.
“What we can see is that inaction after inaction after inaction can have severe costs,” she 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 requests for an interview for this article, and the F.T.C. declined to comment on Thursday.
Meta said the F.T.C. was applying antitrust law incorrectly. The lawsuit focuses on how the merger with Within would remove competition, but Meta said the agency was ignoring the large number of companies that also had health and fitness apps.
“The F.T.C. has no answer to the most basic question — how could Meta’s acquisition of a single fitness app in a dynamic space with many existing and future players possibly harm competition?” Nikhil Shanbhag, Meta’s vice president and associate general counsel, wrote in a blog post.
The company added that it hadn’t decided on whether to challenge the lawsuit, which was filed on Wednesday in U.S. District Court for the Northern District of California.
The F.T.C. accused Meta of building a virtual reality “empire,” beginning in 2014 with its purchase of Oculus, the maker of the Quest virtual-reality headset. Since then, Meta has acquired around 10 virtual-reality app makers, such as the maker of a Viking combat game, Asgard’s Wrath, and several first-person shooter and sports games.
By buying Within and its Supernatural virtual-reality fitness app, the F.T.C. said, Meta wouldn’t create its own app to compete and would scare potential rivals from trying to create alternative apps. That would hobble competition and consumers, the agency said.
“This acquisition poses a reasonable probability of eliminating both present and future competition,” according to the lawsuit. “And Meta would be one step closer to its ultimate goal of owning the entire ‘Metaverse.’”
Rebecca Haw Allensworth, a professor of antitrust law at Vanderbilt University, said the F.T.C.’s arguments would face tough scrutiny because Meta and Within did not compete with each other and because the virtual-reality market was fledgling.
“The way that merger analysis has stood for at least 40 years is about what kind of head-to-head competition does this merger take out of the picture,” she said.
The onus will now be on the agency to convince a judge that its predictions about the metaverse and Meta’s purchase would harm competition.
“The burden is on the F.T.C. to show, among other things, reasonable probability that Meta would have entered the V.R.-dedicated fitness apps market, absent its acquisition of Within,” said Diana Moss, president of the American Antitrust Institute.
If the court dismisses the case, Ms. Khan may have created a precedent that would make it harder to pursue nascent competition cases, antitrust experts cautioned. That could then embolden tech giants to acquire their way into new lines of businesses.
“This is a precedential system which goes both ways — if you win or lose — and sends a signal to the market,” Ms. Allensworth said.
The F.T.C. is reviewing other tech deals, including Microsoft’s $70 billion acquisition of the gaming company Activision and Amazon’s $3.9 billion merger with One Medical, a national chain of primary care clinics. In addition, the agency has been investigating Amazon on claims of monopoly abuses in its marketplace of third-party sellers.
Ms. Khan appears to be prepared for long legal battles with the tech giants even if the cases do not end up going the F.T.C.’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 is a risk you might lose, there can be enormous benefits from taking that risk.”
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