FTC’s economics witness out, in new blow to court fight with Facebook

The lead economics expert in the Federal Trade Commission’s antitrust suit against Facebook has parted ways with the agency, two individuals familiar with the case said — adding yet another impediment to the regulator’s largest court fight.

The FTC is now looking for a new expert, just three weeks before the agency must decide whether to file the new version of the Facebook lawsuit after a D.C.-based judge threw it out last month.

The expert, University of California-Berkeley economist Carl Shapiro, didn’t respond to multiple phone calls and an email asking the reasons for his departure. But he has criticized new FTC Chair Lina Khan’s aggressive approach to antitrust enforcement, and she in turn has faulted the agency’s traditional reliance on economists’ analyses in its fights against alleged monopolists.

The agency hired Shapiro, a former Obama-era antitrust official, to aid in its suit against Facebook in 2019. It has already paid out $5.7 million to the economics consulting firm where he is a senior consultant, according to a POLITICO analysis of federal contracting data. That is nearly double what the FTC has paid for any other expert services over the past two years at a time the agency has told Congress it is strapped for cash.

While the FTC retains any work Shapiro and his associates have completed, experts said much of the work will need to be redone by any new economic team hired by the agency in order to adequately defend it in court.

That’s on top of a growing pile of headaches for the FTC as it attempts to press its case against Facebook and pursues an antitrust probe of Amazon — both of which rank among the five most valuable U.S. companies. The two tech giants have demanded that Khan recuse herself from their cases, prompting an internal debate on how the FTC should respond, and she faces attacks from GOP lawmakers who accuse her of sidelining the agency’s two Republican commissioners.

The agency declined to comment on Shapiro’s departure.

“The FTC does not comment on internal deliberations over any particular expert engagement,” spokesperson Lindsay Kryzak told POLITICO. “But the agency routinely reviews its expert support needs, including to ensure that the agency is making the best use of limited public funds while carrying out its law enforcement obligations.”

The agency sued Facebook in December, alleging the company monopolized the social networking market by buying up Instagram and WhatsApp and cutting off data access to other potential rivals. A federal judge threw out the FTC’s complaint last month, finding prosecutors didn’t show Facebook controls more than 60 percent of the market. The agency has until Aug. 19 to file a new complaint.

The FTC has also been seeking a replacement for Shapiro, the top antitrust economist at the Justice Department in both the Obama and Clinton administrations and a well-known figure in antitrust litigation. He has served as the testifying expert in six FTC or DOJ cases over the past eight years, including the Trump-era Justice Department’s failed bid to stop AT&T’s merger with Time Warner and an unsuccessful attempt by state attorneys general to block Sprint and T-Mobile from merging. He also consults for Google.

Kryzak, the FTC spokeswoman, declined to comment on how much the agency has spent on expert witnesses.

The agency has pleaded with Congress for more money, arguing that its $331 million budget isn’t sufficient for its burgeoning workload of policing mergers, business conduct, consumer privacy and data security. In financial reports, the agency has cited ballooning expert witness costs as among its “top risks.”

Exit reasons unknown

The individuals who spoke to POLITICO didn’t know the reason for Shapiro’s exit and whether it related to disagreements about the future of the case, the costs or the history of ideological differences between Shapiro and Khan. The individuals requested anonymity to speak about internal agency deliberations.

Shapiro has been critical of Khan’s approach to antitrust, particularly her view that enforcers focus too heavily on a so-called consumer welfare standard that emphasizes price as the main sign of a lack of competition. (Critics of the tech industry say the standard is ill-suited to handling companies like Facebook and Google that offer their main products free of charge to consumers.)

In a conversation with reporters on June 28, Khan said previous antitrust enforcers relied too heavily on economic analysis to make their cases. She cited the states’ challenge to the Sprint-T-Mobile merger — in which Shapiro testified on behalf of the attorneys general — where the judge said the dueling economic experts “essentially cancel each other out” and required him to tell the future from “competing crystal balls.”

“Antitrust over the last few decades has become dependent on a particular type of economic theory,” Khan said. “The antitrust statutes are quite sparse. They are very general. There’s nothing in there about what econometric analysis to use. There’s been choices about what types of analysis to privilege.”

Two other individuals familiar with the agency’s Facebook case defended the amount of money the FTC has spent so far, noting that monopolization cases like the one against the social network are notoriously expensive. It also isn’t unusual for a new chair to seek to replace top staffers or experts in high-profile cases to better align with their priorities, one of the people said. Both spoke anonymously to discuss internal agency dynamics.

In a 2019 audit, the FTC’s inspector general found the agency pays about $750 per hour for experts and that cases involving company business conduct — like the antitrust suit against Facebook — are among the most expensive. Of the 15 contracts the inspector general audited, conduct cases accounted for $6 million of the $20 million spent.

The investigators recommended the FTC seek to use its in-house economists as expert witnesses in more cases.

Facebook, meanwhile, has the resources to put up a hefty court fight. It reported $29 billion in revenue in the most recent quarter and has a market value of about $1 trillion.

The Facebook contract

The FTC denied a public records request from POLITICO in February seeking information on expert witness contracts related to the Facebook case, saying its disclosure would interfere with the agency’s litigation. But using public data that the FTC reported to a federal government contracting database, POLITICO was able to identify the expert witness contract related to Facebook.

In the fiscal year that ended on Sept. 30, the FTC spent $21.3 million for expert witness services. So far this fiscal year, the FTC has already spent $25 million, according to federal government contracting records. The amounts paid vary between a few thousand dollars and several million depending on the work required. The $5.7 million contract is by far the largest, nearly double the amount of any other contract the agency has paid for expert witness services.

“The quantity of information both data and documents that experts have to review, use and assimilate has grown astronomically over time and that has caused expert costs to rise,” said Bruce Hoffman, who served as the FTC’s top competition staffer from 2017 through 2019.

The FTC does some of the work in-house but doesn’t have the computing power or infrastructure needed to take on all of it, said Hoffman, now a partner at the law firm Cleary Gottlieb.

Most of the expenses are probably not from Shapiro himself — who offers the government a discount on the rate he charges to corporate clients — but from the Charles River Associates colleagues assisting him. The individuals assisting Shapiro standardize data provided by companies in the investigation and do the economic calculations Shapiro requests. CRA bills the agency for the hours worked by Shapiro and its employees.

The contract terms between a consulting firm and its experts vary, but Shapiro would be paid for the time he worked plus a percentage of his assistants’ total billings, probably somewhere between 10 and 25 percent, according to two economic consultants who asked to speak anonymously to discuss what both the agency and the consulting firms consider confidential billing practices.

Both consultants said they were surprised at the amount the FTC had spent so far given that the Facebook case is just beginning. The most expensive part of antitrust litigation usually takes place later in a case, when experts prepare written reports that can run into the hundreds of pages. Those expert witness reports, which are filed in court, can cost between $1 million and $2 million to prepare, they said.

While any new expert the FTC hires could reuse the data that Shapiro and his team compiled, the consultants said, that person would insist on redoing the economic analysis to be able to defend it in court.

But Hoffman, who left the agency before the Facebook case was really underway, said he wasn’t surprised by the expense.

“It’s a complicated case. I could imagine there’s mind bogglingly large quantities of data,” he said. “There’s a little bit of irony that people all over the country are screaming that the FTC should be more active and on the other hand concerned it’s spending too much money. If you want the FTC to be active, you have to give them the money to do that.”