Facebook said that it expects to face a record fine of up to $5 billion from the Federal Trade Commission for its mishandling of its users’ personal information, an indication that the U.S. government is willing to extract much larger penalties for privacy violations.
On Wednesday, Facebook admitted for the first time that it anticipates a government penalty when it budgeted a $3 billion charge in its first-quarter earnings report. Facebook said the fine, which it recorded as a “legal expense,” could ultimately range between $3 billion and $5 billion, and it booked it at the low end according to accounting rules.
The potential fine would represent the largest privacy-related civil penalty the FTC has imposed. The sheer size of the legal expense — more than 100 times greater than the previous largest fine imposed on a technology company — could reset the baseline for future privacy investigations, putting the United States on par with Europe in its willingness to go after technology firms. The Washington Post previously reported on the expected size of the fine.
Facebook and the FTC continue to negotiate the exact amount of a settlement that would end its investigation, or they could end up in court if they don’t reach a settlement. But Facebook’s recent scandals are already taking a toll on its balance sheet. The anticipated FTC fine knocked 20 percent off Facebook’s profits in the first quarter.
The FTC declined to comment.
It began its investigation last year, following reports about Facebook’s entanglement with Cambridge Analytica, a political consultancy that improperly accessed data on 87 million of the social site’s users. The incident touched off worldwide scrutiny of the tech giant, particularly in Europe, where regulators have opened 10 probes into Facebook’s operations. Additional investigations targeting Facebook are underway in the United States.
The FTC’s probe has sought to determine if Facebook’s entanglement with Cambridge Analytica violated a 2011 agreement, known as a consent decree, with the U.S. government to improve its privacy practices. Since then, the social network has acknowledged additional data mishaps, prompting federal officials to expand their inquiry, according to two people familiar with the matter who spoke on the condition of anonymity because the probe is confidential under law. The probe could also target CEO Mark Zuckerberg personally, perhaps subjecting him to new oversight of his leadership, The Post first reported.
The FTC has been under pressure to show that it has the power and will to penalize Silicon Valley’s worst privacy offenders. Privacy advocates have criticized the agency for the length of its investigation. And even a fine in the billions of dollars would be a drop in the bucket for Facebook, which booked $15.1 billion in revenue in the first quarter.
"This is the new commission flexing its muscles and announcing its presence, assuming the civil penalty against Facebook amounts to somewhere between three to five billion dollars,” said David Vladeck, who served as the director of the Bureau of Consumer Protection at the FTC in 2011. “It’s also supposed to send a message to the other companies the FTC has under order, which are many, basically making it clear the agency takes violations of the consent decrees very seriously.”
The next largest fine was levied on Google in 2012, when the company had to pay $22.5 million to settle charges that it misrepresented to users of Apple’s Safari Internet browser that it would not place tracking “cookies” or serve targeted ads to those users. In Europe, Google has faced roughly $9 billion in fines over the past three years, for business practices that regulators said put its rivals at a disadvantage. But the fines haven’t much affected the search giant, which remains one of the most profitable businesses in the world.
The FTC came to its calculation about a multibillion-dollar fine against Facebook by computing the number of instances that Facebook breached its 2011 agreement with the government to improve its privacy practices. Each violation can carry a maximum penalty of more than $41,000 under law, and the agency has broad latitude to adjust the amount and negotiate with the company accordingly. Privately, though, Facebook has argued to the FTC that it should be forced to pay much less, perhaps only into the hundreds of millions of dollars, the two people familiar with the matter said.
Some privacy advocates, however, said even a fine exceeding $3 billion would not be enough to satisfy their concerns. “The FTC should use its equitable powers to safeguard user data, restore democratic oversight, and promote competition and innovation,” said Marc Rotenberg, the executive director of the Electronic Privacy Information Center, which filed the complaint leading to Facebook’s 2011 settlement with the FTC.
The regulatory threats are taking place in Facebook’s most lucrative markets in the United States and Europe. Facebook made an average of more than $30 per user in North America and nearly $10 per European user in the first quarter, significantly higher than in other parts of the world.
“I understand that any regulation may hurt our business,” Zuckerberg said on a call with analysts Wednesday. “But I think it’s necessary. Over the long term, I believe that increase in the trustworthiness of the Internet can have a much larger positive impact for our community and our business than any short-term hit that we’re going to take.”
Wall Street appeared to shrug off any concerns. Facebook’s stock was up more than 8 percent in after-hours trading after Facebook announced the allocation for the FTC fine as part of its first-quarter earnings. Its revenue was 26 percent higher than in the same quarter the previous year, and profits fell by 51 percent to $2.4 billion, even taking into account the anticipated fine.
Investors asked only one question about the FTC fine on the earnings call.
Debra Aho Williamson, principal analyst at eMarketer, said in an email that the fine was a significant development, even in a strong quarter, because it may come with new stipulations for Facebook’s business. “Any settlement with the FTC may impact the ways advertisers can use the platform in the future,” she said.