May 29, 2019 / 8:17 PM / 3 months ago

Breakingviews - U.S. watchdog should throw down Facebook gauntlet

The logo of Facebook is pictured during the Viva Tech start-up and technology summit in Paris, France, May 25, 2018. REUTERS/Charles Platiau

By Jennifer Saba and Gina Chon

NEW YORK/SAN FRANCISCO (Reuters Breakingviews) - The U.S. Federal Trade Commission may want to play its biggest, yet riskiest, hand. The U.S. regulator is working with Facebook on a pricey settlement after the social network failed to protect consumer data. But a lawsuit against Mark Zuckerberg’s firm might produce more significant sanctions.

Facebook estimated last month that financial penalties would be in the range of $3 billion to $5 billion and signaled an agreement was fast in the making. That was probably hasty. Agency Chair Joseph Simons wants the backing of at least one of two Democrats, who are not yet on board, according to a report in the Wall Street Journal.

At the high end, $5 billion would represent about a quarter of Facebook’s estimated profit this year, according to data from Refinitiv. It would also be by far the largest fine the FTC has imposed on a tech company. In 2017, a judge approved an $11 billion FTC settlement with automaker Volkswagen for its misleading emissions claims on diesel vehicles.

Yet when Facebook disclosed its legal estimates, shares shot up around 6%. Investors may see the potential fine as a simple cost of doing business. Or it could be a sign the markets were encouraged the company was not heading for a protracted lawsuit.

That path would be a huge gamble for the FTC. A settlement guarantees an outcome, which could include some accountability measures for Zuckerberg. By contrast, a judge could hand Facebook a total victory if the agency sues. It doesn’t have a great legal track record. Last year the commission dropped a $4 billion false advertising lawsuit against DirecTV after a judge found that the FTC had weak evidence.

But a lawsuit against Facebook could produce evidence that shows how it really operates when it comes to user data. If the FTC wins, like it did last week when a judge ruled against Qualcomm, it could have bigger consequences for Facebook than just a fine. Zuckerberg could be named as a defendant, the FTC could take the unprecedented step of pushing for him to be stripped of his chairman title, and it might impose stricter privacy rules. Such a move could disrupt Facebook – and change its behavior - more than a settlement.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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