Facebook and the Federal Trade Commission (FTC) reached a $5 billion settlement Wednesday over privacy violations, and while critics slammed the FTC for what seemed like a slap on the wrist, the FTC also opened an antitrust investigation against Facebook which could have more significant repercussions for the social-media giant.
In addition to the $5 billion, Facebook will also pay a $100 million fine to the Securities and Exchange Commission (SEC) for “misleading investors about the risks it faced from misuse of user data,” according to a press release.
The SEC found that Facebook lied to investors and the media about how it sold user data to Cambridge Analytica, downplaying the gravity of the incident and Facebook’s role in facilitating it.
“Facebook discovered the misuse of its users’ information in 2015, but did not correct its existing disclosure for more than two years,” the SEC complaint claims, “Instead, Facebook continued to tell investors that ‘our users’ data may be improperly accessed, used or disclosed.’ (emphasis added) According to the SEC complaint, Facebook reinforced this false impression when it told news reporters who were investigating Cambridge Analytica’s use of Facebook user data that it had discovered no evidence of wrongdoing. When the company finally did disclose the incident in March 2018, its stock price dropped.”
According to the FTC’s press release, the $5 billion fine is “the largest ever imposed on any company for violating consumers’ privacy and almost 20 times greater than the largest privacy or data security penalty ever imposed worldwide. It is one of the largest penalties ever assessed by the U.S. government for any violation.”
That $5 billion is less than a tenth of Facebook’s gross revenue last year, though it’s about half of its $10.2 billion net profit in 2016, when the activity was uncovered.
According to a transcript of Facebook’s Q2 2019 earnings call held Wednesday, Merrill Lynch analyst Justin Post told CEO Mark Zuckerberg, “Good news on the FTC settlement,” further suggesting the fine, even combined with the SEC fine, is barely a blip on Facebook’s financial radar.
In addition to the fine, the FTC imposed a 20-year settlement order on Facebook that requires the company to “restructure its approach to privacy from the corporate board-level down.” Facebook will have to create a privacy committee outside of the board of directors’ control, and designate compliance officers to oversee privacy changes and answer to the privacy committee. Facebook will also have to conduct a privacy review on every product before it’s made available to consumers, implement a new data security program, and is “prohibited from asking for email passwords to other services when consumers sign up for its services.”
The Department of Justice also filed a complaint against Facebook Wednesday seeking “civil penalties” for the company’s “failure to protect consumers’ privacy as required by the 2012 Order and the FTC Act.”
Facebook’s 2018 annual report highlighted potential government intervention with Facebook’s ad business — a likely target of the antitrust investigation — and current privacy practices as “risks” to Facebook’s business under Item 1A: Risk Factors. The annual report also described “unfavorable media coverage” as a risk, further confirming that it’s in Facebook’s best interest to try to spin news coverage as it did for the Cambridge Analytica story.
“For example, beginning in March 2018, we were the subject of intense media coverage involving the misuse of certain data by a developer that shared such data with third parties in violation of our terms and policies, and we have continued to receive negative publicity,” the report says. “Such negative publicity could have an adverse effect on the size, engagement, and loyalty of our user base and result in decreased revenue, which could adversely affect our business and financial results.”
Given the DOJ’s complaint and the FTC’s newly opened antitrust investigation against Facebook, Facebook’s punishments are far from complete.
Still, the settlement fine provoked a backlash from tech experts, lawmakers, regulators and others on social media who considered it insufficient. Alex Stamos, a former Facebook executive, tweeted that “everybody missed” what “really happened” with the FTC settlement.
“The real threat to the tech giants is competition, not regulation,” he said. “Facebook paid the FTC $5B for a letter that says ‘You never again have to create mechanisms that could facilitate competition.'”
But former FTC CTO and Obama senior advisor Ashkan Soltani notes the agency is already investigating Facebook separately over competition concerns.
“What most people fail to understand is: FTC doesn’t have the authority to restrict Facebook (or any firm) for the business practices ppl take issue with,” Soltani tweeted. “Facebook settlement is like busting Al Capone for a tax violation (tho in this case, Al wasn’t deposed, and just pays a fine).”
Soltani called the FTC’s antitrust investigation the “silver lining.”
“Let’s hope the antitrust tools fair better than the privacy authority,” he said.
Democrat FTC commissioners Rebecca Kelly Slaughter and Rohit Chopra voted against the settlement because they wanted a bigger fine and stronger conduct terms.
“I voted no b/c I do not believe either the money or the injunctive relief will ensure accountability or that @facebook changes how it treats user data,” Slaughter tweeted. “And the release of liability is not justified. We shouldn’t analyze the settlement terms against prior settlements; we should analyze them against the specific facts in this case. On that metric, the settlement falls short.”
Chopra took issue with the fact that Zuckerberg, COO Sheryl Sandberg, and “other executives get blanket immunity for their role in the violations. This is wrong and sets a terrible precedent. The law doesn’t give them a special exemption.”
Republican commissioner Joe Simons told reporters that if the FTC had tried to slap Facebook with a larger fine, they would have “had to go to court” and “the only real-world choice was to take the settlement.”
Liberal activist Ralph Nader wrote a letter to the FTC accusing the commission of being out of touch with the ways Facebook harms consumers.
“The FTC remains a largely moribund, sluggish, frightened, alleged watchdog for the American consumer,” he wrote. “The stock market and Facebook are laughing at you.”
Democratic presidential candidates also weighed in on the settlement. Elizabeth Warren, who called for the break up of Big Tech companies like Facebook back in March, called the Facebook settlement a “drop-in-the-bucket penalty” and a “joke,” while Andrew Yang said he hopes the FTC “has the right resources to follow through” on its antitrust investigations of Amazon and Facebook.
At an FTC oversight hearing in November 2018, the FTC told members of the Senate Committee on Commerce, Science and Transportation that it needs more resources to deal with Big Tech problems. Slaughter told senators that FTC personnel levels are 50 percent below Reagan administration levels.