F.T.C. Sues to Block Meta’s Virtual Reality Deal as It Confronts Big Tech

WASHINGTON — The Federal Trade Commission on Wednesday filed for 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 is approaching tech deals.

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. Ms. Khan has argued that regulators must stop competition and consumer protection violations when it comes to the bleeding edge of technology, including virtual and augmented reality, and not just in areas where the companies have already become behemoths.

The F.T.C.’s request for an injunction puts Ms. Khan on a collision course with Mark Zuckerberg, Meta’s chief executive, 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 technology frontier. The lawsuit could crimp those ambitions.

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

In a statement, Meta said the F.T.C.’s case was “based on ideology and speculation, not evidence.” It added that the lawsuit was an attack on innovation and that the agency was “sending a chilling message to anyone who wishes to innovate in V.R.”

Meta had said it would acquire Within, which produces the highly popular fitness app called Supernatural, last year for an undisclosed sum. The company has promoted its virtual reality headsets for fitness and health purposes.

The F.T.C.’s lawsuit is highly unusual and pushes the boundaries of antitrust law. Regulators mostly focus on deals between large companies in large markets, rather than their acquisitions of small start-ups in nascent tech areas. Courts have also been skeptical applying antitrust law to block mergers based on the hypothetical that the two companies involved would later become competitors if the deal was 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 market on social photo sharing, though other start-ups have sprung up since.

“It’s a riskier case, but one they think is worth bringing because if they succeed it will help bring the frontier of enforcement outward,” said William E. Kovacic, a former chairman of the F.T.C. “I think this is a first of a kind.”

The F.T.C.’s lawsuit is part of a broader wave of actions against Meta and other large tech companies like Google, Apple and Amazon, which have increasingly faced scrutiny for their power and dominance. Under Ms. Khan’s predecessor, the F.T.C. filed a lawsuit against Facebook that argued the company shut down nascent competition through acquisitions. The Justice Department has also sued Google over whether the company abused a monopoly over online search.

More cases could be coming. The F.T.C. is investigating whether Amazon has violated antitrust laws, and the Justice Department has inquiries into Google’s dominance over advertising technology and into Apple’s App Store policies.

For Mr. Zuckerberg, the F.T.C. lawsuit is a setback. He has been pushing Meta away from its roots in social networking as its apps, like Facebook and Instagram, face more competition amid stumbles in privacy and content moderation. Instead, he has bet on the metaverse.

Mr. Zuckerberg has reassigned employees 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 V.R. space. In 2019, Facebook purchased Beat Games, makers of the hit title Beat Saber, one of the top V.R. games on the Oculus platform. He has also authorized the purchase of roughly half a dozen other virtual reality or gaming studios over the past three years.

The F.T.C. filed suit on Wednesday hours before Meta reported its first decline in quarterly revenue since it went public in 2012. The company has recently trimmed employee perks and reined in spending amid uncertain economic conditions. John Newman, the deputy director of the F.T.C.’s Bureau of Competition, said the agency acted on the Within deal because Meta was “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 acquire Within’s Supernatural app “to buy market position.” He said the deal was “an illegal acquisition, and we will pursue all appropriate relief.”

The F.T.C.’s vote to authorize 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 declined to comment on her reasoning.

The F.T.C. said in its request that asking for an injunction was sometimes a prelude to filing a complaint against a merger, which could embroil Meta and the agency in a lengthy trial and appeals process. A F.T.C. spokeswoman said the agency had not filed such a complaint and declined to comment further on the agency’s strategy.

Ms. Khan, 33, who was appointed by President Biden last year to acclaim from the left, has tried to make good on expansive promises to rein in corporate power. She became prominent after she wrote an article in law school in 2017 criticizing Amazon. As F.T.C. chair, she has called for regulators to vigorously enforce antitrust laws and has said she may craft sweeping online privacy rules that would implicate Silicon Valley companies.

The lawsuit drew praise from Ms. 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 tech industry allies assailed Ms. Khan’s actions. Adam Kovacevich, the chief executive of Chamber of Progress, an industry group funded partly by Meta, said that with the new lawsuit, “the agency is more focused on getting headlines than results.” He said Meta “isn’t any closer than pickleball or synchronized swimming are to locking up the fitness market.”

Meta said in a blog post that the F.T.C. would fail to prove that the Within deal would “substantially lessen competition,” which is the bar that is typically set to block a deal under federal antitrust law.

In its lawsuit, the F.T.C. 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 associate general counsel for Meta, said in the blog post that the games weren’t competitors.

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

Seamus Hughes contributed research.