FTC Sues to Block Meta’s Virtual Reality Deal as It Confronts Big Tech

WASHINGTON — The Federal Trade Commission on Wednesday sought an injunction to block Meta, the company formerly known as Facebook, from buying a virtual reality company called Within, potentially limiting the company’s push into the so-called metaverse and signaling a shift in how the agency approaches themselves technical agreements.

The antitrust lawsuit is the first under Lina Khan, the commission’s chair and a leading progressive critic of corporate concentration, against one of the tech giants. Khan has argued that regulators need to stop breaches of competition and consumer protections when it comes to the bleeding edge of technology, including virtual and augmented reality, and not just in areas where companies have already become giants.

The FTC’s request for an injunction puts Khan on a collision course with Mark Zuckerberg, Meta’s CEO, who is also named as a defendant in the request. He has poured billions of dollars into building products for virtual and augmented reality, betting that the immersive world of the metaverse is the next technological frontier. The lawsuit could shrink those ambitions.

“Meta could have chosen to try to compete with Within on the merits,” the FTC said in its lawsuit, which was filed in the US District Court for the Northern District of California. “Instead, it chose to buy” a top company in what the government called a “critically important” category.

In a statement, Meta said the FTC’s case was “based on ideology and speculation, not evidence.” It added that the lawsuit was an attack on innovation and that the agency “sends a chilling message to anyone looking to innovate in VR”

Meta had said it would buy Within, which makes the wildly popular fitness app called Supernatural, last year for an undisclosed sum. The company has been promoting its virtual reality headsets for fitness and health purposes.

The FTC’s lawsuit is highly unusual and pushes the boundaries of antitrust law. Regulators mostly focus on deals between big companies in big markets, rather than their acquisitions of small start-ups in emerging technology areas. Courts have also been leery of applying antitrust laws to block mergers based on the hypothetical that the two companies involved would later become competitors if the deal were blocked.

But critics have said the government’s inaction has allowed Meta and other giants to vacuum up services that later became formidable. The agency approved Facebook’s 2012 acquisition of Instagram, the photo-sharing app that has since grown to more than one billion regular users. Instagram has helped Meta dominate the social photo-sharing market, although other startups have emerged since.

“It’s a riskier case, but one they think is worth bringing on because if they’re successful, it will help push the envelope on enforcement,” said William E. Kovacic, a former chairman of the FTC. “I think this is a first of its kind. .”

The FTC’s lawsuit is part of a broader wave of actions against Meta and other major tech companies such as Google, Apple and Amazon, which have increasingly come under scrutiny for their power and dominance. Under Ms. Khan’s predecessor filed a FTC lawsuit against Facebook alleging that the company shut out nascent competition through acquisitions. The Ministry of Justice has also sued Google over whether the company abused a monopoly on web searches.

More cases may come. The FTC is investigating whether Amazon violated antitrust laws, and the Justice Department is investigating Google’s dominance of advertising technology and Apple’s App Store policies.

For Mr. Zuckerberg, the FTC lawsuit is a setback. He has pushed Meta away from its social networking roots as the apps, like Facebook and Instagram, face more competition while stumbling on privacy and content moderation. Instead, he has bet on the metaverse.

Mr. Zuckerberg has reshuffled staff and put a top lieutenant in charge of metaverse efforts. He has also authorized executives to pursue some of the most popular games in the VR space. In 2019, Facebook acquired Beat Games, the creators of the hit title Beat Saber, one of the best VR games on the Oculus platform. He has also authorized the purchase of about a half-dozen other virtual reality or gaming studios over the past three years.

The FTC filed the suit Wednesday hours before Meta reported its first decline in quarterly revenue since going public in 2012. The company has recently trimmed employee benefits and curbed spending amid uncertain economic conditions. John Newman, assistant director of the FTC’s Bureau of Competition, said the agency acted on the Within deal because Meta is “trying to buy its way to the top.” The company already owned a best-selling virtual reality fitness app, he said, but then chose to buy Within’s Supernatural app “to buy market position.” He said the deal was “an illegal acquisition and we will pursue all appropriate relief.”

The FTC’s vote to approve the filing was split 3 to 2. Christine Wilson, a Republican commissioner at the agency, said she was one of the two votes against the lawsuit. She did not respond to an email asking about her reasoning.

The FTC said in its request that asking for an injunction was sometimes a prelude to filing a complaint about a merger, which could involve Meta and the agency in a lengthy litigation and appeals process. An FTC spokeswoman said the agency had not filed such a complaint and declined to comment further on the agency’s strategy.

Khan, 33, who was appointed by President Biden last year to acclaim from the left, has sought to deliver on expansive promises to rein in corporate power. She rose to prominence after she wrote an article at law school in 2017 criticizing Amazon. As FTC head, she has called on regulators to vigorously enforce antitrust laws and has said she could craft sweeping online privacy rules that would implicate Silicon Valley companies.

The lawsuit drew praise from Khan’s allies. Sandeep Vaheesan, the legal director of the Open Markets Institute, a liberal think tank, said in a statement that the lawsuit was a “step toward making building, not buying, the norm for Facebook.”

But allies in the tech industry attacked Khan’s actions. Adam Kovacevich, executive director of the Chamber of Progress, an industry group funded in part by Meta, said that with the new lawsuit, “the agency is more focused on getting headlines than results.” He said Meta is “no closer than pickleball or synchronized swimming is to unlocking the fitness market.”

Meta said in a blog post that the FTC would not prove that the Within deal would “substantially lessen competition,” which is the bar typically set to block a deal under federal antitrust law.

In its lawsuit, the FTC said that if Meta bought Within’s Supernatural, it would no longer have an incentive to improve Beat Saber, the virtual reality fitness game it already owns. But Nikhil Shanbhag, an assistant general counsel for Meta, said in the blog post that the games were not competitors.

“Beat Saber is a game people play for fun, and it has many competitors,” he said. “Supernatural couldn’t be more different.”

Seamus Hughes contributed research.