Facebook’s Small Print Might Be Antitrust’s Next Big Target

By Aoife White and Karin Matussek, Bloomberg News

Facebook Inc.’s small print may be the next big thing in European antitrust as watchdogs home in on how the world’s biggest social network collects information from users that helps generate vast advertising revenues.

Germany’s Federal Cartel Office is examining whether Facebook essentially takes advantage of its popularity to bully users into agreeing to terms and conditions they might not understand. The details that users provide help generate the targeted ads that make the company so rich.

In the eyes of the Cartel Office, Facebook is “extorting” information from its users, said Frederik Wiemer, a lawyer at Heuking Kuehn Lueer Wojtek in Hamburg. “Whoever doesn’t agree to the data use, gets locked out of the social network community,” he said. “The fear of social isolation is exploited to get access to the complete surfing activities of users.”

The European Union’s antitrust arm has grabbed the limelight with eye-popping penalties for U.S. technology firms it found fell foul of anti-competitive behavior. Last year, it ordered Apple Inc. to pay 13 billion euros ($14.9 billion) in back taxes and last week it fined Google 2.4 billion euros for allegedly skewing search results in its favor. But lawyers say the Cartel Office’s probe is testing the boundaries of antitrust law — with ramifications far beyond Germany and Facebook as all kinds of powerful technology firms seek to find new ways to cash in on their trove of customer information.

It’s “more radical” than the EU’s Google case “because it asserts that privacy concerns can be antitrust concerns” and that consumers have a broader role than buyers of services in an economy, said Alec Burnside, an attorney at Dechert in Brussels.

 

Two Billion

The German probe comes as Facebook, which now has 2 billion members and made more than $27 billion in revenue last year, confronts heightened regulatory scrutiny in Europe. It’s being investigated by numerous privacy authorities over its plans to merge data with the WhatsApp messenger application, faces a court battle over data transfers across the Atlantic and was fined in May for misleading the EU in a merger review of the WhatsApp deal.

Andreas Mundt, the Cartel Office’s president, said last week he’s “eager to present first results” of the Facebook investigation this year. Like the EU’s Google investigation, he said the Facebook case tackles “central questions ensuring competition in the digital world in the future.”

Facebook declined to comment on the possible outcome. The company has insisted it operates within applicable law and that it would cooperate with regulators.

When the German antitrust regulator disclosed the review in March last year, it said Facebook collects a large amount of personal user data from various sources and creates user profiles, allowing its advertising customers to better target their ads. Users must accept the terms while it’s hard for them to understand to what extent they agree to surrender their personal information, according to the Cartel Office.

 

Economic Power

Personal data is a hot topic in Europe where internet companies have been criticized by privacy agencies for how they gather and use people’s details. But in antitrust, it’s still a contentious issue that the European Commission’s competition authority in Brussels has largely so far side-stepped, saying its job is to focus on companies’ economic power.

That could be changing should the German regulator embolden other authorities such as the EU to act. While the Google case focused on how the company abused its power to thwart smaller rivals, last week’s decision also revealed how the EU is starting to dig deeper into what technology companies do with the personal information they gather from their users.

The commission pointed to how data collection creates and cements the power of technology giants. Sites such as Google that attract huge numbers of users also draw in advertisers who want to grab those eyeballs, generating profits that can be used to pull in even more users, the EU authority said. The data Google gathers also means it offers better results, which makes it even harder for competitors.

 

Real Names

Facebook is already the target of privacy watchdogs and consumer groups in Germany. The Hamburg data regulator has been attacking the network’s “real name” policy, which banned pseudonyms, and other aspects of its user terms. Facebook won an interim ruling in litigation over users’ names but failed to win a similar request over an order to stop processing data of German WhatsApp users. Consumer group VZBV sued Facebook’s WhatsApp over clauses allowing collection and transfer of user data between the platforms.

Some lawyers say the Facebook case is so daring in its approach to antitrust that the Cartel Office should have left the question of whether the company abuses users’ data to privacy regulators. Those watchdogs — once relatively toothless — will be empowered next year when tougher EU data privacy rules take effect, allowing them to levy fines of as much as 4 percent of global annual sales.

 

Dominant Power

“It may be difficult to show that Facebook is really misusing its market position” under antitrust law, said Daniel Wiedmann, an antitrust attorney at P+P Poellath + Partners, in Frankfurt. “It’s likely users accept the terms not because Facebook is the dominant power on that market but because they’re reflecting their preferences.”

Facebook may have less to fear financially from a Cartel Office probe as, unlike Google, it may not be fined. The current terms of the investigation rule out a financial penalty.

Instead, if it’s found to breach antitrust rules Facebook would face an order to change how it operates.

“That’s the right choice,” said Wiemer. “In these complicated questions where you enter new territory, it makes sense to first ban a certain action without imposing fines.”

Facebook’s vast wealth may show, like Google, that few fines would be big enough to do it real harm. A warning to the most extensive social network that requires it to change how it hooks in users and targets advertising could make a bigger dent in the long run than any fine.

–With assistance from Stephanie Bodoni and Sarah Frier.

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